Income-related expenses (Werbungskosten) are expenses that are directly caused by gainful employment and serve to generate, secure or maintain income. For employees, income-related expenses are considered tax-deductible expenses under Section 9 of the German Income Tax Act (EStG); for the self-employed and tradespeople, comparable expenses are treated as business expenses.
Definition and legal basis
The term income-related expenses is anchored in Section 9 EStG and primarily relates to income from employment. Income-related expenses reduce taxable income if claimed in the tax return (Annex N). For entrepreneurs and freelancers, the rules for business expenses apply (§ 4 EStG as well as commercial law provisions for companies preparing financial statements).
It is important to distinguish: expenses caused by self-employed activity do not count as an employee’s income-related expenses but as the company’s business expenses. Likewise, private living expenses are generally not deductible.
Typical items and required documentation
In practice, income-related expenses commonly occur in the following areas. Listing these items helps with accounting entries and preparing the tax return.
Common income-related expenses
- Commuting expenses between home and workplace (distance allowance)
- Business travel expenses and per diems
- Continuing education and training costs, professional literature
- Work equipment (e.g., laptop, tools, professional books)
- Maintaining a second household for work-related reasons when working away from home
- Occupational clothing, union dues, professional association fees
- Bank account fees, work-related telephone and internet costs
Documentation requirements
- Retain supporting documents: invoices, receipts, mileage logbook, business travel expense reports
- Records showing the split between private and professional use for mixed-use items
- For vehicles used for work: a mileage logbook or the flat-rate distance allowance
Accounting practice and reporting
For freelancers and small businesses that prepare an income-expenditure statement (EÜR), business-related expenses are recorded as business expenses and reduce profit. Employees do not record income-related expenses in the company bookkeeping but in their personal income tax return (Annex N).
Input tax and VAT
Entrepreneurs subject to VAT can claim input tax contained in supplier invoices. For employees without entrepreneurial activity, input tax deduction is not available; in the tax return gross amounts are used.
Timing and deductibility
- Under the EÜR the cash-basis principle applies: expenses are recognised in the calendar year in which they were paid.
- Businesses preparing financial statements follow the commercial and tax-law matching principle (period-accurate accruals).
Practical examples and common pitfalls
Concrete examples help avoid mistakes and ensure the correct accounting treatment.
Example 1: Laptop for an employee
- Situation: An employee purchases a laptop and uses it predominantly for work.
- Tax treatment: Deductible as an income-related expense in Annex N is possible; for mixed use an allocation must be made. If acquisition costs exceed the threshold for low-value assets (Geringwertige Wirtschaftsgüter), depreciation may be required.
- Accounting: The employee documents usage and retains receipts; an employer who provides the laptop records it as a business expense.
Example 2: Commuting to the workplace
- Situation: Daily commute between home and workplace.
- Tax treatment: The distance allowance can be claimed as an income-related expense; the commuter allowance is applied per kilometre.
- Note: Business travel versus regular commuting must be distinguished, as different reimbursement options apply (per diem, mileage allowance).
Common pitfalls
- Missing documentation: Without invoices or proof, expenses are often rejected.
- Incorrect classification: Freelancers sometimes mistakenly record private expenses as income-related expenses instead of private withdrawals. Consequences include adjustments and possibly additional payments.
- Unclear usage allocation: For mixed-use assets, documentation of the business use portion is required.
Conclusion: Income-related expenses are an important tool for tax optimisation for employees. For freelancers and entrepreneurs, comparable principles apply via business expenses. Proper document retention, correct classification in the accounting records and knowledge of the legal basis (§ 9 EStG, EÜR rules) are crucial to ensure deductibility. In case of uncertainty, consult a tax advisor or the responsible tax office.