Taxes and payrolls: the peculiarities of the German labour market

Taxes and payrolls: the peculiarities of the German labour market

Each labour market has some peculiarities. It may be tricky for foreigners to understand fully the payment methods, the taxes and other benefits related. In TalentUp we are starting a series of different blog articles, one for each country. This article analyses the German labour market.

General data about the German labour market

Minimum wage2,000€
Payment basisMonthly
PaymentUsually paid around the 25th of the month.
Maximum working hours a day8h
Maximum working hours a week38-40h
Maximum overtime hours a day2h
Working hours compensationOvertime payment is only required when stated in employees’ individual contracts or collective labour agreements
German minimum wage and maximum working hours disclosure. Data for January 2024. Source:

Payroll taxes in Germany

Social security contributions are made by the employer and the employee and are used for funding unemployment, pension, maternity/paternity leave, and sickness or injury.

ContingenciesEmployer %Employee %
General pension insurance9.39.3
Unemployment insurance1.21.2
Health insurance in general7.97.9
Nursing care insurance1.71.525
Accident insurance00.7 to 2.3
TK-specific supplementary contribution rate0.60.6
Insolvency Charge0.120
Total20.82%21.225% to 22.825%
Share of contingencies applied to the gross salary. Data source:

Once contributions are paid, employees need to pay an income tax that varies depending on their gross salaries. 

IncomeTax Rate
Less than 10,908 euros0%
10.909 – 62,809 euros14%
62,810 – 277,825 euros42%
More than 277,826 euros45%
Income tax in Germany. Data source:

Contingencies from self-employees

Freelancers pay income tax four times a year, in March, June, September, and December, based on estimations of income for that year. These are known as quarterly advances or prepayments (Einkommensteuer-Vorauszahlungen).

The first time, income tax is calculated by estimation of potential earnings, and the following times is calculated with the earnings of the last period. If the freelancer has paid, too much, or not enough, adjustments will be made at the end of the period.

In addition to income tax, freelancers in Germany also have to pay value-added tax (VAT), known as Umsatzsteuer in German. Everyone who offers goods and services must charge VAT to their clients and then transfer this sum to the Finanzamt, including freelancers. This process is called Umsatzsteuervoranmeldung (Advance VAT return).

If you make less than €22,000 in your first year and less than €50,000 in the second year, you are considered a “small business” (Kleinunternehmer) and are not required to charge VAT to your clients.

Example of net salary in Germany

As a reference, we use the average salary of a software engineer. In Germany, on average, software engineers earn annually 70,000€.

Gross salary (annually)70,000
General pension insurance9.36,5109.36,510
Unemployment insurance1.28401.2840
Health insurance in general7.95,5307.95,530
Nursing care insurance1.71,1901.5251,067.5
Accident insurance000.7 to 2.3490 to 1,610
TK-specific supplementary contribution rate0.64200.6420
Insolvency Charge0.128400
Total20.82%14,57421.225% to 22.825%14,857.5 to 15,977.5
Income tax146,036.03 to 6,192.83
Net salary (annualy)47,986.47 to 48,950.17
From gross to net salary of a software engineer in Germany.

The employer contributes 14,574€ to social security and the employee 14,857.5 to 15,977.5€.

After paying the income tax, the employee has a net salary of 47,986.47 to 48,950.17€ coming from a gross salary of 70,000€.

Unemployment regulation in Germany

Benefits received depends on the employees’ last month of earnings: 

  • Unemployed people with at least one child will receive 67% of the amount.
  • Childless persons will receive 60%. 

The duration of unemployment depends on the age of the individual:

  • People under the age of 50 receive unemployment for a max of 12 months. 
  • Those over the age of 50 will receive payment for a maximum of 24 months.

The notice period for dismissal is 4 weeks. Nevertheless, if the employee has been in the company for over 20 years, the notice period is 7 months.

When severance payment is given, it is a half month of the employee’s regular wage for every year the employee was in the company.

Different kinds of leaves in Germany

There are 9 days of holidays followed by all German states. However, more holidays are given depending on each state. When a holiday falls on a weekend, it does not transfer to a weekday.

The minimum number of vacation days is 24 but it is more usual to have 30 days (2.5 per month)..

Sick leave starts after the third day and the amount received varies depending of the duration of employment.

Duration of employmentClaim (full pay)Claim (half fee)
0-5 years6 weeks10 weeks
6-15 years8 weeks12 weeks
16-25 years10 weeks14 weeks
From 26 years12 weeks16 weeks
German paid leave amounts. Data source:

The bereavement leave four mourning and funeral for a close relative is usually 2 days.

Maternity leave consists of 6 weeks before birth and 8 weeks after it (12 weeks in case of premature or multiple births).

Parental leave is a leave of 36 months till the child turns three. This leave can be divided as choose between the parents. The weeks of maternity leave are included inside these 36 months. 

During paternal leave, parents can choose to work part-time up to 30 hours per week.

Other common German benefits

A benefit for employees not working from a home office which recently became more popular is to receive one luncheon voucher (meal voucher)  per day worked in the office. Each voucher translates to 7€, and employees can receive up to 15 vouchers per month. Companies contribute 50% per voucher.

A common benefit for enterprise organizations is to offer saving plans (VWL). The cost of these is approximately 40€ per month.

In addition, car allowance or car lease and fuel budget are common for senior and sales positions.

Common benefits offered in German companies

Benefit% of companies with this benefit
Work-life balance14.6
Professional development9.8
Flexible working hours7.3
Company events5.7
Top 5 benefits offered in German companies. Datasource: TalentUp’s database.

How to employ a German worker

Every company that has employees in Germany needs an income tax number. The income tax number is required for social security contributions.

If a company does not want to have a German legal entity in place (but it has workers in the country), they need to assign a Permanent Representative in Germany to get the income tax number. 

A permanent representative is a person who takes care of the business of a company in the long term and is subject to its material instructions. As a tax consequence, the permanent representative establishes a so-called representative permanent establishment in Germany.

No legal or taxable entity is created. There are no accounts to keep. The initial cost is much lower than setting up a legal entity. However, the employee cannot sign contracts, issue prices, credit terms, etc. without Head Office approval.

Some platforms (Papaya Global among them) offer the Employer of Record (EoR) service, helping companies hire companies in countries where they do not have any offices.
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About Author

Èlia Adroher i Llorens

Content Writer. Èlia studied International Business Economics with a focus on digital marketing. She is also interested in learning about data analysis.