As a thriving European market, Germany is a great place to grow your business operations. Before you start hiring employees, it’s important to familiarize yourself with local labor laws and payroll regulations to stay compliant, avoid costly fines, and reduce unnecessary delays.
Taxation rules in Germany
Germany has various local tax laws that can be confusing for international companies. As you set up your Germany payroll, pay attention to individual income tax (IIT) for employees, social and health insurance costs, payroll tax, sales tax, withholding tax, and business tax.
The country operates under a progressive tax ranging from 14% to 42%. As of 2023, income of up to EUR 10,908 is tax-free (Grundfreibetrag). Income of more than EUR 62,810 is taxed with the highest income tax rate of 42% (Spitzensteuersatz). The so-called “wealth tax” (Reichensteuer) of 45% starts at an income of EUR 277,826 euros.
You’ll also need to contribute to the German social security system, which consists of 7 parts:
- Health insurance
- Nursing care insurance
- Unemployment insurance
- Pension insurance
- Accident insurance
- Maternity insurance
- Insolvency insurance
Employers split contributions equally with employees for health, nursing care, unemployment, and pension insurance. Accident, maternity, and insolvency insurance are entirely covered by the employer. Plan to contribute a total of around 27.5% to the social security system on top of the employee’s salary.
Pension insurance contributions in Germany total 18.6% of the current gross salary. Of this, employers and employees each pay 50%. The income threshold for pension insurance is EUR 7,300 in West Germany and EUR 7,100 in East Germany. If an employee receives a higher salary than this income threshold, the pension insurance contribution is only calculated up to this amount.
The nursing care insurance is 3.05% of EUR 4,987.50. Half paid by the employer and half by the employee. If the employee does not have any children, they pay a contribution surcharge for childless persons of 0.35% to the long-term care insurance. This contribution is borne by the employee alone.
Levy 2 and the insolvency levy are paid by the employer. This is calculated from the gross salary up to the contribution assessment ceiling for pension insurance (EUR 7,300). The contribution rate is determined individually by the health insurance fund in which the employee is insured.
Payroll options for companies in Germany
Employers in Germany have several different payroll options:
- You can find a Germany payroll outsourcing company to manage payroll on your registered business’ behalf. Although the payroll provider can handle payroll calculations, payments, and other filings, you are still liable for all employment, tax, and payroll compliance as the legal employer.
- Larger companies may choose to run their own local payroll by creating a subsidiary and hiring additional team members dedicated to payroll and human resources. You will need extensive knowledge and background on Germany’s payroll laws to make sure you meet all withholding and tax requirements.
- If you wish to bypass entity setup, then you can work with a global employment expert such as G-P to manage payroll as well as many other HR functions. We act as the employer of record and can ensure that your employees are paid on time and compliantly.
How to set up a payroll in Germany
Setting up a business in Germany is a complicated process, partly because you need to make many different financial filings. If you plan to hire and set up a subsidiary on your own, a tax advisor or lawyer can guide you on different payroll options.
You’ll need extensive documentation from your employees to set up payroll in Germany, including:
- ID/passport
- Residence permit/visa
- Tax ID number and bracket
- Social security number
- Bank details
Germany also outlines particular data protection regulations relating to payroll. You can collect personal data and information for employment reasons, but you must keep that data safe and should pay employees using Germany’s File Transfer and Access Management (FTAM) protocol.
Entitlement and termination terms
Your employees also have certain entitlement and termination terms you must outline before setting up payroll in Germany. For example, the nation prohibits employees from working on Sundays and public holidays apart from certain exceptions. The country also has various medical leave entitlements.
A best practice is to include clear termination clauses in a written employment contract. An employer in Germany with more than 10 employees can only terminate employees who have been employed for more than 6 months for specific reasons such as misconduct, personal reasons related to the employee, or compelling operational grounds. Companies cannot terminate disabled individuals, pregnant employees, anyone on parental leave, or council members without government approval.
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