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 wage | 2,000€ |
| Payment basis | Monthly |
| Payment | Usually paid around the 25th of the month. |
| Maximum working hours a day | 8h |
| Maximum working hours a week | 38-40h |
| Maximum overtime hours a day | 2h |
| Working hours compensation | Overtime payment is only required when stated in employees’ individual contracts or collective labour agreements |
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.
| Contingencies | Employer % | Employee % |
| General pension insurance | 9.3 | 9.3 |
| Unemployment insurance | 1.2 | 1.2 |
| Health insurance in general | 7.9 | 7.9 |
| Nursing care insurance | 1.7 | 1.525 |
| Accident insurance | 0 | 0.7 to 2.3 |
| TK-specific supplementary contribution rate | 0.6 | 0.6 |
| Insolvency Charge | 0.12 | 0 |
| Total | 20.82% | 21.225% to 22.825% |
Once contributions are paid, employees need to pay an income tax that varies depending on their gross salaries.
| Income | Tax Rate |
| Less than 10,908 euros | 0% |
| 10.909 – 62,809 euros | 14% |
| 62,810 – 277,825 euros | 42% |
| More than 277,826 euros | 45% |
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€.
| Contingencies | Employer | Employee | ||
| % | € | % | € | |
| Gross salary (annually) | 70,000 | |||
| General pension insurance | 9.3 | 6,510 | 9.3 | 6,510 |
| Unemployment insurance | 1.2 | 840 | 1.2 | 840 |
| Health insurance in general | 7.9 | 5,530 | 7.9 | 5,530 |
| Nursing care insurance | 1.7 | 1,190 | 1.525 | 1,067.5 |
| Accident insurance | 0 | 0 | 0.7 to 2.3 | 490 to 1,610 |
| TK-specific supplementary contribution rate | 0.6 | 420 | 0.6 | 420 |
| Insolvency Charge | 0.12 | 84 | 0 | 0 |
| Total | 20.82% | 14,574 | 21.225% to 22.825% | 14,857.5 to 15,977.5 |
| Income tax | 14 | 6,036.03 to 6,192.83 | ||
| Net salary (annualy) | 47,986.47 to 48,950.17 |
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 employment | Claim (full pay) | Claim (half fee) |
| 0-5 years | 6 weeks | 10 weeks |
| 6-15 years | 8 weeks | 12 weeks |
| 16-25 years | 10 weeks | 14 weeks |
| From 26 years | 12 weeks | 16 weeks |
The bereavement leave four mourning and funeral for a close relative is usually 2 days.
Paid parental leave
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 balance | 14.6 |
| Professional development | 9.8 |
| Flexible working hours | 7.3 |
| Kantine | 6.5 |
| Company events | 5.7 |
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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