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Germany 11 min

How to hire and pay remote workers in Germany

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Hiring employees in Germany is a great way to grow your global team. As the largest economy in Europe and one of the largest in the world, you're bound to find potential employees that have the experience and skills you need to help you expand your business.

Like in most countries, employment law in Germany is contained under multiple laws. To avoid fines or other legal complications, you must stay compliant with all the local rules and regulations— and in Germany, there are a lot of those! To help you navigate the German labor market and set up your remote employees for success, we've outlined the most important things you need to know about hiring remote employees in Germany.

How do foreign businesses pay remote workers in Germany?

Before you set out to recruit your next remote employee in Germany, you need to figure out how you're going to pay them as a foreign business. 

Like in many other jurisdictions, you need a local entity to hire employees in Germany and put them on the payroll. If you do not have a local entity in Germany, you can work with an employer of record, or EOR, to act as a local entity on your behalf. As a member of the Eurozone, Germany requires companies to pay employees in Euros.

If you're looking to expand your business into Germany for the long term, opening a legal entity in Germany can be a great strategy. To open a legal entity in Germany, you need to prepare for substantial paperwork and associated costs. That includes hiring legal help and registering at a German chamber of commerce. There are 79 chambers of commerce in Germany, not counting the chambers abroad. Before you join a particular chamber of commerce, you will need to research which one is right for your business.

The objectives behind the company, minimum capital, founding members or shareholders, and liability are crucial for deciding on a legal structure in Germany. Choosing the correct legal entity for your business means a substantial investment on your part in legal advice.

Work with an employer of record

Working with an employer of record in Germany allows you to hire German employees quickly without opening your own legal entity in the country. You may want to work with a German employer of record for a number of reasons:

  • You do not want to spend the time and money to open a German entity.
  • You only want to hire a few workers in the country.
  • You do not plan a major business expansion into Germany with your products and services.
  • You need an option to employ workers on your behalf before your own entity is ready.

On the last point, many companies choose to work with employers of record to employ workers even when they plan to open an entity in the future. A company may employ workers through an EOR, then transfer those workers to the company’s own entity once the entity is fully launched.

Which parts of salary in Germany are taxable

Taxes make up an important part of the enormously complex equation of working and hiring in Germany. Understanding where remote workers pay taxes can be tricky, but usually employees pay taxes where they live. This is also the case in Germany.

Salaries paid under German payroll are subject to wage taxes. Wage taxes are withheld by the employer and credited against the final annual income tax charge. If you don't have a legal entity in Germany, the tax is withheld by your employer of record.

What are the tax rates for tax brackets in Germany?

As is the case in many European countries, Germany uses progressive tax brackets. Germany has four such tax brackets. Below are the tax rates and brackets for the 2021 tax year.

  • The first tax bracket has a 0% tax rate. It applies to single taxpayers who earn under €9,744 or €19,488 for a married couple.
  • The second tax bracket has a progressive rate that starts at 14% and rises to 42%. It applies to a single taxpayer who earns between €9,744 and €57,918, and between €19,488 and €115,863 for a married couple.
  • The third tax bracket is for a single taxpayer who makes between €57,918 and €274,612 in taxable income or a married couple who make between €115,863 and €549,224. They pay a tax rate of 42%.
  • Anyone earning over € 274,612 as a single taxpayer, or € 549,224 as a married couple, pays a tax rate of 45%.

Common tax deductions for remote workers in Germany

Certain expenses are tax-deductible for German taxpayers. Most deductions count for all employees, while others are specifically available for remote employees.

Alimony payments

Individual taxpayers may deduct up to €13,805 from their taxable income for alimony.

Charitable contributions

Contributions to German and specific international charities are deductible up to 20%. Church tax is fully deductible.

Childcare expenses

If an employee fulfills several requirements, they can deduct a portion of child care expenses. The deductible amount is up to a maximum of €4,000 per year for children younger than 14 years and for disabled children.

Education expenses

In Germany, 30% of tuition fees for qualifying dependent children are deductible if the child attends a recognized private school in an EU/EEA country and if the government approves graduation. Deductible education expenses are limited to €5,000 per year per child and exclude costs for housing, care, and food. 

Working from home expenses

Remote employees can deduct €5 per calendar day for working from home in 2020 and 2021. The total sum deductible for remote workers is €600 per calendar year for a total of 120 days.

Is per diem taxable in Germany?

German employees who travel for work get a set per diem. Per diem is the only tax-free way to reimburse an employee for personal meals.

In 2020, the rates per diem for German employees were adjusted. Employees get €14 per diem

for a trip that lasts between eight and 24 hours. Employees get €28 per diem for a trip over 24 hours.

When meals are offered at no cost in the form of breakfast at the hotel or lunch at a conference, a percentage needs to be deducted from the per diem on that specific day. For breakfast this is 20%, and for lunch and dinner it is 40%.

The tax-free per diem only covers costs for meals. Flights, transport on location, accommodation, and costs incurred while meeting clients are not covered by the per diem. These expenses should be reimbursed by the company through a separate expense claim. 

What payroll deductions are employers required to make in Germany?

As an employer in Germany, you need to withhold payroll deductions and pay statutory fees each month to the tax authority. Some of these deductions come out of the employee’s wages, and others are paid by the employer. 

Here are the costs you can expect from the employer side and what you need to withhold from your employee's salary.

Employer’s statutory monthly fees in Germany

Germany has a strong welfare program. Most of the statutory monthly fees are split equally between the employer and employee, with the exception of accident insurance. Accident insurance premiums are the full responsibility of the employer.

Pension fees in Germany

Germany has a Public Retirement Insurance System that covers a basic pension. The current contribution is 18.6% of the net wages per year. The contribution is split between the employer and employee equally. Both pay 9.3% of the net wage per month.

You can choose to offer an additional employer-financed workplace pension scheme to help attract and retain staff.

Government health insurance

Most Germans are covered by government health insurance. The total contribution to public health insurance is 14.6% of monthly wages. This is again split down the middle between employer and employee, making the contribution 7.3% of the net monthly wages each.

Nursing care insurance

Your employees and your company need to contribute to the government's long-term nursing care scheme. This scheme covers a part of the cost of personal nursing needs if an employee becomes substantially disabled. The total contribution is 3.5%, or 1.525% each.  

Accident insurance

German Statutory Accident Insurance or workers' compensation is among the oldest branches of German social insurance. This insures workers for injuries or illness incurred through their employment or the commute to or from their employment. The contribution is the full responsibility of the employer and amounts to 1.18% of net wages per month. 

What is the minimum wage in Germany and how does overtime work?

The minimum hourly wage for 2020 in Germany is €9.35 per hour. If you work in a sector with a collective bargaining agreement, it’s possible that there is a higher minimum wage.

Most employees in Germany work five days or 40 hours per week. Working hours for German employees are limited by the German Act on Working Time (Arbeitszeitgesetz) to a maximum of eight hours per working day and 48 hours per week. 

If an employee works overtime, those hours are capped at two hours per day according to law on an incidental basis. An employee may not exceed an eight-hour average workday over a period of six months. To ensure employees stay on that average, overtime is often reimbursed in paid leave. 

What are the local labor laws in Germany?

German employment law provides strong labor conditions and protections for employees. In Germany, workers’ rights are governed by statutory regulations codified in (among other laws) the German Civil Code and various federal acts such as the Part-time and Fixed-term Work Act, Employee Leasing Act, Holidays Act, Act on Maternity Protection, and the Dismissal Protection Act.

Pay German workers as contractors

It might be tempting to avoid administrative hassle by hiring your German employees as contractors. However, doing so when a contractor is actually an employee means running substantial risks to the future of your business in Germany. Not only do you risk high fines, you could also face criminal liability.

What's a contractor in Germany?

The main difference between a contractor and an employee in Germany has to do with the level of freedom. A contractor has the freedom to determine the content of their work and how they carry out their services. Employees, on the other hand, work according to the employer's instructions. 

German labor laws favor substance over form when it comes to determining a contractor or employee relationship. This means that if your contractor works like an employee, they are legally an employee and can claim protection against unfair dismissal, paid leave, and other employee benefits. 

You can avoid running the risk of misclassifying employees as contractors in Germany by consulting with local experts. If necessary, you can use an EOR to convert your German contractors to employees to avoid potential misclassification penalties.

How to convert a contractor to an employee in Germany

At some point, a contractor in Germany may become a key part of your business. If that's the case, it might be time to convert them to an employee.

An employee often costs substantially less than a contractor. Even with the benefits you owe an employee, the savings compared to high contractor invoices (plus the intangible benefits of a closer working relationship) are too great to ignore.

Remote has a lot of experience in transitioning contractors to employees in Germany. If not having a German legal entity is an obstacle, you can turn your contractor into a valued employee without establishing a legal entity by working with our local EOR. 

How to pay remote employees in Germany with an EOR

To pay employees in Germany using an EOR, you simply pay the employee’s salary as you normally would, while your EOR manages things like payroll deductions and local compliance.

Without an EOR, your only options to work with Germany employees are to open your own legal entity or to pay workers as contractors. Opening your own entity requires you to find your own German providers for legal, payroll, benefits management, and other services. Opening an entity can also take lots of time and money to complete. It may still make sense to open an entity if your company has plans to employ dozens of employees in Germany, but if you only have a handful, an EOR is the better option.

Pay and hire remote workers in Germany with Remote

You do not have to own a business in Germany to work with great German talent. If you’re looking to tap into the German labor market quickly and easily, it pays to work with a trusted partner with a local legal entity.

At Remote, we have a local legal entity in every country we offer our services, including Germany. Thanks to our in-house knowledge of the German labor market, we can help you hire and onboard employees in Germany quickly and efficiently. Visit our Germany Country Explorer to learn more about employing workers in Germany or to get started today!