Last updated in April 2023.
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Germany, officially the Federal Republic of Germany, is the second-most populous country in Europe, and the most populous member state of the European Union.
Payroll in Germany– 2023 Updates
In 2023, people who have income in Germany will be able to earn more without having to pay tax. The basic tax-free allowance (Grundfreibetrag) is increased to €10.908 euros for the tax year of 2023. Anyone who earns less than this will not pay any income tax. For married couples filing jointly the limit is €20.694.
Here is a guide to other changes for 2023.
Germany Payroll – Basic Facts
In Germany, employers are obliged to deduct employee contributions from the employees’ gross wage and transfer the amount to local state tax office. Employers are responsible for withholding income tax, solidarity tax and levies on social insurance schemes such as pension, unemployment and healthcare insurance. It can be noted that non-German employers are not required to deduct levies from non-German employees working in Germany for less than five years.
Tax returns are always submitted for the previous tax year, so those required to file a tax return have until July 31st of the following year.
Tax and Social Security Considerations
Corporate Tax
Corporation tax (Körperschaftsteuer) in Germany is fixed at 15% and is then subject to a solidarity surcharge of 5.5%. This results in a total tax rate of 15.825%.
Income Tax
Income tax (Lohnsteuern) is calculated from the employees’ gross monthly income.
As of 2023, the top tax rate of 42% will be applied to annual incomes of 62,810 euros (2022: 58,597 euros). The basic tax-free allowance is being increased from 10,347 euros (2022) to 10,908 euros (2023). Only the income earned above this amount must be taxed.
The income tax brackets for 2023 are as follows:
Income | Tax Rate |
€0 - € 10,347 | 0% |
€10,632 - €61,971 | 14% to 42% |
€ 61,971 - €277,8255 | 42% |
€ 277,825 + | 45% |
Social Tax
The employee and employer jointly pay a social insurance contribution (sozialversicherung). The amount contributed varies from state to state and is held by the employer to be paid to the federal government. Social insurance contributions include:
• Retirement pension insurance
• Health insurance
• Long-term care insurance
• Unemployment insurance
• Accident insurance
Generally, social Levies for employees who reside within East Germany and Berlin are capped at a lower rate in comparison to western Germany.
These payments are usually shared between the employee and employer, who is typically contributing 50%. The employee share of contributions will be withheld from their salary and transferred to the relevant organizations. The total contribution for social security generally amounts to around 20 - 22% of the salary up to a specified maximum limit.
Social security rates are calculated each year to make sure that the system stays stable. In 2023 the ceiling for statutory health insurance contributions will rise to €59.850 per year. The compulsory insurance limit will also rise to €66.000 per year. In states across former East Germany the threshold for contributions towards pensions will rise by €350 to €7.100 per month. In states of former West Germany, the threshold will be €7.300 per month, an increase of €250.
Solidarity Tax
This additional levy is paid on income tax, capital gains tax and corporate tax in Germany. Solidarity tax (solidaritaetszuschlag) was applied in 1991 to aid the economic reunification of the federal states of East Germany, which on average, have a higher level of unemployment. This is a flat rate tax fixed at 5.5% and levied on tax liability with no limitation on the total amount surcharged.
Church Tax
TWhen you register in Germany, you are asked to declare a religion. If you declare yourself Protestant, Catholic or Jewish you are liable to pay the church tax, which the tax office collects on behalf of religious organizations in Germany. It is currently 8% in Bavaria and Baden-Württemberg and 9% in all other federal states. If you have no declared religion, you will not pay church tax.
Tax Deductions
The German tax system allows for a relatively wide variety of deductions that can reduce your tax liability. Tax deductions are possible for the following types of payments:
• Employment expenses (unless already reimbursed by an employer)
• Relocation expenses
• Alimony payments to divorced or separated partners
• Charitable contributions to German charities
• Cost of childcare
• Expenses for education or schooling
• Social security contributions
• Church tax
• Mortgage interest payments (buy-to-let mortgages only)
To benefit from tax deductions, an annual tax return (Steuererklärung) must be completed. Many employees in Germany submit one, even if they are not obliged to, to make sure they are not overpaying tax.
Trade Tax
Trade tax (Gewerbesteuer) is a local tax, levied annually and payable to local authorities. Businesses must complete an annual trade tax return. Trade tax is calculated on the basis of trade earnings, taking into account any tax-free allowances.
The base rate for trade tax is 3,5%, which is multiplied by a municipal tax rate (Hebesatz) anywhere between 200% and 580%, resulting in a total trade tax rate of somewhere between 7% and 20,3%, depending on location. Generally, trade tax is higher in urban areas.
If the basis for the two taxes is identical (unlikely in practice), the overall burden on corporate profits earned in Munich would be approximately 33%. In Frankfurt, the burden would be 32%. In Berlin, it would be 30%.
VAT
The standard VAT (Umsatzsteuer - USt) rate is 19%
Other Taxes
- Licence fee (Rundfunkbeitrag) - €18.36 per household per month (in 2023).
- Motor vehicle tax (Kraftfahrzeugsteuer) - The tax depends on fuel type and engine size.
- Dog tax (Hundesteuer) - Usually costs somewhere between €90 to €150 per year for the first dog.
- Property sales tax (Grunderwerbssteuer) - The rate varies between federal states, from 3,5 to 6,5% of the property’s value.
- Capital gains tax (Abgeltungsteuer) - currently a flat rate of 25%.
- Inheritance and gift tax (Erbschafts- und Schenkungssteuer) - The tax rate varies from 7% to 50%, depending on the value of the inheritance.
- Real property tax (Grundsteuer) - The amount of tax payable is calculated on the value of the property and the local tax rate (which varies from 0,26% to 1%)
Compensation and Benefits
Minimum Wage
Germany holds both a minimum wage and industry-specific minimum wage. National minimum wage is set at €12 per hour. Industry-specific wages are generally higher than the national minimum wage
Working Hours
38-40 hours average working week. Workdays are 8 hours and should not exceed 10 hours.
Overtime
Overtime payment is required when stated in individual contracts or collective labor agreements. The max working week is 48 hours.
Public Holidays
There are nine public holidays that are observed in all 16 federal states in Germany, including New Year's Day, German Unity Day and Christmas Day.
Sick Days
The first 6 weeks of sick leave is covered by the employer (regular 100% salary will be paid). After 6 weeks, any additional payment is covered via health insurance. Since 2023, you don't need to give a sick note to your employer. Your employer can get a digital copy of your sick note from your health insurer.
Maternity Leave
Mothers are entitled to 6 weeks leave at full pay prior to their child’s birth, and 8 weeks at full pay post birth. You are entitled to 18 weeks leave in the event of a premature birth, multiple births, or if your child is found to have a disability.
Foreign workers in Germany
Since the enforcement of The German Immigration Act in January 2005, Germany has relaxed its immigration laws for highly skilled foreign workers. The Act gives highly skilled workers permission to live and work from the outset if the worker has a concrete job offer and receives permission from the German Employment Agency. Furthermore, under the 2005 German Immigration Act, family members of the highly skilled workers who enter the country can obtain the right to work in Germany. Nationals of the European Union (EU) and those residing in Iceland, Norway, and Switzerland do not require a visa to enter Germany. Non-EU Nationals are required to obtain a visa if their stay in the country is in excess of 90 days. The individual visa options that can be obtained, include:
- Schengen Visa– This visa grants the holder free travel or stay for residents within Schengen Area countries for a period of 90 days during a six-month period.
- EU Blue Card– Aimed at highly skilled individuals with a recognised university degree and have found a job that exceeds the average German salary by 1.5 times. This is reduced to 1.2 times for highly skilled workers with a profession of shortage in Germany.
- Temporary Residence Permit– Highly skilled workers who don’t qualify for the Blue Card may be granted a temporary residence permit. This is restricted to a number of professions including but not limited to IT professionals with a university (or equivalent) degree, German university graduates, teachers, artists, journalists and professional athletes.
For more information about how our Global Payroll Control Platform integrates with local payroll providers in Germany, contact us today.