When you fill in the Fragebogen zur steuerlichen Erfassung to register as a freelancer, the tax office wants to know about your revenue and profit for the first two business years. Starting a new business is already hard. Predicting your future income might be even harder.
In this guide we will explain how to estimate your revenue and profit, why the tax office needs your estimation and what happens when your estimation turns out to be incorrect.
How to estimate your revenue and profit?
Estimating your revenue
To estimate your revenue you will need to take into account your rate and workload as a freelancer.
You estimate that you will be working 100 hours per month for an hourly rate of €20.
100 x 20 € = 2.000 € per month
2.000 € x 12months = 24.000 € revenue per year
As a general guideline you should not overestimate your first years as usually it takes time to develop a steady customer base as a newly founded business.
Estimating your profit
Profit is your revenue minus your business expenses. Let’s say you estimated a yearly revenue of 24.000 € and you will spend 4.000 € on business expenses.
24.000 € revenue - 4.000 € business expenses = 20.000 € profit
Business related insurances (Liability, legal protection, etc)
Note: You shouldn’t include your health & other precautionary insurances as they will be deducted in your private income tax return and won’t affect your freelance revenue.
Why does the tax office need to know my estimated revenue and profit?
Now that you know how to estimate your revenue and profit, you might be asking yourself why the tax office needs this information in advance, rather than waiting for your actual revenue and profit.
The tax office needs the estimation of your revenue and profit to set up tax prepayments throughout your first and second business year. You will regularly pay some portion of your taxes throughout the year instead of one huge amount at the end of the year:
Income tax prepayments: The tax office will set up quarterly prepayments which you will have to pay on the 10th March, 10th June, 10th September and 10th December.
Advance VAT prepayments: Based on your profit estimation, the tax office decides whether you have to submit monthly or quarterly advance VAT returns or only an annual VAT return.
Qualifying to be a Kleinunternehmer
Kleinunternehmerregelung is a regulation that makes the life of freelancers with lower revenue easier by removing the obligation to collect and pay VAT. If your revenue estimation is lower than the limit, you can request to register as a Kleinunternehmer.
What happens if your estimation turns out to be incorrect?
Your revenue and profit estimations will almost never match the actual revenue and profit. This is normal, and is also expected by the tax office. However, it is important to keep in mind the implications when thinking about what to put as an estimation
What happens if my estimation was too high?
You will be paying higher income tax prepayments throughout the year. Don’t worry, once you submit your annual tax reports, the tax office will adjust your taxes according to your actual earnings and will refund your overpaid taxes. Keep in mind that you will receive the refund only after the tax office will process your end of year reports, so make sure to save enough money to finance your prepayments.
What happens if my estimation was too low?
You will pay less income tax throughout the year and a higher amount after submitting your annual income tax return. It is important to put enough money aside so that you are not surprised by the large payment at the end of the year. The tax office will also adjust your future income tax prepayments to be in line with your actual profit. .
Estimating your revenue and profit as realistic as possible will help you to avoid bad surprises at the end of the year.
Sorted will calculate your estimated tax payments based on your input. To know how much taxes you will need to pay, track your income and expenses regularly with Sorted.
Sorted tax guides are provided without liability and do not replace a tax advisor.
To get an accurate answer for your specific case, please consult a tax advisor.
You can always ask one of tax advisors on the Sorted platform.