Tax advances are earmarked for various taxes. In particular, income tax, corporation tax, property tax and business tax are associated with advance tax payments. In addition, entrepreneurs also know a sales tax advance payment. However, this is about taxes that entrepreneurs withhold and thus owe indirectly. Other tax types, on the other hand, do not know any tax advance payment. This includes, for example, the tobacco tax. This is also due to the fact that the basic idea for a tax advance payment lies in the fact that taxes that are incurred only after a longer period of time have elapsed lead to an interim reduction in the financial capacity of the public sector. For the function of a modern state, it is therefore indispensable that for certain taxes an advance payment is made on the basis of an estimate of the expected taxes.

Most taxpayers know one or the other form of tax advance payment from their own experience. You pay a certain amount of a tax, which the Treasury determines only at a later date. In doing so, the Treasury offsets the advance payment already received against the tax actually fixed. The advance payment is thus a deduction on a tax, the actual fixing of which is yet to take place.

There is the tax advance only for certain taxes. It is particularly relevant for income tax, corporate income tax, business tax and sales tax. Further advance payments are provided for example in the case of property tax and some other levies. However, some differentiations are also useful here. So you should basically exclude the VAT advance payments, because here the tax advance payment is made due to a tax retention. In the other examples, however, the tax arises from the taxpayer himself; More on that later.

But why does the tax advance even exist? And why does it exist in some types of taxes while it is unknown in others? If you want to know more about the secrets of the tax advance, get in this article an insight into its essence.

As so often, we want to start with the legal bases on the topic. In principle, this also seems obvious with regard to the tax advance payment. However, the rules for the advance payment of taxes are always part of the respective substantive tax law, i.e. the specific tax laws. But there are also requirements in formal tax law that are related to the tax advance payment – but only in special cases.

Since the legal bases for tax advance payment are part of the individual tax laws, we do not need a detailed description of all established regulations. Instead, we want to investigate the question of how the Treasury orders advance tax payments.

This is about setting a tax advance. For this purpose, the tax office issues a declaratory decision on the amount and at the time of the tax advance payment. The substantive tax rules set fixed dates for this purpose. In the case of income tax and corporate income tax, for example, this is the tenth day in the last month of each quarter (§ 37 EStG and § 31 KStG in conjunction with § 37 EStG). Although this is therefore regulated by law, the tax office’s tax advance payment decisions still contain these dates. After all, most taxpayers should have no knowledge of German tax law.

In addition, the amount of the advance payment is based on a tax estimate. The tax office estimates the amount of income expected in the coming or current assessment period on the basis of the previous tax collection and calculates the expected tax on this basis. The Treasury then demands this amount as a tax advance payment over a certain period of time – usually one year. Therefore, if the estimate is correct, the tax liability that the future tax assessment will establish is already settled at the time of tax assessment. If, on the other hand, you have paid more in advance payments, you will get the excess amount refunded. However, if the tax estimate was too low, you have to repay the remaining tax amount.

As already mentioned at the beginning, there is the obligation to pay tax advance in various tax contexts. Let us now deal with this in a more nuanced way.

The most common tax that knows a tax advance is income tax. No matter how you generate income, the tax advance payment is provided in principle. This applies both to self-employed entrepreneurs, freelancers or employees and retirees as well as to those whose income is based on renting and leasing. Only in the case of capital income does any taxation take place at the time of tax creation. This is the capital gains tax, which is withheld at the source and transferred directly to the financial funds. As a result, the tax liability is settled directly without any advance payment of the tax.

Furthermore, the tax advance for income tax for employees has its own name: we know it as wage tax. However, the wage tax differs in one important point from the tax advance charged for income tax. While the tax advance for income tax takes place on a quarterly basis, an employer usually retains the payroll tax monthly. In addition, the employer owes the wage tax, which actually affects the employees as an income tax advance. Furthermore, separate dates for payment apply to the wage tax (§ 41a EStG).

In connection with income tax, a comment on the solidarity surcharge and the church tax is necessary. Both levies are firmly linked to the income tax, but they each require a separate adjustment for the advance tax payment. As a rule, the fixing of the advance payment of the church tax and the solidarity surcharge, if they are incurred, is accompanied by the same letter to the declaratory decision on the advance payment of income tax. Technically, however, these are each own decisions.

Since corporation tax as income tax is the equivalent of income tax for legal persons, it is hardly surprising that you have to make an advance payment of taxes here as well. The same conditions are attached to this, which also apply to income tax. The same dates apply to the advance payment of corporate tax.

On the other hand, the tax advance for business tax is different. Since the trade tax is incurred at the municipal level, some special features must be considered here. In particular, the fact that the tax offices determine the tax bases before the municipalities then collect their business tax on this basis complicates an adjustment to the tax advance somewhat. Instead of the tax office making the adjustment to the amount of the advance payment directly, as with the other tax types, it only recalculates the tax base. Only when the lifting municipality is informed about this change can it adjust the tax advance payment. This therefore always requires a detour via the tax office, which may take time. In the meantime, however, the old advance payment notice remains valid.

Another difference to income tax and corporate income tax is the dates for the advance payment of business tax. In each case, the 15. The day in the middle month of each quarter is prescribed as a deadline (§ 19 GewStG). Even in the case of a different marketing year, these dates are maintained.

Since sales tax is an excise duty borne by the final consumer, the retention of sales tax by the entrepreneurs providing the VAT-bearing service is not a tax applicable to them. Nevertheless, entrepreneurs usually have to pay the sales tax. More specifically, they only pay the sales tax paid and thus withheld by their customers to the Treasury. But also for this a tax declaration is provided. However, this is rather a tax declaration than a tax declaration in the usual sense.

Nevertheless, tax advance payments are also made regularly. The advance VAT payments and their registration under the VAT Act take place on the tenth day of the month following the end of a quarter. In the case of a high tax revenue, a monthly period applies. For small sales, an annual tax application and payment may also suffice. And with very low turnovers, one speaks of small entrepreneurs in the sense of sales tax law. As a rule, these do not collect sales tax and consequently do not pay any to the tax office.

The main reason why the legislature introduced the tax advance is of a practical nature. Because a large part of the taxes that finance the budget of the Federal Republic of Germany are based on taxes, which in principle only occur once a year. The income tax is a good example of a one-year assessment period. If no advance payment of the tax was provided, the state would therefore in principle have to wait a year until it can levy the tax on the income generated during the assessment period. From a practical point of view it would take even longer. Finally, taxpayers must first submit their tax returns. Then the tax offices have to process the declarations in order to then determine the taxes and, if necessary, collect them. However, the state does not want and cannot wait for taxes so long.

This is why the tax advance payment has been introduced. Because this allows the state to collect a large part of the expected taxes during the year. The fact that the advance payment is based only on an estimate is justifiable because at the same time the possibility of adjusting the advance payment during the year can be used. So if you find out during the tax period that the estimate of the expected income deviates from reality, you can apply for an adjustment of the tax advance payment at the tax office. In this regard, financial officials are likely to remember the beginning of the Corona pandemic in particular.

4.1.2. Ongoing recording of tax revenue allows planning of public finances

Apart from the fact that the state needs the taxes on an ongoing basis, the planning of its finances is also an argument in favor of tax advance payments. In this way, the public authorities can also carry out medium- and long-term financial planning. For a modern state, this is of great importance. Here, too, the advance tax payments allow the compilation of statistics on tax revenue during the year. This provides both conclusions about the general economic situation of the country, as well as forecasts on the basis of which state expenditures can be planned.

4.1.3. Taxpayers can better plan their finances

At the same time, the tax advance payment also helps many taxpayers. They can orient themselves on the set tax advance payment to better manage their finances. After all, taxpayers are rarely able to predict their future taxes – especially their income tax – reasonably precisely. With the advance payment notice issued by the tax office, this is at least a fairly reliable basis for assessing the expected tax and taking it into account in your own financial planning. After all, taxpayers are usually spared surprises in the actual tax assessment and the amount of the associated tax payment.

However, a tax advance payment is only provided for certain taxes. In the case of taxes other than those mentioned so far, such as the taxation of energy sources (oil, coal, natural gas), the tax is always due immediately. No advance payment is therefore required. Also in the Tobacco Tax Act no advance payment is provided, because you as a tax debtor must always immediately declare the tax.

For other tax types, advance tax payments make no sense anyway. This is the case, for example, with the gift tax and especially with the inheritance tax.

Even in the context of income tax collection, immediate taxation can take place by circumventing a tax advance payment. This relates to the capital gains tax, which has the effect of withholding tax. In principle, a cheaper examination is considered, so that there may still be points of contact with the prepaid income tax. However, the cheaper examination is rarely relevant in practice.

For other taxes, however, the collection always takes place in advance. This is the case with motor vehicle tax.

For all these exceptions, which are not aware of any advance payment, either the direct maturity of the tax is the reason why no advance payment is planned, or the connection between the occurrence of a tax is linked to unforeseeable events.

So, as you can see, tax advances are extremely important for a functioning state (and also for cities and municipalities). However, it is especially relevant if the time of the actual taxation is clearly after the tax origin. However, if a tax applies immediately because it can be calculated immediately, then usually no tax advance payment is provided. Only VAT is an exception in this respect. However, sales tax is an exception among taxes due to the tax liability mechanism by the entrepreneurs who collect it.

Most taxpayers in Germany are at most affected by an advance payment obligation for a tax. This is one or the other type of advance payment for income tax. If you only receive wages or salaries as an employee, you yourself are hardly involved in the tax advance payment. For all others who are faced with a tax advance, the good advice is that you always comply with the payment deadlines. After all, there is no risk of delays or other consequences. In order to optimize this, one should always use the possibility of adjusting the amount of the advance payment.