As a small business owner:in the tax return: How to proceed and what you need to consider

Some people get stressed just hearing the term tax return. Images of forms and attachments arise in their minds, demanding data in cryptic officialese that they didn't even know they had. Even entrepreneurs sometimes shy away from the annual compulsory exercise. But this article shows you that German tax law is better than its reputation, especially for small businesses.

What are small businesses and what taxes do they have to pay?

To get straight into the thicket of technical terms: What are entrepreneurs anyway, whether large or small? The formal answer in tax law:

An "activity" is anything that serves to generate sustainable income, even if it is not about making a profit.

You are a small business owner if:

• you are resident in Germany
• your turnover in the current calendar year is not expected to exceed 50,000 euros
• your turnover in the previous calendar year did not exceed 22,000 euros

These characteristics apply to all small businesses, regardless of whether they are self-employed or commercially active.

Why does the difference between a liberal profession and a trade matter at all?

Because the two areas are treated differently for tax purposes. In principle, liberal professions are those whose main purpose is the provision of certain services which, according to the law, require "special professional qualifications" (Section 1 (2) of the Partnership Act - Part GG). Typical examples are lawyers, tax consultants, doctors, but also business consultants with a degree.

However, self-employed persons in trade, including operators of online stores, are generally tradespeople. Unlike freelancers, they must therefore register a trade and are therefore generally liable for trade tax.

There are also other types of tax that only apply if certain conditions are met, such as corporation tax (which replaces personal income tax for companies).

Which tax returns are relevant for small businesses therefore also depends on the legal form chosen for the business activity. Most small business owners are considered sole traders (or "solo self-employed").

All self-employed persons, including small business owners (whether freelancers or tradespeople), must pay tax on their income.

However, whether sales or trade tax is due depends on certain conditions. The following diagram illustrates how small business owners are classified and which taxes play a role for them.

Tax returns for small businesses in practice

What does this mean in concrete terms for your tax return? You can find out in this section: it goes into details such as forms and deadlines for the individual taxes.

Income tax for small business owners

The difference between natural persons (simply put, people) and legal entities (limited liability companies, public limited companies, ...) is important here. The basic principle is that income tax always applies to natural persons. Legal entities, on the other hand, are subject to certain corporate taxes such as capital gains tax.

For you as a natural person, all income that you generate counts. In addition to the profits from your self-employed activity, this may include all other income, for example the sale of electricity from your solar system or rental income.

Small business owners, including commercial ones, calculate their profits using the so-called revenue-surplus account (EÜR). In principle, this is very simple: income minus expenses equals profit.

You then deduct special expenses such as pension costs and contributions to health and long-term care insurance from your profit (and any other income). This is how you determine your taxable income.

Tax is only payable if this income exceeds the basic tax-free allowance of EUR 9,984. This applies to single people; for married couples, double the amount applies (as of 2022). But you must submit a declaration in any case.

To put it simply: you start paying tax from a (taxable) income of EUR 10,000.

To illustrate this, the following table uses three exemplary income levels to show what percentage of your income is due as tax (average tax rate):

• with an income of 10,400 euros (starting rate just above the tax-free amount)
• at EUR 22,000 (previous year's turnover limit for small entrepreneurs; the assumption is that profits from self-employment are your only source of income and you have zero costs, i.e. turnover equals profit)
• at 50,000 (small business turnover limit for the current year)

The data applies to single people and the calculation year 2022. For married couples, the so-called splitting table is decisive. If you know your individual taxable income, you can also calculate your tax burden using online calculators.

Taxable income in euros	Average Tax rate	Tax burden (without church tax) in euros
10.400	0,07 %	7
22.000	12,13 %	2.668
50.000	24 %	11.884

You must submit these documents to the tax office with your tax return as a small business owner:

• EÜR attachment
• As a freelancer: in Annex S (income from self-employment)
• As a trader:r Annex G (income from business operations)

The regular deadline expires on July 31 of the following year.

Value added tax for small businesses

Normally, everything you sell to consumers is subject to sales tax (colloquially known as VAT). Currently, the regular tax rate is 19%, the reduced rate is 7% (it applies to certain products such as books or services such as theater tickets).

However, small business owners can opt for the so-called small business regulation and apply it to their tax return. In this case, they do not have to charge VAT to their customers.

The main advantage of this is less paperwork: you don't have to

• do not show sales tax on your invoices (but state: "In accordance with § 19 UStG, no sales tax is charged"),
• do not send advance VAT returns to the tax office on a monthly or quarterly basis and
• do not file a VAT return at the end of the year.

In addition, you may be able to offer consumers lower prices than the competition - after all, VAT is not a transitory item for end consumers.

The disadvantage is that you also have to forego the input tax deduction. Input tax is the VAT that you pay on goods or services that you purchase in your capacity as an entrepreneur. You can deduct this from the VAT that you collect and pass on to the tax office.

Do small business owners have to submit a trade tax return?

This tax is paid on the trade income, which is not necessarily equal to the profit. The income is determined according to somewhat confusing legal regulations by adding and subtracting from the profit.

This tax liability is calculated using the following formula:

Income x 3.5 percent x assessment rate of the respective municipality = trade tax

The trade tax allowance of EUR 24,500 is crucial for small business owners. This income should practically never be reached (otherwise you would no longer be a small business owner). Trade tax is therefore generally not an issue for small business owners.

Special features of intra-Community trade

In e-commerce in particular, it is not uncommon for you to have business relationships with other EU countries. In this case, there are a few additional things to consider.

For example, so-called "intra-Community acquisitions" (i.e. when something is delivered from one EU country to another EU country) regularly incur VAT, which in this case is called acquisition tax. Unless you have opted for the small business regulation.

The same exception applies if you carry out tax-free intra-Community deliveries. Without the small business regulation, you are then obliged to submit a recapitulative statement (ZM) in electronic form. This is important because you may face a fine if you fail to do so.

Conclusion: Tax advice can also be worthwhile for small businesses

There are certainly more pleasant things for small business owners than dealing with tax returns. But there's no getting around tax and you can't avoid spending a certain amount of time on it. However, it can also be an efficient solution for you to let a tax consultancy take on the main work.

This sometimes pays off in two ways. Not only can you concentrate on your business and grow your turnover and profits without having to worry about turnover limits for tax purposes. Expert tax advice also prevents you from making costly mistakes in case of doubt.