How to set up as an independent contractor in Germany as a US citizen

Learn how US expats can register as independent contractors in Germany, with this guide by Melissa Groves from Bright!Tax. As well as providing guidance on self-employed worker statuses in Germany, it also considers how taxes work in this scenario.

Are you ready to take the leap into the world of running your own business in Germany? Whether you're a creative genius, a tech whiz, or a skilled professional, Germany offers plenty of opportunities for independent contractors like yourself.

But before you dive in headfirst, let's break down the process and explore the various self-employment statuses in Germany, how US and German taxes work in this scenario, and more.

What is an independent contractor in Germany?

In Germany, independent contractors are known as "Freiberufler" or "Selbstständiger” - both of these words are used to describe individuals who run their businesses autonomously, offering services or expertise to clients on a contract basis.

Unlike (full-time) employees, independent contractors have the freedom to manage their workload and work schedules, set their rates, and enjoy higher flexibility in choosing their clients.

Independent contractor categories in Germany and how to register your business

In Germany, independent contractors fall into two main categories:

• Business people (Gewerbetreibende)
• Freelancers or members of the liberal professions (Freie Berufe)

Business people (Gewerbetreibende)

Gewerbetreibende are self-employed individuals primarily engaged in commercial activities, such as tradespeople, craftspeople, or producers of goods.

Ready to venture into the world of self-employment? As a Gewerbetreibender, you'll need to register your business with two authorities: the German Commercial Register (Handelsregister) and a local German Trade Office (Gewerbeamt) to secure the required licenses.

Liberal professions (Freie Berufe)

Freie Berufe include professions such as healthcare, legal and tax advisory, technical science, linguistics and communications. Professionals in these fields, such as doctors, lawyers, engineers and journalists, are considered part of the liberal professions.

If your profession falls under the umbrella of liberal professions, registering as a Freiberufler might be your ticket to independence. No need to jump through hoops; simply visit the regional Tax Office (Finanzamt) to start the registration process. You can also download the relevant forms online. 

Note that if you’re an EU citizen, from Liechtenstein, Norway, or Switzerland, you can start a business in Germany without a residence permit or a visa. Germany doesn’t offer a digital nomad visa per se, but you can apply for a freelance (Freiberufler) visa to work legally in Germany.

How to navigate taxes as a US expat with a business in Germany

As a self-employed person in Germany, you’ll be responsible for managing all of your own tax affairs. Here’s what you need to know about your tax responsibilities in both Germany and the US. 

Taxes in Germany

You will likely encounter three key types of taxes as an independent contractor in Germany: income tax, VAT, and input tax. 

Income tax

The rate of income tax you’ll pay in Germany varies based on your income:

• Under €11.604: 0%
• €11.605 to €17.005: 14%
• €17.006 to €66.760: 15% to 41%
• €66.761 to €277.825: 42%
• Over €277.826: 45%

VAT

VAT (known as Umsatzsteuer or Mehrwertsteuer in German) is levied on goods and services in Germany at a standard rate of 19%, with a reduced rate of 7% applicable to certain items. If you are required to collect VAT, you’ll need to charge the appropriate rates to all of your goods or services, and then transfer the collected VAT to the tax authorities at regular intervals. In return, you can offset this VAT collected against any VAT you pay for business expenses (see below). 

However, many freelancers can opt out of collecting VAT by making use of the small business regulation. If your annual turnover does not exceed 22.000 euros in your first year of business and 50.000 euros in the year after that, you qualify as a small business and are exempt from collecting and paying VAT. 

Input tax

Input tax (also known as input VAT) is paid on outgoing payments or expenses incurred by the freelancer. You can claim your input taxes against any VAT you collect from clients or sales. 

How to pay your taxes in Germany

Freelancers make advance tax payments based on projected income provided in a questionnaire sent by the tax office. These payments are made quarterly to avoid excessive taxes at the end of the year.

Freelancers and self-employed individuals typically do not pay trade or corporate tax, but professionals involved in trade may be subject to them.

Taxes in the US

If you are still a US citizen or Green Card holder, you’re subject to US income taxes, no matter how much time you spend in Germany.

Although Germany has a tax treaty with the US, to avoid double taxation on the same income, it’s usually better to claim tax breaks available to US expats. For example:

• Foreign Tax Credit (FTC), which gives expats US tax credits for taxes they’ve paid to foreign governments that are legal, made out in their name specifically, income-based, and paid.
• Foreign Earned Income Exclusion (FEIE), which enables expats to exclude up to $120,000 (in 2023) of foreign-earned income from taxation.

To be eligible for these tax breaks, US expats must meet one of two tests:

• Physical Presence Test, which requires expats to have been present outside of the US for 330 days in a 12-month period
• Bona Fide Residence Test, which demands expats to spend at least one calendar year residing permanently outside of the US, proven through official documentation like residence cards, rental contracts, utility bills, etc.

If you’re a parent living in Germany with dependent children, you can also claim Child Tax Credit for a partial refund worth up to $1,500 per qualifying child.

Note that the Germany / US totalization agreement prevents you from paying social security taxes to both countries simultaneously. The first five years spent in Germany, you will be paying social security to the US.

Ready to start your business in Germany? If you’re about to start your journey as an independent contractor in Germany and have trouble understanding your tax liabilities in the US, worry not. Expertise is at hand to help you navigate your obligations with ease - Bright!Tax specializes in working with US expats just like you to ensure full tax compliance no matter where you live in the world. Book a free kickoff call with their experts today!