Key Takeaways
1. Hiring independent contractors in Germany can be a compelling notion for international companies that don’t wish to go through the complicated process of setting up a subsidiary in Germany and hiring employees themselves.
2. Independent contractors can organize themselves in multiple incorporated and unincorporated business forms in Germany, depending on their priorities and projected income. Commonly, independent contractors either structure their business as a Lberal Professional (Freiberufler) or a Limited Liability Company (Gesellschaft mit beschränkter Haftung).
3. Where hiring independent contractors in Germany, it is important to do your due diligence — we recommend working through our ‘hiring independent contractors in Germany’ checklist below.
What is an independent contractor in Germany?
An independent contractor in Germany is a self-employed individual who contracts with companies or individuals to provide professional services. This can include freelance work such as web design, graphic design, marketing, writing, photography and many other creative endeavors. Independent contractors are responsible for their own taxes, social contributions and insurances.
Independent contractors must be registered with their local tax authority (Finanzamt), with their tax classification dependent on their business form (more on this below).
Independent contractors in Germany are not entitled to most of the rights and benefits of an employee – for example holiday pay or sick leave days. However, independent contractors do have more flexibility when it comes to working hours and location. In addition to this they also often benefit from higher rates of pay than employees due to their added skills and expertise.
Why hire an independent contractor in Germany?
Hiring independent contractors or freelancers in Germany can be particularly attractive to international businesses doing business in Germany or the wider German-speaking region: It means the benefits of engaging highly-skilled German-speaking workers without the hassle and expense of setting up a subsidiary in Germany and hiring employees in Germany directly.
However, independent contractors have a more complicated classification under German tax law than in other countries, so it is important that any business considering this hiring option have a thorough understanding of the different business forms that can apply.
We discuss this in detail below.
Which business structure can an independent contractor choose in Germany?
Liberal Professional (Freiberufler)
A Liberal Professional in Germany (‘Freiberufler‘) is an independent contractor who has met certain criteria to receive special status. This includes having a particular minimum level of experience and an appropriate qualification, as well as submitting documents such as proof of income and other relevant evidence.
Once approved, Liberal Professionals enjoy a number of benefits including lower social security contributions, flexibility when it comes to taxation and reduced administrative requirements for paperwork. Crucially, they do not have to register with the local Trade Register (‘Gewerbeschein’), nor pay the annual trade tax (‘Gewerbesteuer’).
Liberal Professionals can include legal and tax professionals, medical professionals, technical professionals and cultural professionals (e.g., writers and teachers).
Sole Proprietorship (Gewerbe)
A Sole Proprietor (‘Gewerbe’) in Germany is a type of business entity whereby the owner operates and manages their own business without any additional partners: As in other countries, in Sole Proprietorship there is no distinction between the individual and their business and the individual is subject to unlimited liability. It is the simplest form of business organization in Germany and requires registration with the local trade register, as well as the local tax office. Once registered, a sole proprietor can start trading right away – they do not require any additional administrative permissions or licenses to operate, unless in a few specifically regulated industries. As such, it can be an attractive option for independent contractors looking to launch their own business quickly and easily. However, as the sole proprietor assumes all responsibility for running their business, they must also take on all risks associated with it — including financial losses should things go wrong. Furthermore, as all income is taxed at full personal income tax rates (going all the way up to 45 percent), it can result in a higher tax burden than incorporated business forms (capped at around 30 percent).Small Business (Kleinunternehmer)
A Small Business (Kleinunternehmer) is a type of business in Germany which has an annual turnover that does not exceed €17,500. For such businesses, there are several tax and social security benefits. Primarily, as a small business owner there is no need for a contractor to pay any value-added tax or VAT (Umsatzsteuer), nor do they have to make any additional contributions to the Social Security System.
Additionally, they also benefit from certain legal exemptions – for example when it comes to contracts or accounting requirements. However, as the annual turnover must remain below €17,500, this is not an attractive classification for many independent contractors.
Limited Liability Company (Gesellschaft mit beschränkter Haftung, or ‘GmbH‘)
A Limited Liability Company (GmbH) in Germany is a type of business entity which offers owners protection from personal responsibility for any debts or liabilities incurred during the operation of their company. This means that shareholders can only lose up to the amount invested into the company — this makes anGmbH attractive to independent contractors as it allows for higher risk-taking without fear of financial ruin. In order to set up a GmbH in Germany, the owners must register with their local commercial court and submit documents such as financial records and annual accounts. Additionally, there is a minimum amount startup of capital (€25,000) which must be invested into the company in order to get it off the ground. Once registered, the GmbH’s activities are subject to monitoring by both state and federal authorities. While this option may require more paperwork upfront than other types of business organization, it could be well worth it in the long run due to its added protection against debt and liability.
However, for many independent contractors the initial startup capital, as well as ongoing compliance and accounting costs are considered prohibitive.
Entrepreneurial Company with Limited Liability (Unternehmergesselshaft)
A Entrepreneurial Company or UG (Unternehmergesellschaft (haftungsbeschränkt)) in Germany is another type of business entity which offers limited liability to its owners. This type of company is relatively new, having only been introduced in 2008, and requires a minimum capitalization of €1. This can be an attractive option for independent contractors who are want the benefits of a GmbH, but do not wish to contribute €25,000 in startup capital. A UG usually has lower establishment costs than a GmbH as well.
Note, however, that, 25 percent of all profits must be withheld and contributed to capital until the GmbH-equivalent €25,000 startup capital.
The only potential downside of the UG from the perspective of a client is that they are known to hold less capital and therefore be more of a risk than a GmbH. In this sense, an UG is usually considered less prestigious than a GmbH.
Hiring an independent contractor in Germany? A checklist
If you decide to hire an independent contractor in Germany, we recommend that you work through the following checklist:
- What business structure is the independent contractor using?
- This affects the risk you take on in engaging that independent contractor. If the contractor is using an unincorporated form, then you can pursue them legally without limitation, if something goes wrong. If they are operating through a UG, or a GmbH, their liability will be limited by the share capital (i.e., €25,000 in the case of a GmbH). On the other hand, contracting with a GmbH guarantees a certain amount of protection, whereas you can be ‘completely out of the money’ with a Liberal Professional or a Sole Proprietorship.
- Does your contract protect your interests?
- Check that your business IP is protected in the contract, and that the independent contractor is required to comply with applicable laws and data protection rules. To get a firmer grip on independent contractor agreements in Germany, consider the following template.
- Is invoicing compliant?
- Invoices in Germany must follow strict rules set out in the tax regulations, including full legal names, tax numbers, physical addresses, and VAT entries.
- Have you checked for employee misclassification/false self-employment?
- In Germany, false self-employment (scheinselbstständig) — engaging an individual as an independent contractor rather than an employee — is taken very seriously by the authorities. Where a company has been judged to facilitate false self-employment, they will be liable for backtaxes, fines, and missed pension and social security contributions. To avoid this, it is common for international companies to use a German Employer of Record (AUG license-holder) to engage the contractor as an employee.
Hiring independent contractors in Germany — with Horizons
Horizons Germany contractor payment solutions mean that you can rest assured that your German contractors or freelancers are being paid in accordance with German law. If you are seeking a longer-term or permanent engagement with a German professional, we recommend you talk to one of our team members about our German Employer of Record and hiring solutions.
Frequently asked questions
Yes. It is possible for both German firms and international companies to hire independent contractors in Germany. Independent contractors may be registered in incorporated (Gmbh or UG) or unincorporated (Liberal Professional or Sole Proprietorship) legal forms.
Yes. It is legal to hire an independent contractor in Germany, though it is important to avoid employee misclassification (scheinselbstständig) if you do so (read more on this above).
