Who does your taxes 1

Tax - what is a tax?

A tax is an amount of money that is levied by government agencies on all taxable persons to generate income, e.g. income tax.

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Tax is probably not the favorite topic for most self-employed people, but every entrepreneur should at least deal with the basics.

Basically, the tax is there to finance the expenses of the public authorities, i.e. the municipalities, the states and the federal government.

All citizens of this country use public facilities such as roads or schools and benefit from the work of state employees such as police officers or teachers. All of this costs money and is financed by taxpayers' money.

The legislature has come up with various methods of what a tax is linked to, how it is calculated and who has to pay it.

The highest tax revenues come from the following taxes:

  1. Sales tax or VAT 197 billion euros (2013)
  2. Income tax 158 billion euros (2013)
  3. Trade tax 43 billion euros (2013)
  4. Income tax 42 billion euros (2013)
  5. Energy tax 39 billion euros (2013)

As a self-employed person, you have to deal in particular with VAT, trade tax and income tax.

Sales tax or VAT

Officially this tax is called sales tax, but in everyday life it is better known as sales tax. You come across this tax by far the most frequently in your everyday life.

Almost every product or service is subject to a specific VAT rate, which is either 7% or 19%. Some payments, such as renting your apartment, are exempt from sales tax.

All entrepreneurs are obliged to add VAT to their actual sales price. For example, if a laptop is to be sold for 1,000 euros, the seller has to add 190 euros (19% of 1,000 euros) VAT to the price.

The customer has to pay 1,190 euros for the laptop. The seller keeps his 1,000 euros from this money and has to pay the 190 euros to the tax office.

You can get a more detailed explanation of the VAT system in the article on VAT.

Business tax

The trade tax is so called because it has to be paid by all traders. So if you are not a business, but are a freelancer, you do not have to pay any trade tax.

This tax is based on the trader's profit.

The special thing about the trade tax is that it has to be paid to the respective municipality.

As a result, the trade tax is not the same everywhere and can vary from municipality to municipality. There is a tendency to say that the trade tax in cities and metropolitan areas is somewhat higher than in rural areas.

Overall, however, you do not need to worry too much about the amount of trade tax, as you can have it credited in your income tax return.

As a trader, you pay more business tax than a freelancer, but you pay less income tax

Income tax

Income tax is probably the best known tax alongside value added tax.

It was calculated based on your income.

In the case of employees, this tax is already deducted from the payroll and the employee is only paid a net amount.

Since you as an entrepreneur do not receive any pay slips, you have to add up your income yourself and transfer the income tax to the tax office.

Income tax has a progressive tax rate. This means that if you earn very little, you only have to pay a very small percentage of your income as tax. However, as your income increases, so does the percentage you have to pay.

For example, with an annual earnings of only 5,000 euros, you don't have to pay any income tax at all. But if you earn 1 million euros per year, you have to pay 45% of that as income tax to the tax office.

This rising tax rate is called tax progression.