Owners of sole proprietorships have to keep a close eye on taxes. This is because the amount of tax owed, and any exemptions, depends on the legal form of the business and its profits.

What taxes do sole proprietors pay in Germany, and what should they be aware of for each type of tax? In this article, we’ll cover the basics of how sole proprietorships are taxed.

What’s in this article?

• What is a sole proprietorship?
  
• What taxes do sole proprietors have to pay?
  
• What should sole proprietors know about income tax?
  
• Do sole proprietors have to pay corporate income tax?
  
• What should sole proprietors know about trade tax?
  
• What should sole proprietors know about VAT?
  

What is a sole proprietorship?

When a business is owned and run by a single person, it is known as a sole proprietorship. Sole proprietors (i.e., the owners of sole proprietorships) manage the business independently, as opposed to companies with multiple shareholders. The legal form of a sole proprietorship can vary: sole proprietors may own a small business, or work as freelance professionals or registered traders. Even with employee support, the business may remain officially a sole proprietorship.

A sole proprietorship can also be classified as a small-scale entrepreneur if it qualifies for and applies for the small-scale entrepreneur rule based on its turnover. However, if the sole proprietorship exceeds the turnover limits, it cannot maintain the status of a small-scale entrepreneur. It’s important to distinguish between sole proprietorships and one-person UGs, one-person GmbHs, and one-person AGs. These structures have more legal obligations, but they offer limited liability protection.

This is not the case with sole proprietorships: if claims or damages are made, sole proprietors are fully liable with their personal assets for the company’s debts. Conversely, all profits go to the sole proprietor. Another advantage of sole proprietorships is that they are quick, easy, and inexpensive to set up.

For more information, see our article on how to set up a sole proprietorship in Germany.

What taxes do sole proprietors have to pay?

Sole proprietors in Germany have to pay various taxes. Similar to liability issues, the owners are directly responsible as individuals when it comes to taxation. Here is an overview of the most important taxes for sole proprietorships:

• Income tax
  
• Value-added tax (VAT)
  
• Trade tax
  

In addition, they might also have to pay the following taxes, depending on their unique circumstances:

• Wage tax: This is if the sole proprietorship employs staff
  
• Property tax: This is if the sole proprietorship owns developed or undeveloped land
  
• Real estate transfer tax: This is if the sole proprietorship acquires real estate
  

What should sole proprietors know about income tax?

The most important tax for sole proprietors is income tax, because sole proprietors don’t take a salary. Instead, the profits from the business are considered personal income for tax purposes. The business’s income, less expenses, is taxed as part of the sole proprietor’s total income for income tax purposes. The legal basis for this is the Income Tax Act (EStG) and the Income Tax Implementation Ordinance (EStDV).

Profits can be calculated using cash-basis accounting for freelancers and sole proprietorships that are not registered or that generate less than €80,000 in profits or €800,000 in sales per year. Sole proprietorships that do not meet these conditions must prepare a balance sheet and a profit and loss statement.

No income tax is levied on an annual income of €11,604 or less (as of 2024). If the sole proprietor’s income exceeds this basic exemption, the percentage increases with income, from a minimum of 14% to a maximum of 45%. Until 2021, almost all employees were subject to a solidarity surcharge on their income tax. However, this surcharge has now been abolished for around 90% of taxpayers, and it will only apply to income tax amounts of €18,130 or more (as of 2024). For married couples, the threshold is €36,260.

Church members also pay church tax: 8% of income tax in Baden-Württemberg and Bavaria, and 9% in the other states. The Federal Ministry of Finance provides an income tax calculator to help individuals calculate their specific tax amount. Anyone classified as having limited tax liability generally does not have to pay income tax (see Section 49 of the Income Tax Act). For example, this applies if income is generated in Germany, but the sole proprietor does not have a residence or “habitual residence” there.

According to Section 37 of the Wage Tax Handbook (LStH), taxpayers are required to make quarterly advance payments of income tax. These are due on March 10, June 10, September 10, and December 10. The tax office calculates the amount of advance payments based on the amount of income tax from the previous year. However, advance payments are only required if they total at least €400 in a calendar year and at least €100 for each payment date (see Section 37 of the Income Tax Act).

Sole proprietors must file their income tax return by July 31 of the following year. This rule will apply from the 2024 tax year. In previous years, special rules applied: for example, the tax return for the 2023 tax period is not due until September 2, 2024. If the income tax calculated by the tax office is higher than the total advance payments, the difference must be paid in arrears.

Do sole proprietors have to pay corporate income tax?

Sole proprietors do not have to pay corporate income tax. Corporate income tax applies only to legal entities such as corporations. Sole proprietors are considered natural persons, so their income is taxed as part of the personal income tax. This means that the profits of a sole proprietorship are included and taxed in the entrepreneur’s personal income tax return.

What should sole proprietors know about trade tax?

In addition to income tax, small-scale entrepreneurs must also pay trade tax if they are engaged in commercial activities and are registered with the trade office. However, freelancers are exempt from trade tax if they are not registered. The applicable legislation can be found in the Trade Tax Act (GewStG) and in the Trade Tax Implementation Ordinance (GewStDV).

Trade tax is based on trade income (see Section 6 of the Trade Tax Act). The trade income is the company’s profit, adjusted by various additions and deductions (see Section 8 and Section 9 of the Trade Tax Act). Additions may include, for example, rent and leasehold interest. Deductions can be made for taxes incurred elsewhere, such as business property taxes. If the trade income is below the statutory allowance of €24,500, no trade tax is due (Section 11, paragraph 1 of the Trade Tax Act).

However, the amount of trade tax a sole proprietorship must pay depends not only on its trade income, but also on the municipality in which it is registered. The trade tax rate varies from municipality to municipality in Germany.

For example, the assessment rate in 2023 was 490% in Munich, 470% in Erfurt, and 410% in Berlin. The 2023 assessment rates of German cities and municipalities are available on the German Chamber of Commerce and Industry website. To calculate the trade tax, the tax-free amount of €24,500 is subtracted from the profit, then the result is multiplied by the tax rate of 3.5% and the tax multiplier of the respective municipality or city.

Example calculation:

If a sole proprietor in Berlin had a profit of €60,000, the calculation would be as follows:

€60,000 Profit - €24,500 Tax-Free Amount = €35,500 Taxable Income

€35,500 Taxable Income x 3.5% Tax Assessment Rate = €1,242.50 Assessed Amount

€1,242.50 Assessed Amount x 410% Berlin Assessment Rate = €5,094.25 Trade Tax Liability

Like income tax, trade tax is paid in quarterly installments. There are also similarities in the tax return: starting with the 2024 assessment period, the trade tax return must also be submitted to the tax office by July 31 of the following year. This also applies to sole proprietors who do not pay trade tax because their trade income is less than €24,500.

What should sole proprietors know about VAT?

Sole proprietorships must pay VAT, just like any other company in Germany that charges for goods and services (see Section 1, paragraph 1, #1 of the VAT Act). Only certain medical professions, such as doctors, and small-scale entrepreneurs are exempt from VAT liability.

The small-scale entrepreneur rule can be applied by businesses whose turnover did not exceed €22,000 in the previous calendar year and is not expected to exceed €50,000 in the current calendar year (see Section 19 of the VAT Act). Thus, sole proprietorships may also be exempt from VAT if their turnover is correspondingly low.

The standard tax rate is 19%. In the majority of cases, this applies to the purchase of a product or the use of a service. A reduced tax rate applies to several everyday goods: these incur a VAT rate of 7% (see Section 12 of the VAT Act). For example, this includes certain foodstuffs, books, and orthopedic appliances. Some services are completely tax-free and are declared with a VAT rate of 0%.

Sole proprietors must indicate VAT on their invoices. The net amount of the service or product, the VAT rate, the resulting VAT amount, and the total gross amount must all be listed. If you want to create legally compliant invoices quickly as a sole proprietor, explore Stripe Invoicing. In addition, with Stripe Payments, you can easily collect and manage payments for products sold or services rendered, gain access to over 100 payment methods, and benefit from a fast, one-click checkout.

Sole proprietors withhold and pay the VAT they collect to the tax authorities on a regular basis through the advance VAT return. Conversely, the tax office promptly reimburses sole proprietors for the VAT they have paid on goods and services that other companies supply under the input tax deduction scheme.

In addition to the monthly or quarterly advance VAT return, sole proprietors must file an annual VAT return. The same deadlines apply for VAT returns as for income and trade tax returns.