Overview of taxation law for language trainers and language schools
Depending on the type of their activity, language trainers come into contact with different taxation laws:
- as a sole trader with income tax and (maybe) VAT
- as a partner and legal representative of a limited liability company (GmbH) with corporation tax, income tax and (maybe) VAT
- as an employed trainer with income tax / wage tax
Sole traders are faced first and foremost with income tax. You are usually faced with three different forms of income tax:
- In the form of wage tax retained by the employer when you are employed. In this case, you earn income from non-self-employed work.
- In the form of reported income tax, if you are not employed. In this case, you earn income from self-employed work. You must then calculate the taxable profit yourself (see here the section on calculating profits) and pay the corresponding amount to the tax office.
- In the form of capital gains tax for most income from interest. It is also described as source tax, because it is automatically withheld at source, usually by the bank.
What type of income do trainers earn?
As indicated in the section on income tax, you are subject to income tax on your income from self-employed work and must report this yourself. In the case of a non-self-employed activity as an employee, income tax is deducted by the employer as income tax and paid to the tax office.
Calculating profits in case of self-employment
If, as a trainer, you perform work that can be qualified as self-employed work, you have three ways of calculating your profit:
- Income/expense statement
- Basic lump-sum consolidation
- Double-entry bookkeeping
Income/expense statement
The income/expense statement is a cash flow statement. Profit is not calculated on the basis of double-entry bookkeeping but by comparing cash inflow with cash outflow. In the case of the income/expense statement, only money that has flowed into or out of the cash book or the bank account has an effect on profit.
Company expenses must be categorised and presented in groups in this statement and be attached to the tax return.
Format of an income/expense statement
| Invoiced income | _____________ | |
|---|---|---|
| Total main income | _____________ | |
| Sale of assets | _____________ | |
| Total secondary income | _____________ | |
| Total company income | _____________ | |
| Company expenses | ||
| Wages and salaries | _____________ | |
| Social security contributions, | ||
| Other personnel expenses | _____________ | |
| Total personnel expenses | _____________ | |
| Rent | _____________ | |
| Electricity, gas, heating | _____________ | |
| Office maintenance, repairs | _____________ | |
| Telephone, postage | _____________ | |
| Vehicle costs, travel expenses | _____________ | |
| Professional training and representation | _____________ | |
| Low-value goods | _____________ | |
| Accounting, consultancy services, stationary expense | _____________ | |
| Representation fees, works contract | _____________ | |
| Interest, financing expense | _____________ | |
| Costs for chamber membership, mandatory insurance, administration | _____________ | |
| Other company expenses | _____________ | |
| Total other company expenses | _____________ | |
| Depreciation expense acc. to assets schedule | ||
| Total non-cash expenditure | _____________ | _____________ |
| Total company expenses | _____________ | |
| Profit from self-employed work | _____________ |
Basic lump-sum consolidation
Basic lump-sum consolidation may be an interesting alternative to the income/expenses statement for trainers with few expenses. Provided that turnover does not exceed € 220,000.00, you may decide to apply the 6% flat-rate business expenses rule (Betriebsausgabenpauschale) instead of listing each individual business expense. Business income is taken as the basis to calculate the 6%.
In addition to the 6% flat-rate business expenses rule, there may be other additional business expenses such as health insurance contributions to a statutory social security provider, as well as mandatory contributions to statutory accident and pension insurance providers. The basic free allowance of the tax-free profit allowance may also be deducted. This amounts to 13% of your profit up to a maximum of 13% of € 30,000.00, i.e. € 3,900.00.
However, should you switch from the lump-sum consolidation of business expenses to listing business expenses individually, you must wait a minimum of five business years before switching back.
Double-entry bookkeeping
Only for reasons of covering every aspect is attention drawn to the possibility of calculating profits using a double-entry bookkeeping system (balance sheets). Freelancers are not obliged to perform accounting in this way, though this may always be done on a voluntary basis. Trainers calculate their profit almost exclusively using the income/expenses statement, as calculating profit using double-entry bookkeeping involves considerable administrative expense.
Value added tax (VAT)
In principle, your income as a self-employed trainer is also subject to VAT. However, if your turnover is less than € 30,000.00 (= net threshold) a year, you are exempt from VAT as a small company. This also means that you may not deduct input tax from receipts, for instance. However, it is possible to decide not to take advantage of the small company rule (Kleinunternehmerregelung). This means that you are entitled to deduct input tax. The VAT rate is 20%. VAT law makes provisions for the exemption of certain schools and school-like establishments from VAT. If you teach at one of these schools as a self-employed trainer, this VAT exemption also applies to your income from this school. As a result of changes in the legal framework and interpretations of regulations pertaining to social security, the vast majority of trainers working for institutes will do so as employees and therefore not be in the position to charge VAT here.
Corporation tax
Trainers or language schools may also choose to conduct their activities using the legal form of a limited liability company (GmbH).
1) The income of limited liability companies is subject to corporation tax (KöSt), Profit must be calculated on the basis of double-entry bookkeeping. Corporation tax amounts to 25% of the income of the limited liability company.
Minimum corporation tax
However, in case of losses or low profits, a limited liability company must at least pay the so-called minimum corporation tax.
The start-up bonus for the first four calendar quarters following the start-up has been replaced by this new regulation. Companies that have taken advantage of this start-up bonus may take advantage of a transition period until 31.12.2013, if the new minimum corporation tax would be higher.
| GmbH | € 437.50 | € 1.750.00 |
|---|---|---|
| GmbH set up after 30.6.2013 | ||
| For the first five years | 125.00 € | 500.00 € |
| For the next five years | € 250.00 | € 1,000.00 |
| Afterwards | € 437.50 | € 1,750.00 |
1) If the actual KöSt (e.g. 25% of € 1,000.00 = € 250.00) is lower than the minimum KöSt (€ 1,750.00 p.a.), then the difference to the minimum KöSt can be added to the corporation tax liability of the following years without restriction.
2) Any profits of the GmbH distributed to a trainer with a participation in the company are then taxed with capital gains tax (KESt). The capital gains tax is to be withheld by the GmbH and passed on to the tax office. However, the trainer is also able to report the capital income subject to capital gains tax if the income tax (ESt) is lower than the capital gains tax. In this case, the capital gains tax is added to the income tax and the difference is refunded. The capital gains tax is 25% of the distributed profits.
Outline of the tax burden of corporations and their shareholders if the entire profit is distributed:
Profit earned by the corporation € 100,000.00
KöSt 25% of € 100,000.00 = € 25,000.00
The corporation retains € 75,000.00
KESt 25% of € 75,000.00 = € 18,750.00
Shareholder receives a payout of € 56,250.00
Total tax burden (based on the profit of the corporation): 43.75%
Profit shares that are not distributed and remain in the GmbH are only subject to corporation tax.
3) In his work as company director, the trainer is subject to income tax on his company director income. In case of a holding of more than 25%, this is to be taxed as income from self-employed work.
Overview of social security law
For language schools
In view of a number of recent Supreme Court rulings, it is no longer possible for language schools to work together with freelance employees on the basis of works contracts or freelance contracts. These contractual relationships are no longer recognised by the regional health insurance providers (Gebietskrankenkassen) and are being turned into proper employment contracts during the course of audits. If you plan to employ the services of people, this will normally take the form of employment contracts. We are happy to calculate the total cost to you and the net income of your employees before an employment contract is signed. We are also happy to make all the calculations and comparative calculations required when converting works contracts into employment contracts and tell you exactly what costs you will have as an employer.
For trainers
As a result of audits currently being carried out by the regional health insurance providers, you will primarily work on the basis of proper employment contracts in the future. We are happy to inform you in detail about your rights before you sign an employment contract and calculate your net salary in advance. We can prepare comparative calculations regarding your gross and net income under works contracts, freelance contracts and proper employment contracts. We can explain the advantages and disadvantages so that you can make a well-informed decision.
Last updated: 1 April 2014
We cannot accept any liability for the accuracy of the information given above despite the care taken when compiling the data. If you have specific questions regarding any of the issues here, we would be happy to discuss these in a face-to-face meeting with you.