starting a small business - online language teaching

[Alberto]

My wife is considering registering herself as a small business - teaching Japanese language online. We expect her income (or is it called turnover? whatever...) will average ca 500-600 eur/month. Costumers/students will be mostly from Germany, UK, China, Hong Kong, Taiwan, Japan, mostly individuals but also schools, and will be invoiced in eur (most of them, few will pay in their currency). She would be working from home.

What is the process of registering oneself as a small business?
What taxes etc will one has to pay?
If her income stays under the minijob threshold of 538eur/month, does she still need to formally register? And pay taxes etc etc? We file taxes together, so I expect this 538eur/month will count together in our married income, so I presume yes she/we will have to pay taxes calculated on our overall German income.
BTW, is the 538eur/month before or after expenses? Or maybe expenses do not count?

Thank you,

[PandaMunich]

My wife is considering registering herself as a small business - teaching Japanese language online. We expect her income (or is it called turnover? whatever...) will average ca 500-600 eur/month. Costumers/students will be mostly from Germany, UK, China, Hong Kong, Taiwan, Japan, mostly individuals but also schools, and will be invoiced in eur (most of them, few will pay in their currency). She would be working from home.

What is the process of registering oneself as a small business?

She has to fill in the "Fragebogen zur steuerlichen Erfassung" in ELSTER (you can use your own ELSTER certificate, she doesn't need one): https://allaboutberlin.com/guides/frage ... -erfassung

She should choose to be a Kleinunternehmerin, to not have to pay VAT.
In the Fragebogen, she also needs to apply to a VAT ID number (Umsatzsteuer-Identifikationsnummer), which she has to mention in all her invoices.
Before you ask, yes, a Kleinunternehmerin who invoices non-German businesses needs a VAT ID number, it's the international proof that she is a business, this does not mean that she has to charge VAT.

What taxes etc will one has to pay?

Her freelance profit gets added to your employee income and you will be taxed as a family: https://expertise.tax/en/faq-german-tax ... income_tax

If her income stays under the minijob threshold of 538eur/month, does she still need to formally register? And pay taxes etc etc? We file taxes together, so I expect this 538eur/month will count together in our married income, so I presume yes she/we will have to pay taxes calculated on our overall German income.
BTW, is the 538eur/month before or after expenses? Or maybe expenses do not count?

A mini job means being an employee.
She will be self-employed.
--> this does not apply to her.
She has to pay tax even if her yearly profit is only 1€.

The important thing is that she can still get free public health insurance through you under Familienversicherung, because otherwise she will have to pay around 220€ per month for public health insurance: https://www.tk.de/service/app/2004108/b ... echner.app
To stay in Familienversicherung, the sum of her monthly income from all sources (freelance profit + capital income + ...) has to stay below:

• 1/7 * Bezugsgröße_in_2025 = 1/7 * 3.745€ = 535€

Bezugsgröße: https://de.wikipedia.org/wiki/Bezugsgr%C3%B6%C3%9Fe

profit
= turnover - business_expenses
= what_you_take_in - what_you_have_to_spend_for_your_business

[Alberto]

Alles klar, thanks a lot, Panda.

Beyond taxes as such, will she have to pay pension contributions? How to calculate this?

She will be working from home and there will be some obvious simple costs, internet connection (which we have anyway), computer, teaching materials, bla bla. Do I understand correctly these costs, can be (partly) offset against the income....?
Will she needs bookkeeping? And having to keep them for ...xyz... years in case they ask?

Thanks a lot

[Alberto]

More questions.
Right now I am tax class 3. What class should she/we opt?
Do I understand correctly that it will remain better to file tax together?

[Alberto]

Right now I am tax class 3. What class should she/we opt?

OK I found the answer on your website, we will be 3 and 5.

[Alberto]

She will be working from home and there will be some obvious simple costs, internet connection (which we have anyway), computer, teaching materials, bla bla. Do I understand correctly these costs, can be (partly) offset against the income....?

When she travels to Japan, can this count towards her business expenses, like visiting her customers who happen to be there? I know this sounds crazy, but I remember reading it in our old forum.

[PandaMunich]

Beyond taxes as such, will she have to pay pension contributions? How to calculate this?

Normally, self-employed do not have to pay public pension contributions, but as a teacher she is an exception.

As long as her monthly freelance profit is maximum 520€, she does not have to pay public pension contributions: https://www.deutsche-rentenversicherung ... ehrer.html

• Whether you teach creative subjects, languages or sport, anyone who teaches on a freelance basis and earns more than €520 per month must make compulsory contributions to the statutory pension insurance scheme.
  
  Even if the first thing that springs to mind is traditional tutoring, teaching is not limited to a specific area. What counts is the transfer of knowledge and skills in group or individual lessons, for example as a lecturer at an adult education centre, as a trainer for health or sports courses, as a teacher of creative courses or as a coach. Freelance teachers must register their work with the statutory pension insurance scheme within three months of starting.
  
  Self-employed teachers who earn less than €520 per month do not have to pay contributions to the statutory pension insurance scheme. However, if they earn more than 520.01 euros per month, they are liable to pay pension insurance contributions. However, freelance teachers, trainers and coaches only have to pay these contributions as long as they do not have an employee subject to compulsory insurance. This also includes apprentices.
  
  All the important information can be found in the free brochure ‘Self-employed - how pension insurance protects you’. It is available for download under this article.

If her monthly freelance profit is at least 520.01€, she has to pay 18.6% of her freelance profit as public pension contributions because of § 2 Nr. 1 SGB VI: https://www.gesetze-im-internet.de/sgb_6/__2.html

• The following are subject to compulsory (pension) insurance
  1. Teachers and educators who, in connection with their self-employed activity, do not themselves regularly employ an employee subject to compulsory insurance,

She will be working from home and there will be some obvious simple costs, internet connection (which we have anyway), computer, teaching materials, bla bla. Do I understand correctly these costs, can be (partly) offset against the income....?

Yes.

Do not claim for a home office (part of purchase price depreciation, heating, electricity, water, and so on) for her self-employed activity, instead just claim the 6€ a day, maximum 210 day Home-Office-Pauschale that you can claim for even if you work at the kitchen table.
Why?
Because claiming for a home office in a house/flat that you own is a bad idea: https://expertise.tax/en/german-tax-ref ... ible_costs

• A note of caution: if you are self-employed and own this flat/house, working from home will turn that room from “private asset” to “business asset”, which means that when you stop working from home, e.g. because you stop working in that room because you move your business into bigger rented offices or because you sell your home, the Finanzamt will come and make you tax the increase in value of that room as income, at your own personal income tax rate of up to 42%. So if you live in a region with rising real estate prices, you may want to put a guest bed into your office, just to make it ineligible as a home office and to not have the Finanzamt ask for its share in the increase in value of your home. Of course, this means foregoing claiming for the home office as a business expense, but in a fast rising real estate market, that may be more advantageous than taxing the increase in value on that home office.
  
  If you are 55 years or older, there is a special tax-free allowance for giving up/selling your business of 45,000€ in §16 (4) EStG, which you can use when stopping to work from your home office. So if you plan to work to over age 55 and think the increase in value of your home office will only be up to 45,000€, by all means work from home and claim for the costs, even if you work self-employed.

Will she needs bookkeeping? And having to keep them for ...xyz... years in case they ask?

She will need to do a profit calculation, she does not have to do double-entry bookkeeping.
So an Excel spreadsheet will do for her.

She will have to transfer the results from her Excel spreadsheet, e.g. sum of all telephone costs 132.56€ into the tax form "Anlage EÜR", that's the part of the tax return where her freelance profit gets calculated.

Right now I am tax class 3. What class should she/we opt?

She will be self-employed.
Only employees have tax classes, since only they draw wages.
The full name in German of the tax class is "Lohnsteuerklasse", i.e. wage tax class.

--> if she were to become an employee, she would have tax class 5.
But as a self-employed, after the first tax return in which she has self-employed income, the Finanzamt will set quarterly income tax prepayments for her.

Do I understand correctly that it will remain better to file tax together?

Yes.

When she travels to Japan, can this count towards her business expenses, like visiting her customers who happen to be there?

She needs to spend at least 10% on business to be able to claim a part of the air travel fare.
And she will need proof for the days that she will spend on business, e.g. the e-mails setting up the appointments with her clients.

For example, if she visits Japan for 14 days and she only has 2 days of appointments, then only 2/14 of the travel cost is a business expense, and she only gets to claim per diems for additional meal costs (Verpflegungsmehraufwand) as business expenses for those 2 days: https://www.bundesfinanzministerium.de/ ... onFile&v=1

Please see here: https://www.haufe.de/finance/haufe-fina ... 44929.html

• Travelling expenses, division into business and private ... / 4.4 Business trip if the private co-incidence is less than 10% (de minimis limit)
  
  Mixed expenses can only be split if the business or professional share of the expenses is at least 10%. If the business or professional share is less than 10%, the general costs may not be apportioned and deducted as business expenses. In the opposite situation, where the private co-incidence is less than 10%, all expenses may be deducted as business expenses, provided there are no other legal restrictions.
  Expenses that are incurred exclusively for business or professional reasons can also be deducted in full as business expenses or income-related expenses if the business reasons are otherwise of secondary importance.
  
  Practical example
  Holiday trip with one-day specialist seminar
  An entrepreneur takes part in a one-day specialist seminar during his 14-day holiday trip. The specialist seminar is of minor importance (less than 10% of the total stay), so that the travel costs to the holiday destination and the accommodation costs cannot be deducted as business expenses, not even partially.
  What the entrepreneur can deduct in full are
  - the seminar fees,
  - the costs of travelling from the holiday destination to the seminar venue and back and
  - if applicable, a lump sum for additional subsistence expenses.

[Alberto]

Panda, thanks again for the explanation, excellent as always.

Taxes are very high (please allow me to see KV and pension contribution as taxes, even though maybe that's not correct...).

Our marginal tax rate is 40%. I consider ourselves financially privileged and complaining feels a little odd, but still.....

Say she had zero expenses, and her income was the smallest above these thresholds of 535 eur/month (from Krankeversicherung) and 520 eur/month (for pension), so say 536 eur/month. In such a case her tax + pension contribution + KVs would be:

income tax + pension contribution: (0.4 + 0.186) * 536 = 0.586 * 536 = 315 eur, almost 60% "tax"
KV = 220
so a total cost of 315+220=535 out of an income of 536, over 99% "tax". Or am I getting something wrong?

Beside, I find odd that if the income is below 535, her KV cost is zero, but above 535 this costs jumps to 220. I know there are instances of taxes being not a continuous function of income (please allow me to use mathematics terms), just I find them odd. Same for pension contribution.

[kiplette]

That's why if you are Familienversichert you HAVE to stay under, otherwise it's essentially pointless.

I think it is less aggravating to volunteer your services to people who otherwise couldn't access what you are offering.

[Alberto]

That's why if you are Familienversichert you HAVE to stay under, otherwise it's essentially pointless.

Well, yes.
But if you work some less because the way things get calculated discourages you, everyone loses out. The taxman, because they get less money from you, yourself, and obviously your potential customer that are willing to pay for your services.

Ideally a system should be such that if you work and earn slightly more, you always pay slightly more.

[Alberto]

I think it is less aggravating to volunteer your services to people who otherwise couldn't access what you are offering.

Yes, fair point.