Tax overview for sole proprietors in Germany: How are they taxed und when

Sole proprietorships vs. partnerships & corporations

Before we look at what taxes a sole proprietorship owes, let’s first unpack what a sole proprietorship is. There are different legal forms of business in Germany, and different laws govern them. We can distinguish between the following:

• Partnerships such as a civil-law partnership or GbR
• Corporations (LLCs) such as a GmbH, UG or AG
• Sole proprietorships
• Freiberufler

Each legal form is taxed differently in accordance with German tax laws.

How to calculate your sole proprietorship’s taxes

Because sole proprietors derive their income from the profits they accumulate, they are subject to income tax 💬Einkommensteuer. Sole proprietorships owe the following taxes, regardless of the amount of revenue or profit they generate:

1. Income tax and a possible church tax 💬Kirchensteuer, plus solidarity surcharge 💬Solidaritätszuschlag 
2. Value-added tax 💬Umsatzsteuer
3. Trade tax 💬Gewerbesteuer, if you are a commercial trader and your revenue exceeds the
4. Wage tax💬Lohnsteuer, if you employ staff

The accounts you keep of all revenue and expenditures of your commercial business activities form the basis for taxation. This bookkeeping determines your profit, which forms the assessment basis for each individual tax. For this reason, we’ll take a quick look at the accounting process and the so-called EÜR, a simplified income statement.

Typical taxes of a sole proprietorship

⚠️This guide looks at the taxes of commercial sole proprietorships rather than those of liberal professionals.

To fulfil your tax obligations, you have to document all business transactions, archive them and store them for ten years. A simple shoebox won’t cut it—opt for a professional accounting software such as Lexware Office, SevDesk or Datev.

In addition to using software to record your transactions, you should also sort your documents chronologically and according to revenues and expenditures—just to be ready in case of a tax audit. Digital invoices also have to be archived with the corresponding emails. All invoices and payment receipts must be filed away with your bank statements. The same applies to your expenditures, which also have to be filed with the original receipts. Subtracting expenditures from earnings will determine the amount of profit on which taxes for sole proprietorships are based.

Income tax and the solidarity surcharge

Sole proprietors in Germany pay income tax on their business profits. The rules are set out in the German Income Tax Act. Income tax applies only once your taxable income exceeds the basic tax-free allowance, which is adjusted regularly by the government. For 2025, for example, it is €12.096 for single taxpayers.

Additional allowances may reduce your taxable income further, such as deductions for children, exceptional burdens or certain pension contributions.

Germany uses a progressive tax system, meaning the tax rate increases as income rises. The current rates range from 14% (entry level) up to 42%, with a top rate of 45% for very high incomes. In addition to income tax, some taxpayers pay a solidarity surcharge of 5.5%, although many lower- and middle-income earners are now exempt. Since 2021, the majority of income-tax payers—about 90 %—no longer pay the solidarity surcharge on their income.

Members of recognised religious communities also pay church tax.

Filing tax returns and advance payment

You must file an income tax return each year. The tax office may require quarterly advance payments, which are typically due on 10 March, 10 June, 10 September and 10 December, based on your previous year’s results.

VAT and entitlements

VAT is an indirect tax that businesses charge on their goods and services and then pass on to the tax office. For consumers, this appears as Mehrwertsteuer on invoices—the standard rate is 19%, while a reduced rate of 7% applies to items such as basic foodstuffs, books, newspapers and other essential goods.

Businesses indicate VAT on their invoices, but they can also deduct the VAT they themselves pay on business-related purchases. This deductible amount is called input tax 💬Vorsteuer. If your deductible input tax is higher than the VAT you owe for a period, the tax office reimburses the difference through the advance VAT return 💬Umsatzsteuervoranmeldung.

📌 If you use the small business regulation, your sole proprietorship is exempt from passing on VAT and deducting input tax.

Trade tax

Trade tax is a municipal tax on business profits. It applies to all commercial businesses in Germany —including sole proprietorships—once they exceed the statutory tax-free allowance of €24,500 per year.

Trade tax is administered by municipalities, who use it to fund local infrastructure and services. Every municipality sets its own trade tax assessment rate 💬Gewerbesteuerhebesatz. In less expensive rural areas, rates may be 200–350%. In major cities, they are much higher. The highest nationwide is currently 900%.

📌 Where you set up your business may significantly influence your total tax burden.