Starting a side income responsibly: registration, records and taxes

What you will learn

• Which registrations a side business in Germany usually needs
• The difference between trade and freelance activity and why it matters
• The small-business VAT rule and basic record keeping
• How to estimate and set aside money for income tax on the profit

Explanation

A side income (Nebeneinkommen) is income you earn in addition to your main job. This lesson covers self-employed side income such as selling products, design work or tutoring. How to test a business idea, calculate break-even and set prices is covered in the "Business" course; here the focus is the administrative and tax side.

1. Check your employment contract

Many contracts require you to inform your employer about side work or forbid competing activity. Total working time must also respect the Working Hours Act (Arbeitszeitgesetz). Read your contract first.

2. Trade or freelance?

• A trade (Gewerbe), such as selling goods online or most services, must be registered with the local trade office (Gewerbeamt) before you start (Gewerbeanmeldung). Trade income can be subject to trade tax (Gewerbesteuer); for sole traders there is an allowance of €24,500 of trade profit per year, so many small side businesses pay none.
• Freelance professions (freie Berufe), such as many teaching, writing, design or consulting activities, do not register a trade. The line between the two is not always obvious; ask your tax office if unsure.

3. Register with the tax office

After starting, you submit the tax registration questionnaire (Fragebogen zur steuerlichen Erfassung) online via ELSTER. The tax office then gives you a tax number for the business and may set advance tax payments.

4. VAT and the small-business rule

Value-added tax (VAT, Umsatzsteuer) is normally charged on sales. Under the small-business rule (Kleinunternehmerregelung, § 19 UStG), since 2025 you do not have to charge VAT if your total turnover was no more than €25,000 in the previous year and does not exceed €100,000 in the current year. If you exceed €100,000 during the year, the rule ends immediately from that sale. The trade-off: you also cannot reclaim VAT on your business purchases. Your invoices must state that no VAT is charged because of the small-business rule.

5. Records

Most small businesses calculate profit with a simple cash-basis profit statement (Einnahmen-Überschuss-Rechnung, EÜR): business income minus business expenses in the year they are paid. Practical rules:

• Use a separate bank account for the business.
• Record every income and expense with date, amount, purpose and receipt number.
• Keep invoices and receipts for the legally required period, which can be up to ten years; check the current periods.
• Write proper invoices with the legally required details.

6. Income tax

Profit from the side business is added to your salary in the annual tax return (lesson 10), so it is taxed at your marginal rate. Because no tax is withheld, set aside a fixed share of each month's profit in a separate account. Also check with your health insurer whether your side business affects your insurance status.

Worked example

Hypothetical example: Yusuf works full-time and sells handmade wooden products online as a registered trade. In one year: turnover €6,000, business expenses €1,400 (materials, platform fees, packaging, shipping). He uses the small-business rule. Assumption: marginal income tax rate 30%. Excluded: solidarity surcharge, church tax, health insurance effects; trade tax is zero because the profit is below the €24,500 allowance.

1. Profit: €6,000 − €1,400 = €4,600
2. Estimated extra income tax: €4,600 × 30% = €1,380
3. Monthly reserve: €1,380 ÷ 12 = €115
4. VAT check: €6,000 is well below €25,000 and €100,000, so he charges no VAT.

Yusuf moves 30% of every month's profit into a tax reserve account. If the tax bill turns out lower, the rest becomes savings.

Common mistake

Practice activity

Hypothetical case: your side business earns turnover of €9,000 and has expenses of €2,100 in a year. Your marginal tax rate is 25%. Calculate the profit, the estimated income tax and the monthly tax reserve. Then list the registrations you would need if this were an online shop.

Key takeaways

• Check your employment contract, register a trade if needed and submit the tax registration questionnaire.
• The small-business rule removes VAT on sales within the turnover limits, but also the right to reclaim VAT.
• Keep separate accounts, complete records and receipts from day one.
• Side-business profit is taxed at your marginal rate; reserve a fixed share every month.

Next step

In the final lesson you will combine everything from this course into a one-page personal financial plan.