A Guide for Running Payroll in Germany
Germany, an active European Union member country, is also the fourth largest economy in the world. The country consists of 16 federal states which are further divided into 20 regions. Each territory has the power to impose a regional tax that can vary from 1.23% to 2.03%.
Here are some important factors to know about running payroll in Germany.
Germany’s minimum wage is €8.50 per hour. There are a few exceptions to the rule. For example, when employees are under 18 years, interns, and long-term unemployed individuals for the first six months in a new job. A violation of the minimum wage rule could result in a fine of €30,000 to €500,000.
The maximum working hours per week in Germany is 48 hours. However, in most cases, a standard work week does not exceed 40 hours. Employers are prohibited to force employees to work for more than six consecutive hours without a break. Employees are eligible for a 30-minute break after for hours worked between 6 to 9 hours, and a 45-minute break is mandatory when employees work more than 9 hours.
Overtime Work and Compensation
Employees’ contract must have a provision of overtime in their employment agreement for doing overtime work. However, such overtime hours may not exceed 12 hours in a week.
It is recommended, to include the pay date in your employees’ employment agreement. In general, the wage payment interval should not exceed one month.
While labour laws do not require other payments besides wages, some employers provide fringe benefits. Examples of fringe benefits are gratuities, profit-sharing, use of a company car, supplemental pay, and commissions.
Annual Leave & Vacations
Apart from official holidays, employers must provide leaves for vacation, maternity, paternity, and sick leave to its
Germany utilizes a social tax scheme to cover various social insurance programs. Both employers and employees share the burden of social tax responsibility. Additionally, employers also withhold a mandatory “solidarity surcharge” of 5.5% from each employee’s wages for social programs.
Every employee regardless if they are German citizens or a resident is subject to income tax by federal tax authorities. Moreover, employers are responsible for the tax payment of their employees to the federal tax authorities. As a result, employers withhold taxes from employees at the time of pay and in turn remit the withheld taxes to the federal tax authorities. Income tax rates range from 14% to 45%. However, wages lower than €8,652 per year may be eligible for a tax exemption.
Income Tax Reporting
Employers are required to remit payroll taxes to the local tax office every month. Payment and reporting obligations vary from employer to employer, based on various factors that the German tax authorities have set forth. For example, foreign entities and employee population residency status.
Online Tax Filing
Germany provides, ElsterOnline – the online financial services tool, for employees and employers tax file their taxes. Companies need to submit their annual income tax forms by February 28 of the following year.
Stock plans offered to employees are taxable upon the exercise of vested options. Moreover, employers need to withhold income tax on any earned capital gains from the exercise of the qualified stock plans.
Unemployment & Health Insurance
Employers withhold 1.5% of employees’ total monthly earnings for unemployment insurance. Additionally, employers withhold an average of 7.3% of total employee wages for health insurance. This percentage changes based on total income. However, the maximum annual taxable income is €50,850.
Retirement Pension Insurance
Besides the German Federal government statutory social pension scheme, employers can provide company supplemental retirement plans to qualified employees on a voluntary basis.
Work Injury Insurance
Employers contribute an average of 1.32% of wages to fund work-related injury insurance. Employees are not required to participate in the work injury insurance fund.
Additional non-statutory employee benefits provided to employees are taxable in Germany. For example, food, transport, outings, retirement funds payment, accident insurance, employers have the option to pay income tax on behalf of their employees. The tax is a flat tax of 15% to 25% of the market value. These benefits are not taxable if the amount does not exceed €44 per month.
Employees are responsible for paying a church tax. The church tax is withheld from each employees’ total monthly taxable income. The church tax varies by federal state between 8% and 9%.
Tax on Capital Assets
Taxes on income from capital assets are charged at a flat rate of 25% and must be withheld at the time of the payout.
Employment agreements determine all rights and duties of the employment, including termination. Employment relationships between employers and employees can be terminated by mutual consent. Moreover, the most common way of separation is by giving an advance termination notice. However, in the case of conflicts, the labour courts play a dominant role.
The information shared in this article is for non-specific employers with employees in Germany. The purpose of this article is to provide general information only and not professional or legal advice. If would like additional information regarding paying employees in Germany, please email firstname.lastname@example.org or call +1-408-913-9130 to speak to our experts.