The rise in freelancers is truly a marker of the gig economy revolution and changing work patterns at large. Freelancing and contracting are popular amongst workers of all generations, but increasingly more so among millennials.
With its sizable economy and strong workforce, Germany maintains rigid rules and regulations around freelancers, independent contractors, and self-employed workers; all of which are equally relevant for any businesses hiring in the country.
In Germany, a freelancer (called a ‘Freiberufler’ m. / ‘Freiberuflerin’ f.) is defined as a person who carries out any of the below professions independently; i.e. without functioning as a business, a partnership, or a full-time, part-time or remote employment contract.
The list of ‘liberal professions’ recognised as freelancing work, governed by the Institute of Liberal Professions (IFB) includes:
Note that other similar professions may also qualify as freelancing work, provided that they meet the conditions outlined above.
The rules can be tricky to navigate from the outset, however, as there is an important distinction in Germany between freelancers and the self-employed.
Freelancers must register as such with the local tax office in their city, known as the Finanzamt. Working as a self-employed/sole trader (AKA ‘Gewerbetreibender’), on the other hand, means still operating independently but under a registered business name. As such, the business name in question needs to be registered with the Business Registered Authority, or Gewerbeamt.
Freelancing or contracting in Germany comes with its fair share of administrative tasks. These workers are liable for both tax and Social Security contributions, and these duties are strictly regulated by the German Income Tax Act, the Partnership Companies Act and the Act to Combat Undeclared Work. Freelancers in Germany must prepare their own tax returns periodically to declare their revenue. The average freelancer will also usually pay approximately 19% VAT but this can go down as low as low 7%, according to their gross income and the services they offer.
Permanent employees, on the other hand, generally have their VAT (tax) and government contributions organised for them by their employers as part of a PAYE (Pay As You Earn) system. Employers cover half of their social security contributions, as well as 100% of their work-related accident insurance.
Social security contributions are mandatory for German workers, and these cover health insurance, nursing care, pensions, and unemployment insurance. Only independent contractors, however, are exempt from this, and must instead arrange for their own social security and private pension funds. In some cases, contractors may qualify for the national German pension scheme and if so, they must pay the contribution in full themselves.
The complicated laws around tax and HR for independent workers begs the question: Are independent contractors and freelancers better off as employees?
The biggest issue with employment status in Germany is getting it right. It’s quite common for employers to mistake their staff for independent contractors, depending on the working arrangements in place. This is especially important in Germany, where labour laws are known to be a little more stringent than in other countries.
Social Security authorities, for example, will often check for unregistered employees to ensure their contributions are paid where due. Misclassified workers may also be looked into during termination cases, as independent contractors can file for an investigation themselves if they wish. Thus, if you consciously choose to hire contractors instead of permanent employees for your business, you must do so with extra caution to avoid hefty penalties.
If you have been working with contractors and freelancers in Germany on a regular basis, you may wish to consider only engaging employees moving forward, or transition your existing contractors to permanent employees for your business. Many employers think twice about the idea of employing workers with a set contract in place, particularly if they are based in another country and are hiring remotely.
But hiring in other countries across Europe or the globe doesn’t have to be an administrative nightmare. That’s where authorised, international third-party employers can come in handy. Known as an EOR (Employer of Record) or PEO (Professional Employer Organisation), these businesses help you hire and manage staff with ease, wherever you wish to grow your operations and teams. They navigate and ensure compliance with local labour laws so you don’t have to.
With an estimated 43 million people employed in Germany – out of an 83-million-strong total population – there’s plenty of talent to go around, and even though it can be tricky staying on top of current laws and work patterns, Teamed are here to help every step of the way.
Not quite sure how you could be hiring and managing staff more efficiently in Germany or across the world? Get in touch to ensure your practices are up to code – so you can focus on expanding your business to new heights (and regions)!