Tax Basics for Startup

20.10.2020 | Business Know-How, Law & Tax

Tax basics for business founder

As soon as someone starts to earn money, the tax office obviously wants its share in form of tax. If a trade has been registered (LINK Anmeldung), the tax office is automatically informed by the trade office. Freelancers (Internal LINK to Freelancer – LINK intern zu Freiberufler) must register with the tax office by themselves. In the “Questionaire for tax registration” (Fragebogen zur steuerlichen Erfassung) from the tax office, the estimated expected turnover and profits must be stated.These serve at the beginning as a basis for the collection of taxes until the first tax return with the actual figures is available!


There are different types of taxes that a company must pay to the tax office.. These are primarily income tax (Einkommensteuer), trade tax (Gewerbesteuer), corporate income tax (Körperschaftsteuer) and sales tax (Umsatzsteuer). If employees are employed, the wage tax registration must be submitted regularly. Which taxes are levied and when they have to be paid depends on the legal form (Link Rechtsform) of the company as well as size and turnover or profit.

Freelancer pays
Income tax + trade tax
Sales tax as end customer

Person enterprises (e.g. sole proprietorship, GbR, OHG, KG) pays
Income tax + trade tax
Sales tax as end customer

Corporation (z.B.UG, GmbH, AG) pays
Corporate income tax + trade tax
Income tax at the shareholder
Sales tax as end customer

The Value-added tax (Umsatzsteuer) is payable by all legal forms but is not levied on small businesses Kleinunternehmern.

Income tax, corporate income tax and trade tax must generally be paid quarterly in advance. In the tax return after the end of the year, the exact calculation and offsetting against the advance payments already made is then made. Since these are based on estimates, a buffer should be included in the financial planning for possible back payments.

Income tax

Income tax must be paid by natural person (private individuals) who have income. It must be paid on income from:

  • independent work
  • commercial enterprises
  • agriculture and forestry
  • employment of salaried labor
  • capital assets
  • renting and leasing as well as
  • other income

In the case of sole proprietorships or partners in partnerships, income tax is levied on the proportionate profit, regardless of whether it is withdrawn or remains in the company. In the case of corporations, the income tax is incurred by the parties involved as natural persons, e.g. in form of wage tax at the managing director’s office.

Wage tax (Lohnsteuer) is a type of income tax. It is deducted from the non-self-employed employee’s income by the employer and is transferred directly by the employer to the tax office on employee’s behalf. If someone is both employed and self-employed (or has other income, e.g. from renting or capital gains), tax must be paid on all income and the income tax return must be submitted independently.

The amount of income tax depends on the taxable income. There is a basic allowance of certain thousand euros that does not have to be taxed. The income tax rate (Einkommensteuersatz) is linear-progressive and increases with the amount of income from 14% to 45%.

The income tax is paid every 3 months in advance. After the end of the calendar year, the actual income tax to be paid is calculated by the tax return. In the case of start-ups, the calculation in the first year is based on the information on expected profit.

BMF Amtiliches Einkommensteuer Handbuch (EStH)

Trade tax

Trade tax is applied to all profits and paid to the municipality. The municipality also determines the amount of trade tax. Trade tax must be paid by tradespeople in industry, trade, crafts and services. For sole proprietorships and partnerships, there is an allowance of € 24,500 and trade tax can be credited against income tax. Liberal professions and agricultural businesses do not pay trade tax.
The profit is calculated in a complicated procedure, the result is calculated with the individual percentage of the municipality, this is the so-called multiplier Hebesatz. In Germany in 2019, this rate varied between approx. 250 and 580 percent.
Trade tax is payable quarterly as an estimated advance payment, which is offset against the tax return at the end of the calendar year.

BMF Amtliches Gewerbesteuerhandbuch (GewStH)

Körperschaftsteuer

The corporate income tax Körperschaftsteuer is levied on corporations (e.g. GmbH, UG, AG) and on cooperatives.Profits that do not remain in the company but are distributed must be taxed. The corporate income tax rate is 15 percent, plus the solidarity surcharge of 5.5 percent on the corporate income tax.
The quarterly advance payment is offset against the tax return at the end of the calendar year.

BMF Amtliches Körperschaftsteuer-Handbuch (KStH)
Körperschaftsteuergesetz

Sales tax and input tax

Value-added tax Umsatzsteuer, also known as VAT, is payable in addition to the ground price on each “turnover”, i.e. for each product or service. The VAT must be clearly identified on the customer invoice and paid by the company to the tax office. The regular tax rate is 19%, (temporarily 16% from 01.07.2020 to 31.12.2020). The reduced tax rate is 7% (temporarily 5% from 01.07.2020 to 31.12.2020). The reduced tax rate (ermäßigte Steuersatz) can be applied to certain services, e.g. food, books or hotel accommodation. VAT exemptions (Umsatzsteuerbefreiungen) nach §4UStG apply, for example, to services such as those provided by doctors and physiotherapists or educational institutions. Small businesses (Kleinunternehmer) also do not have to pay turnover tax to the tax office.

The VAT is only paid by the end consumer. If a company buys goods from another company, it must pay the sales tax, but is reimbursed by the tax office. The company regularly pays the collected VAT to the tax office. Depending on the sales volume and legal form, this advance return for sales tax is submitted monthly, quarterly or even annually. During the first 24 months, entrepreneur must submit the advance VAT return on a monthly basis. It is possible to postpone the deadline for submission by one month. However, this also means that the input tax is refunded one month later.

For imports and sales from and to other EU countries and non-EU countries (third countries), it should be checked which provisions apply. Services to other EU countries are usually taxed in a similar way as within Germany, services to third countries are not subject to VAT. Imports are subject to import turnover tax, which can be refunded as input tax under certain circumstances.



Umsatzsteuergesetz
BMF Umsatzsteuergesetz Handbuch (UStH)
BMWi Existenzgründungsportal Umsatzsteuer/ Vorsteuer

Small business regulation

For small businesses or freelancers, the small business regulationKleinunternehmerregelung according to §19 UStG can be applied. For this, the turnover must be less than € 22,000 per year. Alternatively, the turnover must have been less than € 22,000 in the last year and less than € 50,000 in the current year (as of 01.01.2020). A small business is exempt from turnover tax. This means that it does not have to charge VAT and can therefore offer the service at a lower price to the customer. The VAT-exempt invoice must refer to §19 UStG.

The bureaucracy is to be reduced for small businesses, as the advance VAT return is no longer required. However, there is also no input tax refund from the tax office for material costs and purchases.This is relevant, for example, if larger investments have to be made or high material costs are incurred. In this case it must be well considered whether the small business regulation really pays off.

The accounting can be done with a simple bookkeeping(LINK ACCOUNTING BASICS), if no merchant status exists and no entry in the commercial register. The profit can be determined with a simple income surplus calculation EÜR.

BMWi Gründungswissen Kleinunternehmerregelung

Overview of taxes: Who pays when?

Income tax

Who?Every entrepreneur (natural persons)
When?Quarterly advance payment; tax return after the end of the calendar year

Corporate income tax

Who?GmbH, UG (haftungsbeschränkt), Limited, AG, Genossenschaft
When?Quarterly advance payment; tax return usually after the end of the calendar year.

Trade tax

Who?Tradespeople in industry, trade, crafts, services (exceptions: liberal professions and agriculture, provided this activity is not carried out in a corporation)
When?Quarterly advance payment; tax return after the end of the calendar year

Value added tax

Who?Any company (exceptions: usually the typical turnover of certain professional groups, e.g. doctors, physiotherapist and small businesses)
When?Usually on the 10th of the month following an advance payment period (month or quarter)

Income tax deduction

Who?Any company subject to VAT (exceptions: e.g. doctors, physiotherapists)
When?Within the scope of the advance VAT returns (see above)

Income tax ( on wages and salaries)

Who?Employer for employee
When?The 10th of the month following

Church tax

Who?Employed members of the Protestant or Catholic church, among others
When?Quarterly advance payment; tax return after the end of the calendar year

aus GründerZeiten09 – Steuern

BMWi Existenzgründungsportal Steuern
BMWi Gründerzeiten 09 Steuern
Amtliche Handbücher

Steuertipps für Existenzgründung
Steuertipps für Existenzgründung
BMWi Gründungswissen Kleinunternehmerregelung