Self-employed or employed?

How much someone earns is usually less dependent on whether being self-employed or employed. It is possible to earn a lot of money as an employee. In contrast, there are self-employed people who work in low-paid industries and earn less than the minimum subsistence level. How much money a person earns depends mainly on the industry sector. IT specialists generally earn good money – no matter whether they are employed or self-employed. Drivers in logistics and courier services generally earn rather poorly – no matter whether they are employed or self-employed. Working for yourself means that any failure equates to no income, unlike working for an employer where you would have a financial safety net. Being self employed can be very advantageous but for others it can be the wrong choice.

Self-employed persons must finance their social insurance alone. In general, they have to pay the insurance contributions themselves in full, as nobody is paying the employer’s share of the contributions for them.

Social insurance consists of four main components:

1. Health insurance and long-term care insurance (Krankenversicherung, Pflegeversicherung)
2. Statutory pension insurance (gesetzliche Rentenversicherung)
3. Statutory accident insurance (Gesetzliche Unfallversicherung)
4. Voluntary statutory unemployment insurance (Freiwillige gesetzliche Arbeitslosenversicherung)

To be taken into account in your calculation: For statutory health insurance (Krankenkasse), the monthly contribution starts at about 15 % of the profit earned and varies between 200 and 1,000 euros per month. Ask your Krankenkasse out about the possibility of taking out a sickness benefit plan (Krankengeld). This allows you to compensate for part of your loss of income during illness. Self-employed women also receive maternity benefits (Mutterschaftsgeld), provided they have statutory health insurance and are entitled to sickness benefits. For statutory pension insurance, the full monthly contribution is 18.6 % of the profit earned and varies between 100 and 1,400 euros per month. For the amount of a possible monthly compulsory contribution to the statutory accident insurance, please contact your responsible Social Accident Insurance Institution.

Self-employed people have no paid leave and no automatic continued payment of wages, no sick pay in the event of illness. It is up to you to protect yourself against these lost earnings. Include appropriate contributions in your financial plan! Take realistic vacation and sick days into account when calculating your hourly rates for your service or the price calculation for your products.

Self-employed persons are confronted with higher financial risks than employees. They bear the full entrepreneurial risk, their income fluctuates and is dependent on the order situation. You have no protection against dismissal or job security. Self-employed people therefore need sufficient reserves for times when sales are low so they can keep up with rent, social insurance and living expenses. Take these reserves into account in your financial plan!

Self-employed persons are obliged to submit a tax return. The profit from your self-employment is taxable, which you must take into account in your financial plan. Determining your profits in accordance with German tax law is one of your personal tax obligations – for which you will also be held personally accountable. Unlike income tax for employees, where the employer automatically transfers tax payments to the tax office, self-employed persons must pay income tax to the tax office four times a year in advance. Other taxes that are payed in advance include trade tax, corporation tax and value-added tax. Take these payments into account in your financial plan!

False self-employment or “Scheinselbstständigkeit”
What is known as “false” or “bogus” self-employment (“Scheinselbständigkeit“) may exist if someone claims to be self-employed, although their relationship to the client points to dependent employment. It is often difficult to distinguish between genuine self-employment and regular employment. Multiple factors from several fields of law need to be taken in account: employment law, social security law and tax law. An English language example is available from the Office for the Equal Treatment of EU Workers.

Employee-like employment or “arbeitnehmerähnlichen Selbstständigkeit”
Are you are legitimately self-employed but work only for one client? Then you might have to join statutory pension insurance. Statutory pension insurance is compulsory for certain occupational groups such as teachers, artists, nurses, licensed craftsmen and those who have mainly only one client. In the statutory pension they are known as “Selbstständige mit einem Auftraggeber“. Learn more about pension insurance and who to contact for professional advice.

Beware: False self-employment and employee-like employment could cost you significant amounts of money in paying taxes and social insurance contributions back or a possible court action by your customer or legally determined employer who are having to foot your tax bill.

It is also important to consider fundamental entrepreneurial issues that influence your financial planning:

• Self-employed people need to win enough customers so they are able to finance their entire livelihood from the profits they make, including social insurance and reserves. Until you can build up a sufficiently large volume of orders, you need to finance your start-up phase with your living expenses and ongoing operating costs from financial reserves. The start-up phase often lasts between 12 and 18 months, even for successful start-ups.
• Self-employed people are in a constant state of customer acquisition and ongoing customer care. They are dependent on their customers, the customers‘ decision-making processes and working methods. Clients can cancel orders at very short notice. By then, it is often too late to find other assignments for that period. Cancellation fees are only paid very rarely.

Mastering self-employment successfully and sustainably is very challenging. Ask yourself if you are committed to that challenge and the accompanying implications such as:

• Self-employed people often have a high workload and work more hours per week on average than salaried employees. In addition to your actual self-employed activity, customer acquisition, bookkeeping and marketing take up a lot of working time. You need to take this time into account when calculating your hourly rates for your service or the price of your product.
• There are a number of legal and tax rules and obligations for the self-employed, and you are responsible for complying with them. Do you have the necessary professional and commercial qualifications or are you going to a professional? If so, take the expenses of your tax advisor into account in your financial plan!

Navigating the tax and legal challenges of self-employment can be complex when there is a language barrier. Proficiency in German is crucial for self-employed work. You must be able to fully understand and apply the requirements in terms of taxes and accounting, laws, social and business insurance as well as communication with the authorities. Language level B2 seems recommendable to be able to handle that communication. Language difficulties can result in misinterpretations of laws and regulations, flawed contracts, ineffective communication and delays. The stakes are high as errors can lead to significant financial damages that you will have to account for as as any other business owner.

Citizens of a member state of the European Union (EU) or an EFTA country (Iceland, Liechtenstein, Norway and Switzerland), do not need a special permit to go selfemployed. Citizens of a non-EU or non-EFTA country will need to clarify whether their residence status or permit entitles them to go self-employed. If not, they must apply to the Foreigners Office for an additional permit. Please note: If the residence permit bears the words “Erwerbstätigkeit gestattet” (“Employment permitted”), or “Niederlassungserlaubnis” a special additional permit is not required.

How do I apply for a residence permit to go self-employed?

Find out whether you need official recognition, who is responsible for providing it and how the recognition process works.