Which taxes to small business owners need to pay?
Small business owners need to pay income tax only. They do not have to pay VAT, business tax, or corporation tax.
How much tax do small business owners need to pay?
Profits up to €10,347 are tax-free. If companies achieve a higher profit, a tax rate of 14–45% applies.
What should small business owners pay attention to when filing their 2022 tax return?
Small businesses and sole proprietorships should take particular care to declare all expenses incurred (e.g. advertising expenses, travel costs, and insurance) int heir tax return. They must also submit a statement of revenues and expenditures. You should not miss the deadline for submission (2 October 2023)– otherwise, things could get expensive.
As entrepreneurs, we know: 2022 was quite a turbulent year. The ongoing Corona pandemic and the energy crisis did not make it particularly easy for small businesses in particular to grow as planned. It is therefore important for many founders to be particularly careful with their money this year. One thing that helps is paying lowest possible back taxes. We show you what small businesses should look out for in their 2022 tax return – and how they can reduce their tax payment.
Small business owners need to pay income tax only. Because they do not charge VAT and their annual turnover is below €24,500, they do not have to pay VAT. This also applies to business tax.And what’s more: small business owners also do not have to pay corporation tax.
The question that probably concerns you the most: How much in back taxes do you expect to have to pay? As a general rule: Income tax is payable on the profit. In 2022, profits of up to €10,347are tax-free. This is referred to as the basic tax-free allowance.
Every euro above this amount incurs a tax rate of 14–45%. Exactly how much you have to pay depends on your profit. It is also decisive how many advance tax payments you have already made over the year. For this purpose, the tax office usually gives you a guideline based on your profit from the previous year or your estimate for the first year as a small business owner.
Three pillars in particular are important for the tax return of small business owners:
1) include expenses in when calculating profits
2) submit a statement of revenues and expenditures to the tax office
3) do not miss the deadline for the tax return
Let it be said in advance: Everything you want to deduct for tax purposes must have a recognisable connection to yourself-employment. In practice, this means: if you are a musician, for example, you can deduct the purchase of a guitar or a piano. However, this is not possible if you practise law. And what’s more: you should keep a receipt or invoice for everything you purchase for your business. What can small business owners and sole proprietorships deduct in their tax return?
If you take part in a training course that is directly related to your self-employment, you can deduct it. This can be particularly useful at the beginning of your self-employment in order to quickly deepen your specialist knowledge.
If you use your car more than 90% for yourself-employment, your car is considered work equipment. That means: You can claim costs such as insurance, petrol, or interest as business expenses.
You can fully deduct insurance policies that cover business risks. These include:
● purely corporate legal expenses insurance
● operational trade indemnity insurance
● operational fire, theft, and hail insurance
● statutory accident insurance
● business interruption insurance or loss-of-use insurance
● comprehensive, liability, and accident insurance for cars used for business purposes
● occupational accident insurance
● public liability, professional liability, and pecuniary damage liability insurance
● household contents insurance (pro rata) insofar as you have a home office
You can deduct the following insurances ona pro rata basis:
● health insurance
● daily sickness allowance insurance
● life insurance
● long-term care insurance
● accident insurance
● term life insurance
● personal liability insurance
● pension insurance
Advertising costs include working materials and contributions to professional associations. In addition, small business owners can deduct all other expenses they need for their self-employment as advertising costs in their tax return. These include office equipment, business accounts, company cars, promotional gifts, and work clothes. However, the tax office does not recognise the purchase of a business suit – these are too versatile.
Small businesses and sole proprietorships that rent an office or a space in a co-working space and/or buy office furniture can deduct it in their tax return. You can also claim your work place at home if you have a home office.
If you do not have a room in your flat that you use almost exclusively for your self-employment, you can use the home office flat rate introduced in the Corona period. This grants you €5 for each working day that you have worked exclusively at home – for a maximum of 120home office days. Converted this means: you can charge a maximum of €600 for this.
If you use a tax advisor or incur legal costs for a consultation or a lawsuit, you can deduct these in your tax return.
With the statement of revenues and expenditures, small business owners and sole proprietorships calculate in the tax return how much profit they made in 2022. In doing so, you list your business income and your business expenses. The difference is the profit your business has made.
Example: Let’s say you had €15,000 in income and spent €3,000 on your business. You have thus made a profit of €12,000.
The tax office uses your calculated profit to determine your income tax. And what’s more: this is how it can be determined whether you are still a small business owner.
The obligation to file an income tax return normally falls on 31 July of the following year.However, because of the Corona crisis, the federal government has pushed back the deadline for the 2022 tax return somewhat. You must submit the declaration by 2 October 2023 at the latest. If companies work together with a tax advisor or income tax assistance association for their tax return, the obligation to submit the income tax return is extended until 31 July 2024.
If you fail to submit your income tax return, you can expect a penalty – usually after a prior request from the tax office. The amount of this is regulated by law. The late payment surcharge is 0.25% of the tax payable but at least €25 for each month or part thereof of delay.
Tip
If you can already foresee that you will not meet the deadline for submission, you can apply for an extension of the deadline. Give reasons and name a new date. The tax office accepts a longer illness, missing receipts, or a move as a justification.
As a rule, companies must submit their tax returns electronically to the tax office. For this purpose, they can, for example, use the “Elster” portal provided by the tax office.
By the way
Why the tax return is not only a time-consuming affair but often also allows companies to save money is shown by figures from the Federal Statistical Office. For example, 88% of tax returns for 2018resulted in a tax refund. On average, €1,072 were returned.
In order to remain a small business owner with your business, you must not have made more than €22,000 in turnover(not: profit) in the previous year and at the same time not expect more than€50,000 in turnover for the current year.
If you no longer meet one of the requirements, you must charge VAT for your services.
Especially at the beginning of your self-employment, it is difficult to plan how much money you will earn in a year – and how high your advance tax payments will be.If you have calculated too low, you may end up with considerable back taxes to pay. If you are then unable to pay this, you will incur heavy penalties.
In order to avoid such penalties, you can take out a loan through Puls at short notice and with little effort. In order to calculate your current credit limit, Pulse takes into account your income and expenditure. You can then apply for a loan directly via the platform – without a credit check, without a bank, and with no paperwork. This way, you can ease your worries about back taxes and focus on developing your business.
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