Running payroll in Germany

Germany is known for its complex laws and regulations. This also holds true for German payroll. According to the Global Payroll Complexity Index 2021, Germany is the fourth most complex country worldwide for payroll processing. 

Not only does the country have a complex social security and welfare system which requires employers to make various contributions and meet different filing and payment deadlines, but also income tax calculation can be quite difficult. With 6 different tax classes and geometrically progressive tax rates, withholding the right amount of payroll tax from employee wages can be a challenge.

Unless they decide to outsource payroll to a local payroll partner or hire via an Employer of Record (EOR), employers need to complete several registration processes before they can start processing payroll in Germany. Here is an overview of the different steps: 

• Registration with Federal Employment Agency in order to obtain an eight-digit employer number which is needed for registration with the social security authorities

• Registration with local tax authority (usually the one closest to the business’s main location): done by phone or letter; employers receive their employer tax identification number 

• Registration for statutory accident insurance: risk assessment in order to determine the contribution rate

• Registration with different social security schemes (health, invalidity, pension, unemployment): no upfront registration needed as this is done together with the registration of new employees

It is not necessary to establish a local legal entity to hire employees in Germany. However, foreign employers without an office in Germany must appoint a local representative who can act as a point of contact for audits conducted by the social security authorities - new law from January 2021. There is no legal requirement to set up a local bank account.

Germany has a well-developed social security system to which employees and employers must contribute. The tax system is progressive with a 45% top rate. 

Tax considerations

In Germany, tax on employment income is called “Lohnsteuer”. Income of up to EUR 9,984 is tax free - EUR 19,968 for married couples (valid for 2022 tax year). Thereafter, geometrically progressive tax rates apply which range from 14% (low rate) to 42% (high rate). Income exceeding EUR 277,825 (for singles) is taxed at a top rate of 45%. 

There are 6 different tax classes which are based on the employee's marital and family status. They are used to adjust an employee’s monthly tax burden by deducting the necessary allowances (e.g. child allowance) before tax calculation. It is important to note that - contrary to general misconceptions - the tax classes do not dictate the tax rate levied on an employee, but are merely a tool to simplify the tax calculation process as they give an overview of the different tax attributes that need to be considered. The 6 tax classes are:

• Tax Class 1: single/widowed/separated/divorced

• Tax Class 2: single parent

• Tax Class 3: married with partner being in Tax Class 5 and earning significantly less (also used for widowed tax payers in the year of their spouse’s decease)

• Tax Class 4: married with both partners having similar income

• Tax Class 5: married with partner being in Tax Class 3 and earning significantly more

• Tax Class 6: used for second and side jobs, regardless of marital status

Resident taxpayers in Germany are taxed on their worldwide income while non-residents only pay tax on income sourced in Germany.

Up until 2021, taxpayers also had to pay a 5.5% solidarity surcharge on their income tax. Since 2021, the solidarity surcharge only applies to employees earning more than EUR 96,409 in one year (EUR 192,818 for married couples). A reduced rate applies to annual income between EUR 61,717  (EUR 123,434 for married couples) and EUR 96,409 (EUR 192,818 for married couples). 

Employees who are members of an official religious institution (Catholic Church or other) also have to pay church tax. Church tax is paid at a rate of 8% or 9% (depending on the federal state) of the employee’s monthly income together with the other payroll taxes.

* Please note that tax rates range progressively from 14% to 42%.

Tax withholding and reporting

Employers in Germany (or foreign employers hiring employees in Germany) are responsible for calculating and withholding the correct amount of tax from their employees’ salaries which then has to be submitted to the competent tax authorities (“Lohnsteueranmeldung”). 

This has to be done on a monthly basis. The deadline is the 10th of the month following the pay period for which the tax is paid (e.g. tax on income earned in January needs to be paid no later than the 10th of February). The filing is done electronically. 

Depending on the withheld amounts, employers may be able to pay and report wage tax quarterly (possible if total annual amount of tax remitted is between EUR 1,080 and EUR 5,000) or yearly (possible if total annual amount of tax remitted is less than EUR 1,080). 

In addition, employers need to prepare and file an annual wage tax summary (“Lohnsteuerbescheinigung”). The filing deadline is 28 February - or 29 February depending on the year - of the following year. The tax year in Germany runs from 1 January  until 31 December.

Social security contributions

Employees in Germany are automatically covered by the statutory social system system which comprises 4 different social insurance schemes (contribution rates are valid for 2022): 

• Health insurance (14.6% with an additional 1.3% surcharge levied by the individual health fund)

• Pension insurance (18.6%)

• Unemployment insurance (2.4%)

• Long-term care insurance - also known as invalidity insurance (3.05% - 0.35% surcharge applies in certain cases)

Contributions are paid in equal shares by the employee and the employer. There is an income threshold up to which contributions to pension and unemployment insurance are calculated. In 2022, this threshold is EUR 7,050 in the western regions of Germany and EUR 6,750 in the eastern regions of Germany. Health and care insurance contributions are also subject to a monthly income limit which is EUR 4,837.50. 

Employers have to submit a monthly social security statement (“Beitragsnachweis”) covering the entire period from the first to the last day of the month. The report must be filed by the 5th last working day of the month and payments are due 2 days later. 

On top of these monthly reports, employers also need to file an annual social security statement for each employee (“Sozialversicherungsmeldung”) which is due no later than 15 February of the following year. The yearly statement for the statutory accident insurance is also due in February (11 February to be precise). 

Employees have the possibility to opt out of public health and care insurance and take out a private insurance scheme instead. However, they must earn more than EUR 64,350 per year to do so (2022 threshold). 

As mentioned before, employers need to sign up for statutory accident insurance to cover their employees. The average contribution is 1.3%. Contributions are capped at a monthly income of EUR 5,670 (as of 2022). Furthermore, there is a 0.12% insolvency charge which is levied on employers. Employers can decide whether they want to set up an additional company pension scheme for their employees. However, there is no legal requirement to do so. 

* There is a 0.35% surcharge (was 0.25% in 2021) for childless employees aged 23 or older, which brings the total contribution to 3.4%.

Employees in Germany are entitled to various benefits. These include:

• Annual leave and public holidays: minimum 20 days of paid annual leave, plus 11 national public holidays

• Maternity leave: 14 weeks

• Paternity leave: no special paternity leave, but fathers can take parental leave

• Parental leave: up to 36 months of which 12 to 14 months are paid

• Sick leave: 6 weeks on normal pay, thereafter employees receive statutory sickness benefits

For more information on employee benefits and other employment requirements in Germany (including severance pay and termination procedures), check out our Global Hiring Guide.

In January 2022, the national minimum wage in Germany reached EUR 9.82 per hour. As of 1 July 2022, the minimum wage will rise to EUR 10.45 per hour. There are no legal regulations on overtime pay, but overtime pay may be regulated by a collective agreement. If this is not the case, employee and employer should agree on a pay rate for additional hours in the individual employment contract. Employers are not obligated to pay their employees a 13th salary, but it is common to do so. If offered, the 13th salary is usually paid in November or December. 

Employees in Germany usually get paid once per month - the exact pay date is subject to the individual employment contract. The agreed pay date should be respected. It is legally required to provide each employee with a payslip - unless there are no changes from one pay period to the next one. Payslips can be issued either in paper form or in digital form. The latter must comply with data security regulations. All payslips must include at least the following information:

• Contact details of the employer

• Contact details and date of birth of the employee

• Social insurance number of the employee

• Date of employment commencement

• Tax class and tax ID

• Pay period

• Payment sum and how it has been calculated (income tax, social security contribution etc.)

• Child allowances

• Information on church tax

• Tax allowances and other deductions

Payments to employees can be made from a foreign bank account. Companies are obligated to keep payroll records for at least 6 years.