A Kleingewerbe (small trade business) in Germany is not automatically tax-free, and there is no special tax-free limit for it. Three taxes apply, each with its own threshold: income tax (Einkommensteuer) only applies once your total taxable income in 2026 exceeds 12,348 euros. Trade tax (Gewerbesteuer) only applies once the profit from the business exceeds 24,500 euros a year. And as a small business owner (Kleinunternehmer), you do not charge VAT (Umsatzsteuer) as long as your turnover in the previous year did not exceed 25,000 euros. This article describes the rules for people who live in Germany.
If you are employed and run the Kleingewerbe on the side, there is also a small extra threshold: if all your income besides your wages adds up to no more than 410 euros a year, it remains tax-free. Above that, the profit is gradually taxed in full.
Contents
- Which taxes do you pay with a Kleingewerbe?
- How much can you earn tax-free?
- Kleingewerbe next to a job: the 410-euro threshold
- Trade tax: only above 24,500 euros profit
- VAT: small business owner or not?
- Which tax returns you file
- Advance payments: when the tax office wants money in advance
- Frequently asked questions
Which taxes do you pay with a Kleingewerbe?
Whether you pay tax on your Kleingewerbe depends on your profit for income tax and trade tax, and on your turnover for VAT. Turnover is everything your customers pay you. Profit is what is left after deducting your business expenses.
| Tax | What it is calculated on | When it applies (2026) |
|---|---|---|
| Income tax (Einkommensteuer) | Your total taxable income: profit from the business plus wages, pension and other income | above 12,348 euros (basic tax-free allowance, Grundfreibetrag), for married couples assessed jointly above 24,696 euros |
| Trade tax (Gewerbesteuer) | Profit from the business (trade income, Gewerbeertrag) | above 24,500 euros a year (allowance for sole traders) |
| VAT (Umsatzsteuer) | Turnover | not at all for small business owners, as long as turnover was no more than 25,000 euros in the previous year and is no more than 100,000 euros in the current year |
So the small business scheme (Kleinunternehmerregelung) is a rule for VAT only. "Kleingewerbe" and "Kleinunternehmer" sound similar but mean different things, see Kleingewerbe and Kleinunternehmer.
If you are a small business owner, you set this once in your profile in the office1.cloud invoicing software. The software then adds the matching notice to every invoice itself and shows no VAT.
How much can you earn tax-free?
Your profit stays free of income tax as long as your total taxable income does not exceed the basic tax-free allowance. In 2026, that is 12,348 euros (§ 32a EStG).
The allowance applies once to all your income together, not separately to each source of income. The law adds up profit, wages, pension and other income before it calculates the tax (§ 2 EStG). If you live only from your Kleingewerbe, you can use the full allowance for your profit. If your income from a job alone is already above 12,348 euros, no allowance is left for the profit.
Two terms explained:
- Profit, in the cash-basis profit statement (Einnahmenüberschussrechnung, EÜR), is business income minus business expenses. Income counts in the year in which the money reaches you (§ 11 EStG).
- Taxable income is what remains of all your income after tax deductions, for example after contributions to health and long-term care insurance as special expenses (Sonderausgaben) (§ 2 (4) and (5) EStG). If you live only from your Kleingewerbe, your taxable income is therefore lower than your profit as soon as such deductions apply.
This is how much income tax applies in 2026, calculated with the formula in § 32a EStG, for one person not assessed jointly, without solidarity surcharge and church tax:
| Taxable income | Income tax 2026 |
|---|---|
| 12,348 euros | 0 euros |
| 15,000 euros | 435 euros |
| 20,000 euros | 1,570 euros |
| 25,000 euros | 2,850 euros |
| 30,000 euros | 4,217 euros |
For 2027, the German government plans a higher allowance of 12,564 euros. This is part of the draft Income Tax Reform Act 2027 (Einkommensteuerreformgesetz 2027), which the Bundestag debated in first reading on 8 October 2026. It has not been passed yet (as of 19 October 2026).
Kleingewerbe next to a job: the 410-euro threshold
If you are employed, a small side income of up to 410 euros a year remains tax-free. For this, the law adds up all income from which no wage tax (Lohnsteuer) was withheld, including the profit from the Kleingewerbe. If it is no more than 410 euros, the tax office deducts it from your income again (§ 46 (3) EStG).
Between 410 and 820 euros, a hardship allowance (Härteausgleich) applies: the tax office deducts the amount that is missing to reach 820 euros (§ 70 EStDV). With a profit of 600 euros, that is 220 euros, so 380 euros are taxed. From 820 euros, the profit counts in full.
Above 410 euros, the law also requires an income tax return (§ 46 (2) no. 1 EStG, § 56 EStDV).
From then on, the profit is taxed together with your salary, at the tax rate your total income reaches. An example based on the 2026 tariff: your taxable income from your job is 30,000 euros. If 8,000 euros of profit from the Kleingewerbe are added and raise your taxable income by the same amount, your income tax rises by 2,366 euros. That is just under 30 percent of the profit.
Trade tax: only above 24,500 euros profit
If the profit from your business is below 24,500 euros a year, you pay no trade tax as a sole trader. The law reduces the trade income of natural persons by an allowance of 24,500 euros (§ 11 (1) GewStG).
Trade income (Gewerbeertrag) is based on the profit. The law adds or deducts certain amounts (§§ 7 to 9 GewStG). However, interest, rent and similar costs are only added once together they exceed 200,000 euros a year (§ 8 no. 1 GewStG).
The regulation only requires a trade tax return once trade income exceeds 24,500 euros, or if the tax office explicitly asks for one (§ 25 (1) GewStDV).
If the profit is higher, the tax office credits the trade tax of sole traders fully or partly against income tax (§ 35 EStG). How this is calculated is shown in Calculating trade tax.
Whether you run a trade business at all or work as a freelancer is explained in Freelancer or trade business.
VAT: small business owner or not?
As a small business owner, you do not put VAT on your invoices and do not file advance VAT returns. This applies if your turnover did not exceed 25,000 euros in the previous year and does not exceed 100,000 euros in the current year (§ 19 (1) UStG).
In the year you start, the tax authorities apply a lower threshold: turnover may then not exceed 25,000 euros in the current year (section 19.1 (3) of the VAT Application Decree, Umsatzsteuer-Anwendungserlass, letter of the Federal Ministry of Finance of 18 March 2025). The very sale with which you exceed a threshold is already subject to normal VAT. What you earned up to that point remains tax-free.
As a small business owner, you do not file VAT returns (§ 19 (1) UStG). Exceptions are special cases in which you owe tax yourself, for example as a customer of a foreign business (§ 18 (4a) UStG), and a request from the tax office (§ 149 (1) AO).
The scheme is optional. You can waive it and charge VAT; this then binds you for at least five calendar years (§ 19 (3) UStG). Whether this pays off for you is explained in Small business owner: yes or no?. Without the small business scheme, you show VAT on your invoices and report it to the tax office, see Advance VAT return. What the invoice looks like in both cases is shown in Invoicing with a Kleingewerbe.
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Which tax returns you file
If you stay below 24,500 euros profit and are a small business owner, usually only the income tax return with the cash-basis profit statement goes to the tax office. The other two returns are only added above certain thresholds or if the tax office asks for them.
| Return | When the law requires it | Legal basis |
|---|---|---|
| Income tax return with Anlage EÜR | without wages: if the sum of your income exceeds the basic allowance. With wages: if your income besides wages exceeds 410 euros | § 56 EStDV, § 46 (2) EStG |
| Trade tax return | if trade income exceeds 24,500 euros | § 25 GewStDV |
| VAT return | for small business owners usually not, except on request of the tax office or in special cases | § 19 (1) UStG, § 18 (4a) UStG |
If the tax office asks for a return, the law requires you to file it even below these thresholds (§ 149 (1) AO).
If you have income from a trade business, you generally submit the income tax return electronically, for example via ELSTER, the tax authorities' online portal (§ 25 (4) EStG). The cash-basis profit statement is also sent to the tax office electronically, as Anlage EÜR (§ 60 (4) EStDV).
Without a tax adviser, the return is due seven months after the end of the year, that is on 31 July of the following year (§ 149 (2) AO). With a tax adviser, longer deadlines apply, see Tax return deadlines.
Before the first return comes the registration with the tax office: after you register your trade, the tax office requires further information about your tax situation, submitted electronically (§ 138 (1b) AO). How this works with the tax registration questionnaire (Fragebogen zur steuerlichen Erfassung) and when you receive your tax number is explained in Registering a trade.
Advance payments: when the tax office wants money in advance
If the tax office expects income tax on your profit, it can set quarterly advance payments (Vorauszahlungen): on 10 March, 10 June, 10 September and 10 December (§ 37 (1) EStG). They are based on the tax from your last assessment. The tax office can adjust the advance payments to the tax it expects for the current year (§ 37 (3) EStG). It does not set any below 400 euros a year or below 100 euros per date (§ 37 (5) EStG).
With the first tax assessment, both can therefore come together: the additional payment for the past year and the first advance payments for the current one. It helps to put part of every payment into a separate account from the start. How large that part should be depends on your tax rate; the table under How much can you earn tax-free? gives you a guide.
Frequently asked questions
Is a Kleingewerbe tax-free up to 25,000 euros?
No. The 25,000 euros are the turnover threshold of the small business scheme and only concern VAT (§ 19 UStG). For income tax, the basic allowance of 12,348 euros counts; for trade tax, the allowance of 24,500 euros profit.
How much can I earn with a Kleingewerbe?
There is no fixed earnings limit for the Kleingewerbe itself. What counts are the tax thresholds in this article. Above 800,000 euros turnover or 80,000 euros profit a year, the law requires proper books and annual financial statements. This obligation only starts after the tax office has notified you (§ 141 AO).
Does the allowance apply to turnover or to profit?
For income tax and trade tax to profit, for the small business scheme to turnover. An example: 20,000 euros turnover and 6,000 euros business expenses result in 14,000 euros profit. For the small business threshold, the 20,000 euros count; for income tax and trade tax, the 14,000 euros.
Will the basic allowance rise in 2027?
That is planned. The government's draft provides for 12,564 euros in 2027 and 12,900 euros in 2028. The Bundestag and Bundesrat have not made a final decision yet (as of 19 October 2026).
What applies to married couples?
If you are assessed jointly, the tax office calculates the tax with the splitting method (§ 32a (5) EStG). As a result, income tax only applies once the couple's joint taxable income exceeds 24,696 euros, twice the basic allowance. The thresholds for trade tax and VAT do not change.
Sources
- § 2 EStG, scope of taxation, definitions (Umfang der Besteuerung, Begriffsbestimmungen), in German
- § 11 EStG, receipt and payment (Vereinnahmung und Verausgabung), in German
- § 25 EStG, assessment period, obligation to file (Veranlagungszeitraum, Steuererklärungspflicht), in German
- § 32a EStG, income tax tariff (Einkommensteuertarif), in German
- § 35 EStG, tax reduction for trade income (Steuerermäßigung bei Einkünften aus Gewerbebetrieb), in German
- § 37 EStG, income tax advance payments (Einkommensteuer-Vorauszahlung), in German
- § 46 EStG, assessment for employees (Veranlagung bei Bezug von Einkünften aus nichtselbständiger Arbeit), in German
- § 56 EStDV, obligation to file a tax return (Steuererklärungspflicht), in German
- § 60 EStDV, documents for the tax return (Unterlagen zur Steuererklärung), in German
- § 70 EStDV, hardship allowance (Ausgleich von Härten in bestimmten Fällen), in German
- § 7 GewStG, trade income (Gewerbeertrag), in German
- § 8 GewStG, additions (Hinzurechnungen), in German
- § 11 GewStG, tax base rate and tax base amount (Steuermesszahl und Steuermessbetrag), in German
- § 25 GewStDV, trade tax return (Gewerbesteuererklärung), in German
- § 18 UStG, taxation procedure (Besteuerungsverfahren), in German
- § 19 UStG, VAT exemption for small businesses (Steuerbefreiung für Kleinunternehmer), in German
- § 138 AO, notification of business activity (Anzeigen über die Erwerbstätigkeit), in German
- § 141 AO, bookkeeping obligation (Buchführungspflicht bestimmter Steuerpflichtiger), in German
- § 149 AO, filing of tax returns (Abgabe der Steuererklärungen), in German
- Federal Ministry of Finance, letter of 18 March 2025: special rule for small businesses, in German
- German Bundestag: Income Tax Reform Act, first reading on 8 October 2026, in German
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