Who has to pay solidarity surcharge in Germany?

In Germany, every taxpayer must pay a solidarity surcharge called Solidaritätszuschlag, or Soli. But as of January 2021, the threshold based on which you have to pay the surcharge has been increased, resulting in tax cuts for an estimated 90% of German taxpayers, including freelancers and self-employed business owners. Not sure if this applies to you? Read on to find out how to calculate the Soli and if you are one of the lucky ones to benefit from the change.

Solidarity surcharge: Rules for freelancers

The solidarity surcharge, or Soli, was introduced in 1991 to help carry the cost of the German reunification. The surcharge has to be paid in addition to your income tax and potential trade tax.

Freelancers must pay the solidarity surcharge just like every other taxpayer. The only difference is that an employee’s surcharge is automatically deducted from their wage, while freelancers and self-employed workers have to pay the surcharge when paying their annual income tax. 

If your annual income exceeds the tax free allowance of 9,744 Euro (for 2021), you will have to pay income tax on your earnings―and you will be charged an additional 5,5% on your taxable income to pay the solidarity surcharge. 

Who benefits from the abolition of the solidarity surcharge in 2021?

To relieve the strain on low and medium wage earners, the German government has decided to lift the income threshold: from 972 Euro to 16,956 Euro for singles and from 1,944 Euro to 33,912 Euro for married couples. This will result in a major tax dedication from the 1st of January 2021 for about 90% of German taxpayers. Only high income earners will still have to pay the surcharge. 

Tax free thresholds for the solidarity surcharge

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What about business owners?  

Sole traders and partnerships (OHG and KG are the legal terms in German) that solely earn income through business transactions also benefit from the abolition of the surcharge. If their profitable business income is less than the threshold, they will not have to pay the additional solidarity surcharge. And if their income falls into the mitigation zone, they only partly have to pay the additional tax. 

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Mitigation zone for the solidarity surcharge 

The so-called mitigation zone was introduced to ensure that employees and freelancers whose income is only just above the new threshold won’t be charged the full solidarity surcharge. Instead, the amount is gradually adapted to your income and will increase the more money you make.

How to calculate the solidarity surcharge 

In general, the solidarity surcharge equals 5.5% of your income tax and will only be charged if your earnings exceed the tax free threshold. Child tax free allowances are deducted before the calculation of the solidarity surcharge, unless they have already been taken into account for your income tax. 

Example: Single freelancer

Claudia, single, has earned 44,000 Euro before tax in 2020. She has to pay 8,852 Euro income tax. Since her income exceeds the threshold for 2020, she still has to pay the full solidarity surcharge (8,852 Euro x 5.5% = 486.86 Euro). 

For 2021 however, Claudia’s income will not exceed the new increased threshold and therefore she won’t have to pay the solidarity surcharge, leaving her with additional savings of 486.86 Euro a year.

Conclusion

From 2021 on, most freelancers and self-employed workers will not have to pay the solidarity surcharge anymore. Sole traders and business partnerships will also benefit from the new rule that saw the increase of the tax threshold for the surcharge. This results in additional savings of almost 500 Euro for singles without kids who earn 44,000 Euro a year.

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