Advance tax payments can be both a curse and a blessing: On the one hand, they can help self-employed people to keep track of their tax liability due at the end of the year. This minimizes the risk of high additional payments.
On the other hand, if they are very high, they can also reduce the payer’s liquidity and thus have a negative impact on their business.
In addition you also have the rather unclear handling of tax prepayments in the annual income tax return.
But don’t worry, here you will find everything you need to know about tax prepayments in Germany.
What is a tax prepayment?
If you are employed, you do not have to take care of your advance tax payments yourself. Instead, these are deducted directly from the salary by the employer and paid to the responsible Finanzamt (tax office).
However, freelancers and Gewerbetreibende (tradepersons) do not receive a fixed salary. Consequently, the Finanzamt would not receive any monthly tax payments from this professional group. In order to nevertheless ensure a regular flow of money from self-employed persons to the state, they have to make so-called advance tax payments themselves.
Solidaritätszuschlag – Solidarity surcharge
In addition to income tax, every tax payer in Germany also has to pay the so-called Solidaritätszuschlag (solidarity surcharge), often abbreviated to Soli. This was originally introduced at the beginning of the 1990s to finance short-term costs for German reunification and the monetary burden of the Gulf conflict, among other things, and was actually only supposed to be payable for a limited period of one year. In the meantime, however, the Soli has been converted into an unlimited payment that is used exclusively to finance the costs of German unification.
🔖 Since 1998, the solidarity surcharge has been calculated at 5.5% on the respective income and is deducted directly from the salary of employees and paid to the Finanzamt (tax office).
However, since 2021 the income threshold for when you need to pay the Soli has been increased. Read here, if the change applies to you and if you can profit from it.
Who has to pay tax prepayments?
In theory, all freelancers and Gewerbetreibende have to pay advance tax payments. However, it depends on what future income is expected when starting a new business or taking up freelance work. At the latest, if the Finanzamt demands more than 400€ back on the last tax return, advance tax payments are due for the coming year.
📆 These are generally paid four times a year and are always due on March 10, June 10, September 10, and December 10.
How to calculate advance tax payments?
The amount of advance tax payments you have to pay is determined by the Finanzamt on the basis of the income from the last tax return. If you’re just starting as an independent, the Finanzamt estimates the expected tax liability. This, in turn, is done on the basis of the information you stated when applying to become self-employed with the form Fragebogen zur steuerlichen Erfassung.
Since annual income can fluctuate greatly, especially when starting a self-employed or freelance business, you can repeatedly apply for an adjustment of your advance tax payments during the current fiscal year. All you have to do is credibly explain why your income will probably be lower or why you will have significantly more expenses than expected.
💡 Accountable tip: In our software you can always see all your income and expenses listed in real time – in the app and on desktop. This gives you a good overview of your available money and makes it easier to calculate your income tax.
However, if your advance tax payment notice seems too high right from the start, you have the option of appealing against it. The Finanzamt must review the notice and decide whether the advance payments should be adjusted accordingly or whether the amount originally determined remains unchanged. If the latter is the case, you can take legal action against the assessment in the last instance at the tax court. But this should be rarely the case.
Where do I include the advance tax payments in my tax return?
One would think that the quarterly advance tax payments made, would also have to be entered in the annual tax return. So that the tax liability due would be reduced by the amount already paid. However, this is not exactly the case.
You state your prepayments in your tax software, for example in Accountable. But the Finanzamt already knows the amount of advance payments made. Thus, they will be taken into account on the final income tax assessment that you receive in the mail and deducted from the amount due.
If you want to know what your actual tax burden is, you can of course grab your calculator and subtract the advance payments made for the year from the tax burden indicated in the tax notice. However, you should not transfer any potentially outstanding amounts to the Finanzamt until you have received the written assessment. In this letter you will find the final calculation of your income tax, which includes the advance payments.
💡 Accountable tip: If you need a program to keep track of your bookkeeping and prepare your tax obligations, try Accountable! Also, if you need help with your tax return or have general questions about tax issues, you should take a look at our Knowledge Center. Here you will find all kinds of helpful articles on the subject of taxes.
