Planning Personal and Business Finances Properly

The self-employed know the pattern: income lands in one account, private spending goes out of the same account, and at the end of the year an additional tax payment comes as a surprise. Order comes less from elaborate software than from a clear structure. This article shows how to separate your accounts, set an owner's salary, put tax aside in good time, organise your private budget and build insurance cover and retirement provision into the plan.

Three accounts create clarity

The simplest step is an organisational one: a business account for all business income and expenses, a private account for the household and a separate reserve account for tax money. In Germany, sole traders are not generally required by law to keep a separate business account, but it makes bookkeeping considerably easier because every transaction can be clearly assigned. A GmbH (the German private limited company) has its own account in any case, because its assets are separate from those of its shareholders.

The gain in overview is greater than it first sounds. The business account balance shows what is genuinely available once the taxes have been moved to the reserve account. The private account shows whether the household manages on the set amount. And the reserve account prevents money that belongs to the tax office (Finanzamt) from being spent by mistake on investments or a holiday.

A fixed owner's salary

Many self-employed people withdraw money as needed. A fixed monthly amount, the owner's salary (Unternehmerlohn), is easier to plan. In a sole proprietorship, this counts for tax purposes as drawings (Privatentnahme). It does not reduce profit: tax is charged on the profit of the business, regardless of how much you withdraw. The amount is based on your fixed private costs, your provision for the future and what the business earns on a sustainable basis, not on a single good month.

In a GmbH, the managing director receives a contractually agreed salary, which is a business expense for the company and subject to wage tax deducted at source (Lohnsteuer). Whether shareholder managing directors are liable for social security contributions depends, among other things, on their shareholding and voting rights. The status determination procedure (Statusfeststellungsverfahren) run by the German statutory pension insurance, Deutsche Rentenversicherung, provides clarity. The balance between salary and profit distributions is best agreed with your tax adviser, because the two are taxed differently.

Setting tax aside before it falls due

For the self-employed in Germany, income tax is not deducted from pay every month. Instead, the tax office sets advance payments which, under section 37 of the German Income Tax Act (Einkommensteuergesetz, EStG), fall due on 10 March, 10 June, 10 September and 10 December. They are generally based on the most recent tax assessment. If profit rises markedly, an additional payment follows later, and the future advance payments are often raised at the same time. Precisely this combination strains liquidity if there is no reserve.

In economic terms, VAT (Umsatzsteuer) does not belong to the business. It is paid by the customer and passed on to the tax office, minus the input VAT (Vorsteuer) on your own purchases. The simplest approach is to treat it as a pass-through item and move it to the reserve account as soon as a payment arrives. The advance VAT return (Umsatzsteuer-Voranmeldung) must be filed and paid by the tenth day after the end of the return period: monthly if the VAT for the previous year exceeded 9,000 euros, otherwise usually quarterly.

Businesses that carry on a trade (Gewerbetreibende) also pay trade tax (Gewerbesteuer) to their municipality, with advance payments on 15 February, 15 May, 15 August and 15 November. Sole proprietorships and partnerships receive an allowance of 24,500 euros on their trading income (Gewerbeertrag), and under section 35 of the Income Tax Act trade tax is taken into account against income tax at a flat rate. Members of the liberal professions (Freiberufler) pay no trade tax. What percentage of profit is appropriate for the reserve depends on the individual case and can be agreed with your tax adviser.

Net revenue	€12,000
VAT at 19 % to the reserve account	€2,280
Business costs (net)	€4,000
Profit before tax	€8,000
Reserve for income tax and trade tax (assumption: 30 %)	€2,400
Building up the business reserve	€600
Owner's salary to the private account	€5,000

The example assumes a sole proprietorship that takes in 12,000 euros net plus 2,280 euros in VAT; for simplicity, input VAT on costs is left out. The 30 per cent rate for the tax reserve is a round assumption, and the actual burden depends on the individual case. Sole traders also pay for their health cover and retirement provision out of the owner's salary of 5,000 euros.

Private budget and two separate reserves

On the private side, a simple split of the owner's salary is often enough: fixed costs such as rent, insurance and loans, variable spending on everyday life, and a fixed amount for saving and provision that is set aside as soon as the money comes in. Which shares suit you depends on your circumstances and income. What matters is less the exact ratio than the rule that the household manages on a fixed amount.

This goes hand in hand with two reserves that should not be mixed. The private emergency fund covers repairs, illness or a period with a lower owner's salary. The business reserve absorbs fluctuations in revenue, late payments and unexpected costs in the business. How large it might be is covered in the article Cash Reserves: The Questions Business Owners Should Answer. Keeping the two pots apart shows early on whether a shortfall is private or business in origin.

Insurance cover and retirement provision

In Germany, health insurance is compulsory. Depending on their previous periods of insurance, the self-employed take out either voluntary statutory cover or private insurance. For people whose main occupation is self-employment, sickness benefit (Krankengeld) during a longer illness is not automatically included in statutory health insurance: it requires a declaration of election to the health insurer. In private insurance, a daily sickness allowance (Krankentagegeld) has to be agreed separately. The risk of occupational disability and business liability also belong on the list of questions to settle before choosing specific contracts.

On retirement provision, the self-employed differ markedly from employees. Only certain groups are compulsorily insured in the German statutory pension scheme, such as many craftspeople, midwives, self-employed teachers, artists and writers, as well as self-employed people who have no employees subject to compulsory insurance and work on a lasting basis essentially for just one client. Most others are not subject to compulsory insurance and decide for themselves how to make provision. In principle, these routes are open:

• compulsory insurance on application, to be made within five years of starting self-employment
• voluntary contributions to the statutory pension scheme, at an amount you choose within legal limits
• the basic pension (Basisrente), with tax relief through the deduction of special expenses under section 10 of the Income Tax Act
• your own assets, such as securities or property, built up with a fixed monthly savings amount

Each route has its own conditions regarding flexibility, access before retirement and cover in the event of reduced earning capacity. Deutsche Rentenversicherung offers free advice on this. What matters most is that provision is a fixed item in the plan and does not depend on what is left at the end of the year.

A fixed monthly finance appointment

A plan only works if it is regularly checked against reality. A fixed date each month helps, for example in the first week, with a few key figures that can be reviewed in half an hour:

• balances of the business, reserve and private accounts
• revenue and profit for the previous month compared with the plan
• unpaid invoices and how long they have been outstanding
• tax deadlines for the next three months
• the level of the business and private reserves

Once a year, a broader look is worthwhile: how has profit developed, are the advance payments and the owner's salary still right, what investments are coming up? This review combines well with a meeting with your tax adviser, who knows the bookkeeping figures anyway. The cash reserve calculator shows how long the available money will last at current costs.

Keeping business money, household money and tax money apart shows you at all times what is really available.

Sound financial planning does not require complicated tools. It rests on a few fixed rules: separate accounts, a predictable owner's salary, taxes as a pot of their own and provision as a fixed item. Once this structure is in place, you gain not only an overview but also room for decisions, because shortfalls become visible before they become pressing.

Frequently asked questions

Does a sole trader have to keep a separate business account?

In Germany, there is no general legal obligation to do so. A separate account does, however, make bookkeeping, the tax return and work with your tax adviser easier, because private and business payments no longer get mixed up. In addition, the terms of a private account may restrict business use, and a look at your own account agreement provides clarity here.

How much money belongs in the tax reserve account?

There is no fixed rate for everyone, because the burden depends on profit, marital status, legal form and municipality. VAT can be calculated precisely and set aside in full. For income tax and trade tax, you can work out with your tax adviser a percentage of profit that sits slightly above the expected burden, so that additional payments do not leave a gap.

Are the self-employed automatically covered by the statutory pension scheme?

Only certain groups are compulsorily insured by law, such as many craftspeople, midwives, self-employed teachers, and artists and writers. Other self-employed people can apply for compulsory insurance within five years of starting their activity or pay voluntary contributions. If in doubt, Deutsche Rentenversicherung, the German statutory pension insurer, gives a binding answer on whether the obligation applies in your case.

What is the difference between owner's salary and profit?

Profit is what the business earns after deducting all business costs, and for sole traders it forms the basis for income tax. The owner's salary is the amount you pay yourself regularly. It sensibly sits below sustainable profit, so that there is still room for taxes, investment and reserves.

Terms

Drawings

Money or assets that a sole trader takes out of the business for private purposes (Privatentnahme) and that do not reduce taxable profit.

Income tax advance payment

Quarterly payment towards expected income tax (Einkommensteuer-Vorauszahlung), which the German tax office generally sets on the basis of the most recent assessment.

Basic pension

Tax-advantaged retirement provision in Germany (Basisrente) with a lifelong monthly pension, whose entitlements cannot be inherited, transferred or used as collateral.

To the business glossary

Sources

1. Selbstständige (in German)Deutsche Rentenversicherung
2. Einkommensteuergesetz, § 37 Einkommensteuer-Vorauszahlung (in German)Bundesministerium der Justiz
3. Umsatzsteuergesetz, § 18 Besteuerungsverfahren (in German)Bundesministerium der Justiz
4. Gewerbesteuergesetz, § 19 Vorauszahlungen (in German)Bundesministerium der Justiz
5. Sechstes Buch Sozialgesetzbuch, § 4 Versicherungspflicht auf Antrag (in German)Bundesministerium der Justiz

financial planningself-employedowner's salarytax reserveretirement provision

Image: illustration, created with AI.