Side Business Alongside Your Day Job: Registration, Taxes, and Obligations

At what point does a side job become a business?

A business is an independent, sustainable activity carried out with the intent to make a profit, through which you participate in general economic activity. It may not consist of agriculture, forestry, a liberal profession, or other self-employed work (Section 15(2), first sentence, of the Income Tax Act (EStG)). The fact that you also have a primary job does not change this. Even a secondary intent to make a profit is sufficient (sentence 3). It is enough to intend to generate income that exceeds expenses. A tax savings resulting from the activity does not constitute a profit: Anyone who incurs losses solely to save on taxes does not have an intent to make a profit.

There is no minimum threshold for revenue or profit specified in § 15(2) of the Income Tax Act (EStG) or in § 14 of the Trade Regulation Act (GewO). The decisive factor is the nature of the activity, not the amount of income.

If the activity falls under the category of liberal professions—such as journalism or translation—it is not considered a business. The article on “Business vs. Liberal Profession” explains the difference between the two.

How do you register a side business?

Anyone starting a business must simultaneously notify the municipal business registration office (§ 14(1) GewO). The municipality forwards the information to other agencies, including the tax office (§ 14(8) GewO). The tax office also requires a questionnaire, which you must submit electronically.

What's on the questionnaire for the tax office?

The tax registration questionnaire asks about the type of activity, expected revenue and profit, profit calculation, and VAT information (Section 138(1b) of the German Fiscal Code (AO)). The tax office uses the questionnaire to determine how and under which tax categories you are to be registered for tax purposes; after which it will assign you a tax identification number. This requirement also applies to a side business; it is based on the commencement of the activity and not on the amount of income. An exception may be granted via a Federal Ministry of Finance (BMF) letter for activities with no tax implications (para. 1c). For more information, see the article on the questionnaire.

What are the rules for small business owners with a side business?

The small business exemption (§ 19 UStG) exempts businesses from VAT as long as total revenue in the previous year did not exceed €25,000 and does not exceed €100,000 in the current year. What counts is the business owner’s total revenue, not that of individual business locations: The revenue from all of your business locations is combined. Therefore, if you start a side business in addition to an existing self-employed activity, you do not start with a new threshold.

Only taxable sales are counted, based on payments received—that is, on the date the money is received, not on the invoice date. Services provided abroad are not included in the limit. The sale of fixed assets is not included (Section 19(2) of the Value-Added Tax Act).

Small business owners do not report VAT, do not claim input tax credits, and generally do not file advance VAT returns. They are not required to file an annual VAT return on their own initiative. However, if the tax office requests that they do so, they must comply.

You can opt out of this rule and pay VAT as usual. You can declare your opt-out by the last day of February in the second year following the relevant year; it will then take effect as of the beginning of that year. The declaration cannot be withdrawn; the waiver binds you for at least five calendar years and can only be revoked thereafter, effective as of the beginning of a subsequent calendar year (Section 19(3) of the German Value-Added Tax Act (UStG)). Anyone who has made significant investments in the initial year can thus switch to standard taxation retroactively and claim input tax credits.

Each of the three types of tax has its own threshold. For income tax, the intent to make a profit is the key criterion. For VAT, you are considered a business owner if you are self-employed and generate income on a sustained basis; whether you intend to make a profit is irrelevant in this context.

How is a side business treated for income tax purposes?

Income from a side business constitutes a separate category of income (income from business operations, § 15 EStG) and is added to other sources of income, such as wages. The tax office then applies the tax rate, which increases as income rises. The profit is therefore taxed at the individual’s personal tax rate, not at a separate rate for the side business.

The amount of profit depends on how it is calculated: under the income-surplus method, operating income minus operating expenses (Section 4(3) of the Income Tax Act).

When do you have to file a tax return?

If, in addition to your wages, you have income that was not subject to payroll tax withholding and the total amount exceeds €410 per year, you will be assessed for tax (§ 46 (2) No. 1 EStG). This refers to profit, not revenue. If all of this income is combined—such as profits from a side business and rental income—the €410 threshold applies to the total amount. Investment income on which the bank has withheld tax is not included in this threshold.

The same rule specifies a second threshold, also set at 410 €: for income and benefits subject to the progressive tax rule. Anyone who has received wage replacement benefits in addition to income from a side business must therefore check two thresholds, not just one.

For winnings up to and including 410 €, no tax assessment is triggered. If a tax assessment is issued for another reason or at the recipient’s own request, this income up to 410 € is deducted from taxable income (Section 46(3) of the Income Tax Act (EStG)): It then has no tax implications. If, for example, you voluntarily file a return for a profit of €300, the profit has no tax implications. For amounts over €410, a hardship adjustment reduces the tax liability until the income reaches €820: The difference between the income and €820 is then deducted from your taxable income (Section 70 of the Income Tax Implementation Regulation (EStDV)). The deduction no longer applies for amounts of €820 or more.

A return must also be filed whenever a remaining loss carryforward is determined at the end of the previous year. Anyone who incurred losses in the first year of operating a side business must therefore file a return in subsequent years.

If you are required to file a return, you must submit the declaration electronically. Income from a side business should be reported on Schedule G.

Does the employer need to be notified?

Whether a side business must be reported to the employer or requires the employer’s consent is governed by the employment contract and labor law, not tax law. This article does not provide any information on this matter. Employment contracts often contain provisions regarding side jobs; even if such provisions are absent, the question may still be raised. This matter is clarified by a source of labor law, not the tax office.