Can I use the actual taxation method as a freelancer?
April 25, 2023 | 40,00 EUR | answered by Lina Sauer
Dear tax advisor,
My name is Ella Hoffmann and I work as a freelance graphic designer. In the past, I have settled my sales tax based on the accrual method. Now, I am considering whether the cash method would be suitable for me as a freelancer.
So far, I have been submitting a monthly sales tax return and calculating the sales tax based on my invoices. However, my income as a freelancer fluctuates significantly from month to month, causing me to sometimes pay more sales tax than has actually been received. This leads to cash flow problems and is a major burden for me as a self-employed individual.
Therefore, I am wondering if it would be beneficial for me to switch to the cash method. This way, I could only pay the sales tax when the actual money is received. This may help me improve my liquidity situation and better manage fluctuations in my income.
Could you please explain to me whether the cash method is recommended for freelancers like me? What are the requirements for switching from the accrual to the cash method? Are there any potential disadvantages or risks that I should be aware of?
I would greatly appreciate your assistance in making this decision and informing me about the pros and cons of the cash method for freelancers.
Thank you in advance for your support.
Sincerely,
Ella Hoffmann
Dear Mrs. Hoffmann,
Thank you for your inquiry regarding the switch from accrual accounting to cash accounting as a freelance graphic designer. Cash accounting can be a sensible option for self-employed individuals with fluctuating income to avoid liquidity constraints and better manage income fluctuations.
With cash accounting, the sales tax is only due when the invoice amounts have actually been received. This means that you only have to remit the sales tax once the money has been credited to your account. This allows you to improve your liquidity situation and better plan your finances, as you can adjust the sales tax payments to match actual cash receipts.
To switch from accrual to cash accounting, certain requirements must be met. First and foremost, you must be considered a small business owner according to § 19 UStG, meaning that your annual turnover did not exceed 17,500 euros in the previous year and is not expected to exceed 50,000 euros in the current year. Additionally, you must submit an application for the switch to the tax office and prove that cash accounting is economically beneficial for you.
However, there are also disadvantages and risks to consider when switching to cash accounting. For one, you may encounter resistance from clients who prefer to claim the sales tax immediately. Additionally, cash accounting can lead to increased administrative effort as you need to carefully monitor payment receipts and remit the sales tax accordingly.
Ultimately, the decision to opt for or against cash accounting as a freelancer is an individual one that depends on your personal circumstances and needs. I recommend carefully weighing your options and consulting with your tax advisor to find the optimal solution for you.
I hope this information helps you in your decision-making process. If you have any further questions, please feel free to contact me.
Best regards,
Lina Sauer
