Tax reserves: the prepayment cliff in year two
In your first year, self-employed income feels like gross equals net — the tax office only gets in touch later. In year two, everything arrives at once. Know the pattern, and it will not scare you.
Why year two hurts
For your first profitable year, the Finanzamt (tax office) initially sets no prepayments — it does not know your profit yet. You pay the tax for year 1 only when the assessment arrives: often in the middle of year 2. And with the same assessment, the tax office sets prepayments for the current year — partly retroactively, for quarters that have already passed.
The result: within a few months, you pay the complete tax for year 1 plus several quarters of prepayments for year 2. Depending on timing, that quickly adds up to one and a half years of taxes in one go. It is not a penalty — just how the system works. But it surprises almost everyone the first time.
How much to set aside?
As a rule of thumb for creators with profits up to the mid five figures: 25–35% of profit (not of revenue) into a separate account. You can get more precise with your personal tax rate — StackManagement continuously projects the reserve from your actual profit and shows it right next to your income.
This guide explains the legal situation in general terms and to the best of our knowledge. What applies in your specific case is for a tax advisor, a lawyer, or the competent authority to determine — and we tell you in the app when that moment has probably come.
What else can come on top
- Trade tax (Gewerbesteuer): only above €24,500 of trade income (the allowance for sole proprietors), and largely credited against income tax — noticeable mainly in cities with a high municipal multiplier.
- VAT: only under standard taxation — and then it is a pass-through item you should never regard as "your money". As a Kleinunternehmer (small business), it does not apply.
- Health and long-term care insurance: not a tax, but the same effect — contributions are adjusted retroactively based on income.
Three habits that save you
- Open a reserve account; set up a standing order or a fixed percentage of every incoming payment
- Plan for the year-1 tax assessment instead of suppressing the thought — it will come
- Have your prepayments adjusted when your profit swings sharply (an informal request to the tax office is enough — downwards as well as upwards)
Your reserve calculates itself.
StackManagement continuously estimates what you should set aside — the year-two cliff included.