Payroll and employee benefits in Germany

A highly skilled workforce, a strong background in research, science and innovation, a stable business environment… There are lots of reasons why many international organizations make Germany their prime destination for hiring fresh talent for their globally distributed team. The economy is strong and English proficiency levels are high among professionals.

However, hiring employees in Germany also comes with some challenges, namely navigating local requirements for payroll processing and employee benefits. Complying with payroll rules and statutory benefits can quickly cause headaches for HR and payroll teams. Not to mention the challenging task of designing competitive benefits packages which will allow you to attract the best talent available. 

That’s why we have compiled a detailed overview of payroll requirements and employee benefits in Germany. This short guide will tell you everything you need to know about mandatory benefits, additional perks which are typically offered as well as the different payroll aspects international employers should be aware of, including tax withholding, social security contributions for employers, reporting and employee payment.

The benefits system in Germany is quite generous. The statutory welfare system provides employees with good coverage and leave requirements are in line with Western European standards. In order to qualify for the full range of benefits, employees need to be hired for a full-time position and need to have served for a continuous period of at least 4 weeks.Under German employment law, employees are entitled to the following mandatory benefits:

• Paid time off (PTO): minimum of 20 working days (24 working days for a 6-day week - many collective bargaining agreements grant employees additional paid vacation days), plus at least 11 public holidays (more depending on the region)

• Sick leave: 6 weeks of sick leave paid at full wages, after that sick pay is provided by Social Security

• Maternity leave: 14 weeks (6 before and 8 after giving birth), 18 weeks in case of multiple births or complications during birth

• Parental leave: either mother or father can go on parental leave until the child is 3 years old - leave is paid by Social Security

• Education leave: 5 days per year - applies in most regions

Find out more about employee benefits and employment law in Germany in our Global Hiring Guide.

In countries like Germany where the majority of the workforce is to be considered as highly qualified, it’s often not enough to simply adhere to the statutory benefits requirements. In order to attract and retain the right talent to grow your global team, you will have to offer candidates a competitive benefits package which does not only include commonly offered additional perks but also popular soft benefits. 

Let’s start with PTO. As mentioned before, the legal minimum for annual leave in Germany is 20 days. However, most employers offer between 25 and 30 days - even without a legally binding collective agreement in place. 

Another way to attract more talent is to offer insurance supplements. Employees in Germany are automatically covered under the statutory social security scheme (see details below). However, additional perks such as supplementary dental care or a private pension fund are becoming increasingly popular.

Soft benefits you can offer to your employees in Germany include flexible working hours (in German, this is called “Gleitzeit”), remote-work options (either home office or hybrid models are common) together with the necessary equipment, childcare support and mental health and wellness programs as well as gym or co-working space memberships. Meal and/or transport allowances also add a nice little extra. 

Not sure how to handle benefits administration on a global scale? Read our related blog post to learn more about managing benefits for a globally distributed team.

Personal income tax in Germany is called “Lohnsteuer” and has to be withheld from the employee’s monthly wages. Income tax rates are progressive, starting from 14 percent on income above EUR 9,745 and increasing to 45 percent on income exceeding EUR 274,613 (thresholds for 2021).

When calculating income tax, employers have to keep in mind that there are six different tax classes employees are assigned to with regard to their marital status. All employees are covered under the public social security scheme by law. Contributions are shared between employee and employer. The employer’s mandatory share amounts to roughly 20 percent and includes:

• 9.3% Public pension plan

• 7.3% Health insurance

• 1.525% Long-term care insurance

• 1.2% Unemployment insurance

Furthermore, employers are required to provide accident insurance for their employees (minimum 1.32% of employee’s wages, but contribution level varies depending on the result of the workplace risk assessment). A 0.12% insolvency charge also needs to be paid by the employer.

Setting up payroll in Germany

In order to process payroll in Germany, both employee and employer must be registered with the local tax and social security authorities - this includes the statutory accident insurance (“Berufsgenossenschaft”). Upon registration, employers obtain an employer tax identification number as well as an eight-digit employer number which they need in order to register their employees with the respective social security bodies. This registration process can take up to 6 weeks.

Tax remittance and reporting

It is the employer’s responsibility to calculate and withhold the right amount of income tax as well as the appropriate social insurance contributions from their employees’ wages. Tax withholdings must be remitted to the local tax office by the 10th of the following month on the employee’s behalf - under certain circumstances, a quarterly or yearly remittance is possible.

Social insurance contributions are due earlier, usually on the third last day of the month. The yearly reports are usually due in January (social insurance contributions) and February (tax withholdings on wages). The tax year in Germany runs from January 1 until December 31.

Please note that proceedings and regulations are different for foreign employers who hire employees in Germany without a local legal entity.

Currently (2021), the national minimum wage in Germany is fixed at EUR 1,664 per month (EUR 9.60 per hour) but skilled professionals will expect a competitive salary exceeding the statutory minimum. According to the Federal Statistical Office of Germany, the average gross monthly salary for 2020 was EUR 3,975. 

It is common practice to pay employees on a monthly basis. The exact pay date is to be specified in the employment contract. After each payroll run, the employer has to issue a detailed payslip - online payslips are legally valid - including information on social insurance contributions, paid income tax, holiday pay and more.

Although there is no legal requirement to pay employees a 13th-month salary, it is common practice among employers to provide an annual Christmas bonus. Depending on the employee’s position, performance-based bonuses may be expected. 

Employees who are hired by a foreign employer without a local entity in Germany can be paid from a foreign bank account. However, you should keep in mind that cross-border payments can take several days to go through and that paying foreign employees in their local currency often comes with high commission fees. 

That’s where solutions like Lano Wallet come into play. Our digital wallet allows you to pay employees and contractors in over 150 countries with free local payments in over 50 currencies.

Still feel like you need help running payroll and managing employee benefits in Germany? The Lano platform provides you with everything you need to compliantly hire and manage employees in Germany.

Thanks to our large network of top tier payroll partners, we can help you find the right payroll provider to speedily set up local payroll - and that not only in Germany but in over 130 countries worldwide! What’s more, our Employer of Record solution has all your employment needs covered, including benefits administration in more than 170 countries.

Skip incorporation and onboard your new hire in Germany through one of our trusted partners. No need to worry about employee benefits or payroll! Your EOR partner will take care of everything.