Starting to freelance

Need to know before you start

Let’s be real for a minute. Starting your own business or freelancing career will not turn out the way you imagine it. At least not in the beginning. There is a lot of potential in the long run. But in order to make it you have to embrace some hard truths, develop a certain mindset and - most importantly - be willing to go all the way. Consistently. There are no shortcuts. You will fall, fail and lose. Just to get up again and continue. No matter what. Because we both know. You got this, you can make it happen!

Luckily, there are some people out there who already did make it happen. And who share their story to support and guide you along the way. And here I am. Sharing a little bit about my personal story with experiences and lessons learned on the journey from working 9-to-5 to becoming a full-time freelancer. Let’s get to it!

Before we start a little disclaimer. This post is not meant to be the ultimate guide to establish a successful freelance business. Nor is it meant to be complete or foolproof. This is just me. Sharing what I experienced along the way. From my very own perspective. Also, some examples are pretty basic and over-simplified. Please keep that in mind - especially when reading the VAT and tax section.

Preface

We all have seen the photos on instagram. Freelancing digital nomads living it large in some foreign country, hanging on the beach or at the pool, occasionally working on their side hustle. Well, there is some truth to it. As I am writing this I am sitting in a cafe in Phuket, Thailand. Enjoying an Iced Cappuccino while appreciating the sunshine during the cold German winter. It’s noon already. Granted, I already took a dip in the pool, exercised and even got some sunbathing in. But I already billed 2,5 hours today. And worked on my own business for one hour as well. Gonna bill at least another 5,5 hours today. Need to. Gotta pay the bills. Only to then keep workin on my business. With a current screen-time averaging above eleven hours a day. So much for the dream life.

“Mental effort is just as real as the effort of moving your legs.”

Alex Hutchinson - Endure

So why do all this? Why not keep working as an employee? Get a steady paycheck at the end of each month, living a - kind of - safe and secure life?

Because of a shift in mindset. Accompanied by a belief that there is more to life. And most importantly. That it can be attained.

“Tomorrow is a direct result of what you choose to do today.”

Unknown Author

Mindset

This is where the mindset comes in. It actually goes by different names. For me, it is a mix of Entrepreneurial Spirit, Positive Mental Attitude and Growth Mindset. If you are not familiar with these terms you are hereby encouraged to pick up some books. For example by Grant Cardone, Robert Kiyosaki and Napoleon Hill. Or you listen to Tom Bilyeu’s podcast. There is a ton of inspiring and educational content out there, just take your pick and start consuming it.

A certain positive mindset is absolutely indispensable when it comes to starting your own business. But as important is - as Simon Sinek puts it - your ‘Why’. Write down why you want to embark on this journey, what it means to you and what you want to accomplish in the long run. When times get tough - and they will - your mindset and your Why will keep you going.

“If WHAT you do doesn’t prove what you believe, then no one will know what your WHY is and you’ll be forced to compete on price and service; the stuff of commodities.”

Simon Sinek - Start with Why

Another aspect that can be factored in here is what some people call ‘Support System’. This could be family, friends or a loved one. In general, it is one person (or more) who is there for you, listens to you (non judgemental) and picks you up when you’re down. That can be really helpful as shit gets overwhelming at times. But not everybody has that. As a matter of fact, many might not understand you (anymore) and say that you have changed. But that’s okay. It even is part of the journey.

“The help that never came made me who I am.”

Grant Cardone

You can read all the books you want. Listen to all the podcasts out there. But only when things happen in real life you will know how resilient you are and how strong your mindset is. You have got to leave your comfort zone. Get uncomfortable. Learn. Grow. Evolve. And start start chngng-prspctvs.

Registering A Business

It might be a good idea to actually know what it is exactly that you want to do as a freelancer. What service(s) do you want to offer? To whom? At what price? And how do you intend to find your potential clients?

For me, it was a bit different. I had no clear idea of what I actually wanted to do. I just knew that I was going to start freelancing. With some ‘digital-online-remote-consulting-service-or-product”. And that’s exactly what I did. Which is kind of a funny story.

When I went to the Tax Department (yeah, in Germany you have to register before you start freelancing) the clerk was quite baffled. “What do you mean you do not know what service or product you want to offer? You are here to register a business so you must have some idea on how to enter and survive the marketplace.” Which I did not have at that time. So I put down “digital remote online consulting service”. The clerk reluctantly approved it and sent the document ahead for further processing. Long story short. The Tax Department classified me as a ‘Business Consultant’.

Even though I did not know what services to offer, I knew exactly what type of company or corporate structure I wanted to have. Which, at that moment, was none at all. I just wanted to be a freelancer (which is ‘Freiberufler’ in Germany). No matter what service or product you sell. Get clear on what type of company you register. They all come with different duties and obligations. And all have their specific pros and cons. If you would like to know more about this, put it in the comment section; I will do a separate post if you are interested in learning about the different types of companies in Germany.

Next, you need to make a decision on whether you want to be VAT liable or not. Like choosing a company structure, this one has immediate implications aka duties. But also opportunities.

VAT Liability

There are two sides of the same coin when it comes to being liable to pay VAT. On one hand, it sucks. Because you have to submit a VAT advanced payment report each month (or every quarter, depending on how much revenue you generate). Based on the bottom line of that report, you have to pay the government. And that is not fun. Especially, if you do not know about Accounting and / or do not keep your books in a timely and organized manner. Because how do you know how much you owe them if you don’t know how that system works and how to do proper accounting? Check out smi Management Solutions, they can and will support you along the way.

On the flip side, being VAT liable also comes with opportunities that are definitely worth talking about. We’re talking about VAT payable and receivable here. The philosophy behind this is pretty simple. For every product or service you purchase VAT has to be paid. In Germany, for the majority of products and services, 19% is added on top of the net price. This gross amount is what all of us have to pay; this equals cash-out from our bank account. But in the end. Only the end-consumer has the burden of paying the VAT. Because. We, as a registered entity or freelancer, can ‘claim the VAT’. What does that mean? Let’s take a look at an example.

Say in the current month you render services for 1.000,00 EUR net. Adding 19% VAT that totals 1.190,00 EUR. If you do not have any expenses in this month you owe the government 190,00 EUR. Plain and simple. But if you have had some expenses, this debt is being diminished.

Let’s say your laptop mouse broke and needs replacing. So you buy one for 50,00 EUR net. Which totals 59,50 EUR gross. Factor this in, and the VAT you owe is 190,00 - 9,50 = 180,50 EUR. Yeah, not a big deal, I know. But what if you also purchase a laptop for 1.000,00 net in the same month? That alters the calculation. For both, your income as well as for your expense, the VAT totals 190,00 EUR. The VAT of the expense hereby offsets the VAT of the revenue. Plus, you bought a laptop mouse. And now, you actually get 9,50 EUR back from the government.

Let that sink in and reflect for a moment.

Here’s some more food for thought. Something that many people do not understand. We again take the example of the service you performed for your client. For which the client is billed 1.000,00 + 190,00 EUR = 1.190 EUR. Your client, most likely a company, can claim the VAT on their part. So most companies are fine to ‘pay you more’ (the VAT) because they understand how the game is played.

Once you receive the 1.190,00 EUR in your account it is very crucial to recognize that the 190,00 EUR DOES NOT belong to you. They belong to the government. This money just happens to pass through your account on the way to the feds. You have no ownership of that. And therefore you should not spend it. Because. At the end of the month. You have to pass that on to the tax department - or at least some of it.

Now let’s move on to the other opportunity being VAT liable presents. For businesses registered in Germany at least. Because the German government decided to ‘support’ very small businesses by allowing them to not be subject to VAT. As long as they do not generate revenue greater than 22.000,00 EUR (caution; over-simplified; terms-and-conditions apply). Which is totally fine for many businesses. For me using this exception is a no brainer. I would never ever use it. But then again. It highly depends on you, your business or service, and in which environment and industry you act.

Just think of the perception of the outside world. Or in other words. Think of how your potential client sees you. Once you tell them you are VAT exempt you basically tell them ‘I don’t make more than 22k (revenue!) per year’. For whatever reason that is. Me. I want to play in the big league. Even if I’m not there yet. At least I give the perception that I am. And that - sometimes - is all that matters.

Revenue, Profit and Accruals

Now let’s talk revenue. Which does not equal profit, btw. On the ‘gram’ you see a lot of posts like “6-figure-business” and “made 100k this month”. Always keep in mind that they are talking revenue. Which is (gross) money coming in. Without any expenses paid. For me, that is not worth bragging about. It is nice, good for you! But if you do wanna brag about something, show us your bottom line. How much is REALLY left after expenses and taxes?

Taxes can be a bitch. Especially when you are just getting started. In Germany, sometimes it seems that the whole system was designed to confuse you. And to basically ensure that tax advisors never run out of business.

From a German perspective, when you first start to freelance, the government asks you for an estimate of how much you are going to make in the first year of running your business. And let’s be real. Who the hell can properly estimate that? Anyway, you have to give them a figure. Here you basically have two options.

Option number one is to go big. Let’s say you expect to generate 50k as a freelancer. That leaves you with a tax burden of about 24% in income tax. Here, again over-simplified, the government is gonna be like. “Okay. you will make 50k, that equals taxes of about 12k per year. Breaking this down to one month… that is 1k.” PER MONTH. What you would have to pay them as advanced income tax. EVERY MONTH. Which is a shit-load of money. Especially as you do not know how much you are actually going to make and how much expenses you will have in the course of your first fiscal year.

Anyway, when you generate less, you get the money back, of course. If you do end up making more… You guessed correctly, you have to pay them more. Now let’s take a look at option number two.

You could also tell them that you will make 10k during your first year of business. Which means that you basically would have to pay no income tax at all. Which would leave you with a lot more cash in the course of your first fiscal year because the advanced income tax payment would be quite low. But be assured. Once the fiscal year is over and you do your taxes… The tax department is gonna come knocking, ready to collect. And you better have some cash stashed away for that. And here is where accruals come in.

Accruals are super important. Especially when you go with option number two. But what are accruals? Basically, these are funds, or money stashed away, to be used for a certain purpose in the future. Like, taxes for example.

Even if you are not into Finance, Accounting or Controlling as a freelancer you will always have to keep an eye on your income as well as on your expenses. If you don’t want to do it - get somebody to support you like smi Management Solutions. Or do not pay attention at all. And pay the ultimate price later.