Income tax is the tax on the taxable income of natural persons in Germany. It is determined according to the provisions of the Income Tax Act (EStG) and primarily affects freelancers and owners of small businesses, whose business profit or other income is captured in their personal tax return.
Grunds and Legal basis
Income tax is an annual tax that results from the sum of all types of income (e.g. business profits, income from employment, capital income, rental income). The legal basis is the Income Tax Act (EStG). In addition to income tax, the solidarity surcharge and, where applicable, church tax may be levied.
Special features for entrepreneurs: For sole proprietors and partnerships (e.g. GbR, OHG, KG), the profit from the business activity is attributed to the individual’s personal income and taxed at the personal tax rate. Corporations (e.g. GmbH), on the other hand, pay corporation tax; distributions to shareholders are then subject to income tax again.
Practical application in accounting
For ongoing bookkeeping and tax planning, income tax is one of the most important factors: it affects liquidity, the building of reserves and decisions about investments.
Profit determination: cash-basis (EÜR) vs. balance sheet
For small entrepreneurs and freelancers, the cash-basis profit determination (EÜR) is common. Companies required to prepare financial statements determine profit via the balance sheet and the profit and loss statement.
The determined annual profit/loss is the starting point for calculating taxable income.
Posting and provisions
Record income tax prepayments as receivables or liabilities against the bank account and create provisions at year-end for the expected additional tax liability.
Private withdrawals should be recorded separately, as they do not reduce taxable profit but do affect liquidity.
Prepayments and tax assessment
The tax office sets prepayments based on the previous year’s taxation. Review these regularly and request adjustments if profit forecasts change.
After receiving the income tax assessment notice, adjust your posting and payment plan: pay any additional liabilities on time; use refunds to reduce liabilities or for liquidity planning.
Concrete examples and action points
Practical example 1 — Freelancer using EÜR: You have revenues of €60,000 and business expenses of €20,000. Your annual profit is €40,000, which is declared in the income tax return. From this profit, special expenses and, where applicable, social security contributions are deducted to determine taxable income. The progressive income tax rate is applied to this income.
Practical example 2 — Liquidity planning: Base your calculations on the average tax burden of recent years and build monthly reserves (e.g. 25–35% of profit, depending on your individual tax burden) so that you have sufficient funds at payment dates.
Practical example 3 — Loss carryforward and carryback: If a loss arises, it can be offset against profits of other years according to the rules of the EStG. In accounting, losses must be documented correctly so that they can be taken into account in the tax assessment.
Tips for tax practice
Keep business and personal accounts strictly separate. This simplifies profit determination and proof requirements towards the tax office.
Document all business expenses completely (invoices, receipts, contracts), as they reduce taxable profit.
Plan prepayments and review the assessment notices annually for plausibility; request adjustments in case of large profit fluctuations.
Seek tax advice for complex matters (e.g. private use of vehicles, investment allowance, profit distributions) to avoid errors and additional payments.
Conclusion: Income tax is central to financial planning for freelancers and small businesses. Clean bookkeeping, timely reserve building and knowledge of the relevant EStG provisions provide planning security and help avoid liquidity bottlenecks.