In principle all goods, deliveries and services are liable to turnover tax (exceptions: see § 4 UstG (Turnover Tax Act)). Currently the turnover tax amounts to 19 % of the invoice amount. A reduced rate of taxation of currently 7 % applies to nearly all articles of food as well as for books, brochures, art objects and some other goods. For deliveries and services to the consumer the tax has to be included in the invoice amount. If the invoice amounts to more than 150 Euros the recipient can ask to have the tax identified. As a person carrying on a trade or business you can deduct value-added tax charged to you by other companies as so-called input tax of your own turnover tax debt. An example: In June Martin Müller achieved a turnover of 4.760 Euros (gross) with his retail business. He invoiced his customers 19 % value-added tax amounting to 760 Euros. His suppliers identified in their invoices value-added tax amounting to 290 Euros. Therefore he has to pay to the tax office: 760 Euros minus 290 Euros = 470 Euros. A turnover-tax advance return has to be submitted to the tax office before the 10th day of the following calendar month electronically (example see page 28/29). Only in exceptional cases can it still be submitted on paper. For businesses whose turnover tax liability amounted to less than 6,136 Euros in the previous year a tax advance return before the 10th day of the new quarter is sufficient. You have to calculate your turnover tax (advance payment) for the corresponding fiscal period yourself and remit it to the tax office. The payment period for remittances is three days – decisive is the date of receipt at the tax office. In the year following the foundation and in the calendar year thereafter persons setting up in businesshave to submit their advance value-added tax return on a monthly basis. This has the advantage that input VAT amounts – possibly after deposit of a security - might be disbursed faster.
For the calculation of the turnover tax, the following has to be recorded:

• All remunerations received for products and other services – separated according to the rate of taxation as well as according to taxable and tax-free turnover.
• All payments for deliveries received and other services as well as the input tax included therein.

Only so-called small traders can choose at the start of their activity whether they charge VAT or not. The limit is a turnover below 17,500 Euros in the previous year and below 50,000 Euros in the current year. In the tax assessment a small trader is treated like an individual. As he is not paying turnover tax he cannot charge value-added tax in his invoices and value-added tax he had to pay himself (i.e. to a seller for goods received) cannot be refunded as input tax by the tax office.

Here the following rule applies: individuals (“natürliche Personen”) pay income tax while legal entities (“juristische Personen”) pay corporation income tax. The term individual (“natürliche Person”) stands for the owner of the business who is liable for his business with his name and his personal assets. The profit achieved according to the annual balance sheet together with further possible income from capital assets etc. has to be stated in the income tax return. The profit results from the sum of all income minus all operating costs. Not deductible is the cost of living (e.g. apartment, clothing, meals, ski vacations etc.). The higher the profit, the higher the rate of taxation for income tax ranging from 15 per cent to the upper tax limit of 45 per cent. Earnings from legal entities like private limited companies are liable to corporation income tax. The determination of profits is done within the scope of double entry bookkeeping (balance and profit and loss account) according to the regulations regarding income tax for operating revenues and operating costs. The taxation rate amounts to 25 per cent for retained profits; distributed profits are taxed according to the half earnings taxation procedure (Halbeinkünfteverfahren). Usually a business has to make an advance payment regarding the income and/or corporation income tax four times a year. The tax office determines the amount according to the tax debt expected. These advance payments will be taken into account at the later tax assessment.

Here the annually achieved earnings are taxed. Trade tax only has to be paid when a tax-free allowance of 24,500 Euros concerning the income from trade or industry has been exceeded. This tax free allowance does not apply to corporations (e.g. a private limited company). Trade tax also has to be paid in advance payments every quarter. The amount depends on the rate imposed by every municipality for its area. For the entrepreneur this means a tax burden of up to 20 per cent of the profit.

The employer has to declare, withhold and transfer the wage tax of his employees (usually monthly) to the corresponding tax office. Since 2005 the wage tax declaration has to be done electronically via ELSTER. Only in exceptional cases the tax office allows for the declaration in paper copy. Information can be obtained under www.elster.de (compare page 28-29) The amount of the wage tax results from the wage tax chart obtainable at specialized retailers. For every employee a payroll has to be kept. Information can be obtained from banks and tax authorities. If a wage tax card is not available the income tax has to be calculated according to tax class IV of the gross wages. Furthermore in certain cases the possibility of consolidation in a lump sum exists.

• Taxation according to wage tax card: In wage tax classification I, II, III and IV no wage tax is deducted for marginally employed (part-time worker earning no more than 400 Euros per month) as long as the employee has no other income. In case the employee secures his livelyhood by several jobs he/she has to submit further wage tax cards (class VI) according to which his/her income will be taxed.
• Wage tax on a per diem basis: In case the employee does not submit a wage tax card the employer can pay tax on the income of part-time employees on a per diem basis of 2 or 20 per cent. For temporary employees a lump sum of 25 per cent applies. Added are church tax and solidarity tax. Furthermore the employer has to pay the contributions for the social security.
• Recommended procedure: In case the entrepreneur is in doubt as to the admissibility of a consolidation into a lump sum he should tax the income according to wage tax class VI. This way he prevents to be taken into recourse by the tax authorities later on.

Regulation for marginal occupation (geringfügige Beschäftigung):

• Definition: A “marginal occupation” exists when the income does not exceed 400 Euros.
• For employers: lump-sum for taxes and social insurance contributions. The employer pays a lump-sum of 30 per cent of the income of which 15 per cent are for the compulsory pension scheme, 13 per cent for the compulsory health insurance and 2 per cent for the income tax including church tax and solidarity tax.
• For employees: exempt from taxes and social security contributions The income from a marginal occupation remains exempt from taxes and social security contributions for the employee.
• In case the payment in form of a lump-sum amounting to 30 per cent (including tax portion of 2 per cent) is not permissible due to the addition of several employments the employer can tax the marginal occupation flat with 20 per cent.
• Several marginally occupied employees will be added together. In case the limit of 400 Euro is exceeded all employees are subject to social insurance contributions. The obligation to insure starts when announced by the collecting agency or the pension insurance carrier.
• Simplified procedure for employer and employees in private households: The employer reports to a central collecting agency (Bundesknappschaft in Cottbus for the whole ofGermany) a simplified declaration and pays the lump sum to that collecting agency. The collecting agency then distributes the various amounts to the pension fund and the health insurance as well as to the tax authorities. The collecting agency allocates the company number, calculates the social insurance contribution and the shares in the costs according to the continuation of payments law and collects these amounts by debit note from the employer.

Every businessperson is obliged to keep at least the following records:

• He has to keep a so-called “cash journal”, the daily recording of cash receipts and cash disbursements
• Recordings regarding goods received and outgoing goods.
• The duty of double entry bookkeeping applies to: businesses with an expected annual turnover of more than 500,000 Euros in the calendar year
• businesses with a profit of more than 30,000 Euros in the current fiscal year
• businesses where the owner is registered in the commercial register or with a bookkeeping requirement according to non-fiscal rules and regulations.

The easiest form of double entry bookkeeping is the columnar bookkeeping (amerikanisches Journal). Every business transaction is entered into account and contra account. The accounts are listed next to each other in tabular form (general ledger). You will find journals with a variable number of columns at specialized retailers. Despite all the progress in mechanical and electronic bookkeeping columnar bookkeeping is still the best solution for small businesses. Freelancers as well as businesses not registered in the commercial register or not required to keep accounts have the opportunity to determine their profit according to § 4 (3) Income Tax Law via a calculation of excess of receipts over expenditure. The tax authorities developed an official form (see page 61-63 plus instruction for the official form, page 64-69) that has to be used for the profit determination starting with the fiscal year 2005. However, in case the operating receipts do not exceed 17,500 Euros an informal determination of profits is still possible. Special legal obligations to keep books and records apply to trades subject to supervision. In Bavaria this also applies to the trade in second-hand goods. Information can be obtained from the responsible authority and the Chamber of Industry and Commerce.