Accounting For Self-Employed: How To Get Your Finances In Order
As a freelancer or self-employed person, you have to deal with many different issues. This includes the rather unpopular topic of accounting. Many people can't wait to hand over this responsibility to external service providers such as tax consultants. However, at least basic knowledge is an absolute must if you want to run your own business. In this article, you will not only learn what is important, but also receive valuable tips from expert and accountant Simone Althier.
Most freelancers and self-employed people consider accounting to be a tiresome topic that they could easily do without in their work. However, basic knowledge in this area is an important prerequisite for a successful business start-up - after all, you need a good knowledge of your finances if you want to run your business sensibly. But why do so many people find finance and accounting so difficult? Simone Althier, economic mathematician and certified accountant, sees one point in particular that makes access to these important topics difficult:
"Many freelancers and self-employed naturally want to focus primarily on their business and are often put off by things like taxes, finance and accounting. If someone has little connection to numbers anyway, there is a big inhibition threshold to deal with these requirements and laws."
Basically, if you run a business, you are obliged to submit an annual profit calculation to the tax office. In order to fulfil this requirement, you should keep all invoices and receipts relating to your business activities and archive them properly. It's best to do this regularly and don't be careless - otherwise, in the worst case scenario, you'll have to painstakingly gather everything together when the next tax return is required.
As you can see: Correct accounting is important to keep track of your finances and comply with legal requirements. However, these differ according to your status - depending on whether the tax office recognises you as a freelancer or a self-employed person. This is because double-entry accounting applies to larger companies, while simple accounting is completely sufficient for smaller businesses.
Legislation allows for various accounting systems, which we will look at in more detail in the course of this article. But whichever system you choose, there are some basic accounting principles that you should always follow:
Should the tax office wish to subject your company to a tax audit, the responsible auditor must be able to trace all postings and business transactions. Accordingly, you must keep receipts for up to ten years.
Your accounts must be clear and concise so that you and the authorities can easily understand them at any time.
You must not conceal any receipts or business transactions. It is best to adhere to the principle of "no entry without a receipt" in order to fulfil the requirements of the tax office.
You may not simply change receipts and postings retrospectively. This is only permitted under certain conditions, for example if the date is missing from an invoice or the date is incorrect. You must carefully log such changes.
- Data access:
All data must be stored electronically in such a way that the tax office can access it without any obstacles.
- Data security:
Store your data securely and make backup copies in case of technical failures or cyberattacks.
Apart from these principles, Simone Althier recommends the following for a successful first contact with the topic of accounting:
"Get support - at least at the beginning. What this actually looks like can vary depending on your existing knowledge. Nevertheless, it is important, especially at the beginning, that someone not only takes over the work for you, but also gives you an overview of how accounting works, makes the necessary corrections and provides important tips. This way, you always have someone to contact if you have any questions."
Now that you are familiar with the principles of proper accounting, let's take a closer look at the various accounting systems.
Single-entry accounting is intended to make accounting a little easier for certain groups such as freelancers. This involves comparing the income and expenditure for a financial year in a net income method.
This can be created relatively informally, for example in an Excel spreadsheet. It simply needs to clearly show all business transactions and list income and expenditure. This will give you the profit or loss for the year. You then enter this in your income tax return as income from self-employment or business operations.
Whether this type of accounting is suitable for your business depends on various factors:
- Freelancers may use it regardless of turnover and profit.
- Entrepreneurs can only use this option if they do not exceed the maximum turnover or profits stipulated by the legislator in their country.
This type of accounting offers you a number of advantages:
- It is less complex, as you only have to enter income and expenses.
- You save money, as it is possible to prepare the income statement without a tax consultant.
- You also benefit from the fact that with simple accounting, your income only has tax consequences once it has reached your company in the form of money in your account - you don't have to pay tax on profits before then.
Simone Althier finds the net income method to be perfectly adequate for determining profits for freelancers: "It's much simpler and cheaper than a balance sheet with a profit and loss account. However, if you run a business, you only have this option up to certain profit and turnover figures - so always keep an eye on your numbers."
In contrast to freelancers, sole proprietorships or small businesses, corporations are obliged to keep double-entry accounts. They must draw up a balance sheet at the end of the year to determine profits and, for this purpose, must properly record all business transactions in the current financial year in real and personal accounts (debtors and creditors). You must also prepare a profit and loss account for all expenses and income. All of this flows into the final balance sheet at the end. It is advisable to work with experts for this, as errors can lead to serious problems with the authorities.
You first have to earn money before you can generate revenue. This only works if you regularly acquire customers. Our article 5 Tips for Freelance Client Acquisition will help you with this.
In addition to income and expenses, you must also declare the amount of VAT and how much input tax you have paid on your incoming invoices to the tax office. The term "input tax" describes the VAT that freelancers and self-employed pay when they purchase goods and services or make investments in connection with their work, which they can deduct from tax.
First things first: Even as a business founder, you are obliged to submit a turnover tax advance return from the outset. The frequency with which you must fulfil this requirement can vary from country to country. Please also note the amount of your VAT, as this often also determines whether and at what intervals you have to submit your advance return.
However, these regulations do not apply if you use the small business regulation. You must apply to the tax office to be recognised as a small business owner. If the tax office approves your application, you will no longer have to show VAT on your invoices, but you will also no longer be able to claim input tax from the tax office. You will also no longer have to submit an advance VAT return. However, you will still have to file a VAT return. Here too, there are different turnover limits from country to country within which you can apply for the small business regulation. Think carefully about whether the status of small business owner is right for you - because once you have decided, you are bound to your decision for some time.
Simone Althier finds it difficult to answer whether it makes sense to make use of the small business regulation across the board: "Seek tax advice on the advantages and disadvantages and make your decision on this basis. Also bear in mind that the small business regulation is tied to certain turnover levels and that you can only make your choice to a limited extent."
Whether you are a small business owner, entrepreneur or freelancer, you are all obliged to submit an income tax return. The basis for this is the income statement. The tax office uses this to determine the profit made in a year and how much of your income you have to pay tax on. At this point, we would like to recommend that you work with a tax consultant. This will ensure that all information is complete and in the right place. There is also a real chance that experts will discover potential savings in various places.
But what exactly does the tax office need to calculate your tax burden?
Documents For the Tax Office
No matter what type of accounting you use: The tax office requires a number of documents each year to calculate your taxes. These include:
- Income statement
- Advance sales tax return, if applicable
- Value added sales tax return, if applicable
- Income tax return
Creating these documents may seem like a lot of work at first. But if you document your finances systematically, regularly organise and store receipts and documents in a sensible way and don't hesitate to seek help from supporting tools or a tax advisor, your accounting will be much easier.
Finally, if you would like to make accounting a little easier with electronic support, let's take a look at the tools available.
You Drive Your Business Forward, We Protect You
Accounting is very similar to insurance: you don't have to become an expert, but it's important to familiarise yourself with the basics - after all, this is the only way to know what your business really needs.
When it comes to coverage, Professional Indemnity Insurance from exali is there for you. With customised solutions for your business, you are insured against claims for compensation from third parties, among other things. The insurer examines claims made against you and settles the claim if it proves to be justified. If this is not the case, the insurer will defend the claim on your behalf.
If you have any questions, our customer service team will be happy to help you on + (49) 0 821 80 99 46-0 from Monday to Friday from 9.00 am to 6.00 pm (CET). Alternatively, you can use our contact form.
Of course, you also have the option of using external help for your accounting. For which business this is a sensible option is ultimately a case-by-case decision. In Simone Althier's experience, most freelancers and self-employed people outsource these tasks sooner or later - either partially or completely.
"When the business grows, many people don't have the time or inclination to deal with their accounting. However, there is also no capacity to hire someone. It's a logical next step to hire someone to take care of the day-to-day accounting while a tax advisor takes care of tax matters."
The accountant generally recommends that professionals at least take a look at your accounting to ensure that all the information is correct.
"Professionals do nothing other than deal with this matter and can therefore also ensure that the current legal requirements are met. For example, I take part in various training courses throughout the year to keep my knowledge up to date. Nevertheless, it is of course advisable for freelancers and the self-employed to familiarise themselves with these topics and at least acquire some basic knowledge."
In this way, you can avoid the first typical mistake that Simone Althier repeatedly encounters during her professional career: Many freelancers and self-employed people don't spend enough time on the topic of accounting. This leaves plenty of room for error, as many people get basic terminology mixed up.
Who is a sole trader?
For example, anyone who works alone and has not chosen another legal form is a sole trader. The law distinguishes between self-employed persons and freelancers. However, the final decision on this status is made by the tax office.
Who is a small entrepreneur?
The term "small entrepreneur" is similarly misleading for laypeople. It often "only" means that you do not have to show VAT on your invoice. However, many people do not realise that they may still have to submit an turnover tax advance return or file a VAT return. This must be considered separately from your income tax. Even if you are self-employed on a small scale, for example as a sideline, you are basically a small business owner and only enjoy accounting relief.
- A lack of knowledge can also manifest itself as follows:
- Incorrect/incomplete issuing of invoices
- Incorrect recording of tax rates
- No overview of income and expenditure
- Lack of diligence
- The accounting remains undone for months
- No clear separation between private and business expenses
Every self-employment is different, but just like with accounting, many people fail at similar points. In the article Top 5 Business Start-up Mistakes to Avoid, you will learn about the typical stumbling blocks on the path to self-employment and how to deal with them.
All of this often results in a certain degree of overestimation or underestimation of the accounting workload.
"There are now some accounting programmes that make it very easy to do the accounting yourself. However, this also creates the illusion that you don't need a wealth of knowledge. But as simple as the matter may seem thanks to digital support, you should still familiarise yourself with the basics, regardless of whether you also get external support or not."
At the latest when it comes to splitting invoices according to different tax rates or concluding cross-border transactions, it quickly becomes clear how important it is to familiarise yourself intensively with the subject matter and not underestimate the complexity.
The right accounting software is not only a valuable support for freelancers and the self-employed, but also offers a lot of time savings. Providers such as Sevdesk or Lexoffice make it possible to do your accounting quickly and easily online. The required range of functions varies depending on your business activity.
Topics such as double-entry accounting do not play a role for freelancers, for example. A straightforward accounting programme is therefore sufficient in this case. You should prioritise the following features when making your choice:
- Digital document management
- Online banking
- Cash book
- Advance VAT return with an interface to a tax programme or to the tax consultant
- Create income statement
- Time recording for customer orders
- Invoicing functions and integrated customer relationship management (CRM)
- Use of the software via app
The use of accounting software is definitely also recommended for freelancers - even if the accounting requirements are relatively straightforward. You can still make your life a lot easier this way and always keep an eye on your income and expenses. Apart from that, there are many other advantages to using accounting software:
- You can very quickly create your income statement based on the invoices and receipts you enter.
- Editing invoices is simple and organised.
- You can easily transfer your turnover tax advance return.
- Digital document recognition enables systematic filing in one place.
- All important documents can be transferred to the tax consultant easily.
Even if you're not enthusiastic about your accounting, this article has hopefully shown you one thing: you can still make it a lot easier for yourself to deal with the topic of accounting. Organise your accounts regularly, keep an overview and make use of support. This way, your finances will no longer be a chore and you will have taken an important step on the way to a successful and profitable business in the long term.
Simone Althier works as a certified accountant.
She has been supporting self-employed business owners with their accounting since 2022. She takes care of the day-to-day bookkeeping, but also supports self-entrepreneurs with any questions they may have.
Vivien Gebhardt is an online editor at exali. She creates content on topics that are of interest to self-employed people, freelancers and entrepreneurs. Her specialties are risks in e-commerce, legal topics and claims that have happened to exali insured freelancers.
She has been a freelance copywriter herself since 2021 and therefore knows from experience what the target group is concerned about.