Freelancer and the „false“ self-employed phenomenon

Some service industries employ freelancers rather than employees in order to carry out certain jobs. To work as a freelancer can be beneficial both for the freelancer and his/her customer. However, if the freelancer’s position is similar to the one of an employee major risks may occur both for freelancer and customer.

Benefits of freelance work in Germany

Germany has strict employee protection laws for example in regard to dismissal protection, vacation entitlement, sick payments, minimum wages. These provisions have not to be observed if a person is self-employed.

Another reason for choosing the status as a freelancer is that self-employed individuals are not liable to social security contributions. In Germany social security contributions have to be paid by employer and employee on equal terms and can be as high as 40% of a salary or other benefits.

For expatriates who are still health insured or pay into pension plans in their home countries the avoidance of German social security contributions can be beneficial. It does not make economic sense to pay into two systems without getting adequate benefits in return.

However, if a freelancer is performing his/her job like an employee this may be seen by German authorities as an artificial arrangement. These arrangements are classified as „false“ self-employment and bear various risks for freelancer and his/her customer.

„False“ self-employment

Persons who have an arrangement as self-employed freelancer but performs their services in a way which is typical for employees are treated as such for social security purposes. This is the case if the contractual partner has the executive prerogative of an employer and the freelancer is integrated into the organisation of the partner.

German social security agencies qualify a contractual agreement as an employment relationship if the following applies:

  • The freelancer does not employ staff.
  • He/she works predominantly for one contractual partner.
  • More then 5/6 of his/her turnover is paid by this partner.

Risks of a „false“ self-employment

If tax authorities or social security agencies qualify a contractual arrangement as employment both freelancer and his contractual partner face severe negative consequences.

  • Social security contributions have to be paid to the agencies retrospective up to a period of 4 years. This applies for the employer’s and the employee’s part of the contributions. In addition to that interests and penalties might be due.
  • If the freelancer has charged his/her services with VAT the contractor will lose his right to deduct this tax as input-VAT. He/she has to pay respective amounts to the tax office. Interests might be due. This can be rectified by the freelancers under certain circumstances. If the VAT is refunded to them they have to pay these amounts to his partner.

In most cases these arrangements will be detected in tax or social security audits years later. This results in significant back payments and interests. Especially smaller companies often face threatening liquidity shortfalls.

Note: In Germany social security contributions will note be administered by the tax authorities but by social security agencies. Both organisations are entitled to carry out separate audits. This doubles the risk that respective arrangements will be detected.

Professional sectors concerned

The following professional sectors are affected:

  • film and television industry
  • graphik- and text-designer
  • building industry
  • nurses and care staff
  • lecturers, teachers, coaches
  • IT-services (e.g. software developers)

Test

The following questions should be asked:

  • Is the freelancer free of directives by his contractual partner?
  • Has the freelancer control over his/her own working hours?
  • Is the job activity of the freelancer different from the one of employers of the contractual partner?
  • Is the freelancer free of giving periodic working reports?
  • Is the freelancer able to choose his working place?
  • Is the IT Hard- and Software of the freelance not under the control of his contractual partner?
  • Does the freelancer acquire new clients and does he/she do marketing for him- or herself?
  • Does the freelancer use own business cards and business paper?
  • Has the freelancer his/her own business website?
  • Does the contractual partner pay only for services performed by the freelancer?
  • Is the freelancer not paid by the contractual partner when being on holidays?

If most questions have been answered with „yes“ this indicates that the freelancer is no „false“ self-employed.

Glossary

„False“ self-employment Scheinsselbständigkeit
Freelancer Selbständig Tätiger
Tax office Finanzamt
Social security agencies Sozialversicherungsträger
Value added tax (VAT) Umsatzsteuer (USt)

Autor: Peter Scheller, Steuerberater, Master of International Taxation, Fachberater für Zölle und Verbrauchsteuern

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4 Antworten auf Freelancer and the „false“ self-employed phenomenon

  1. Mihaela Horecica sagt:

    Dear Mr. Scheller,

    I worked as a freelancer in Germany since 2015 until end of February 2017.
    I filed and closed the Income tax returns for 2015 and 2016.
    However, in 2017, I moved and setup a self-employed entity in Switzerland starting February 2017. I have some invoices that were paid in January 2017 and I do not know if that income I can declare it completely in Switzerland, or do I have to declare it in Gemany only, considering I was resident in Germany only one month out of 12 of the financial year 2017. In case I have to declare it Germany, would that income be taxes as annual or as pro-rata per period?

    Thank you so much!
    Mihaela

  2. Peter Scheller sagt:

    To me it looks like you have to file a inocme tax return in Germany.

  3. Michelle S sagt:

    Herr Scheller

    I will be applying for a marriage visa and live with my german fiance soon, and there is a possibility that I get a remote IT support work from an affiliate of my employer. Now my boss wants me research how this is possible. What’s the best way to know the requirements and deal with the tax and social security in germany? And the best option (cost saving). Is it better to get a Zeitsarbeitfirma, like an agency to handle for my gov’t payroll deductions? Thank you in advance!

    Mich

    • Peter Scheller sagt:

      You will find a lot of articles on this website which might be of help for you. However, I think that you need the support of an experienced German tax adviser.

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