Income tax prepayments are payments set by the tax office, usually payable quarterly, on the expected annual income tax. They serve to spread the tax burden evenly over the year and are based on the most recently assessed tax or an estimate by the tax office (cf. §37 EStG).
When and for whom are prepayments relevant?
Income tax prepayments are common for freelancers, self-employed persons and owners of small sole proprietorships because no ongoing wage tax is withheld as with employees. The tax office sets prepayments when the assessed tax of the last assessment period exceeds a certain amount or when an additional payment is to be expected.
Important: Corporations (e.g. GmbH) are not subject to income tax but to corporation tax (Körperschaftsteuer); different prepayment rules apply to them.
Calculation and due dates
Calculation
The tax office usually refers to the last income tax assessment and divides the estimated annual tax by four. If significantly higher or lower income is foreseeable, you can file an application for adjustment.
Due dates
In practice, prepayments are due on the following dates: 10 March, 10 June, 10 September and 10 December of a year. In case of late payments, default surcharges under the Fiscal Code (e.g. §240 AO) and interest on back payments (§233a AO) may be charged.
Accounting treatment in practice
For accounting it is crucial: income tax is not a business expense and does not reduce profit. Therefore it must not be recorded as an expense in the profit and loss statement. Instead it affects the equity account or the owner's account.
Practical journal entries:
- Sole proprietor / freelancer (double-entry bookkeeping): Bank to Owner's account (withdrawal).
- EÜR (cash-basis profit determination): Record the payment generally as an owner's withdrawal; not as a business expense.
| Example | Journal entry |
|---|---|
| Prepayment €2,500 | Bank to Owner's account €2,500 |
Note: For transparency it is advisable to maintain a separate tax account in the chart of accounts, to which prepayments are initially posted and later offset against the actual tax liability. Separate accounts or provisions should also exist for VAT and trade tax.
Practical tips, adjustment and consequences of non-payment
Adjustment of prepayments
If your income is expected to deviate significantly (e.g. contract cancellations, illness, temporarily lower turnover), you can apply to the tax office for a reduction of the prepayments. Submit the request in writing and justify the expected change in income; it is advisable to include a rough forecast or cash flow plan.
Excessive prepayments
If the tax office has set prepayments too high, a refund is usually issued after the income tax assessment. Through coherent forecasts and timely applications you can prevent unnecessarily tying up funds.
Consequences of non-payment
If prepayments are not made, late payment penalties, reminders and possibly enforcement measures may follow. In addition, the tax office may increase the prepayments if available documents indicate that the tax owed will be higher.
Concrete use cases and workflow for bookkeeping
Recommended workflow for freelancers and small business owners:
- Check prepayments and due dates based on the last tax assessment.
- Liquidity planning: set aside a monthly reserve for tax payments (e.g. a separate business account or sub-account "tax reserve").
- If a change is expected: file an application for reduction/increase in good time.
- Post prepayments as owner's withdrawals or via the tax account and reconcile them at the annual assessment.
With this approach you avoid surprises regarding your tax burden and keep your bookkeeping clear and auditable.