Payroll taxes in Germany: An employer’s guide

When you hire in Germany, you — as the employer — are responsible for calculating, withholding, and submitting payroll taxes from your team members’ pay slips. For some taxes, you are also required to make employer contributions.

In this article, we’ll explain clearly which taxes you need to withhold, which taxes you need to contribute to, and how to remit and make payments. So let’s jump straight in.

What is payroll tax?

Payroll taxes are the contributions employees and businesses make to the government to fund public programs, such as retirement, healthcare, and unemployment insurance. They typically include income tax and social contributions, and are set at pre-determined rates.

These rates (and the rules governing them) vary by country, but it’s every employer’s responsibility to ensure they are compliant, and that they are withholding and submitting the correct amounts.

What is the difference between payroll taxes and corporate taxes?

Generally, payroll taxes are tied to your employees’ wages, while corporate taxes are based on your company’s profits. 

Which payroll taxes do you need to withhold from your employee in Germany?

In Germany, the main taxes you’ll need to withhold are:

Income tax (lohnsteuer)

German residents are taxed progressively at the national level, at rates of between 0% and 45% depending on their level of income. Note that individuals can opt to be taxed as single taxpayers, or file jointly with their spouse.

You must withhold the correct amount from your employees’ pay slips based on these rates.

When to pay: Income tax must be remitted and paid to the local tax office (Finanzamt) every month.

Solidarity surcharge (Solidaritätszuschlag)

Originally introduced to fund German reunification in 1991, the solidarity surcharge funds infrastructure projects, particularly in the former East Germany. The employee contribution is 5.5%, although some employees with low taxable income may be exempt.

When to pay: Alongside income tax payments (see previous section).

Social security contributions

Employees must contribute to the following social insurance programs:

• Pension insurance (rentenversicherung): 9.3% of gross wages.

• Unemployment Insurance (Arbeitslosenversicherung): 1.3% of gross wages.

• Health Insurance (Krankenversicherung): 7.3% of gross wages. Additional contributions may vary by health insurance provider (around 1.5% on average).

• Nursing care insurance (Pflegeversicherung): 1.525% of gross wages. Childless employees aged 23 and older pay an additional 0.35%.

When to pay: These payments must be made monthly.

You may also be required to withhold additional taxes for certain employees, such as child support payments, student loan repayments, or any other court-ordered garnishments.

Note that, if your employee is a member of certain religious groups, you will also need to withhold a church tax (Kirchensteuer) of between 8% and 9%, depending on their location.

Which payroll taxes does your business need to contribute to?

As well as withholding the taxes and contributions listed above, you are also required to make your own contributions, as follows:

Social security contributions

Employers are required to match their employees’ contributions to the various social insurance schemes detailed in the previous section. This means that you will need to pay:

• Pension insurance (rentenversicherung): 9.3% of gross wages.

• Unemployment Insurance (Arbeitslosenversicherung): 1.3% of gross wages.

• Health Insurance (Krankenversicherung): 7.3% of gross wages (plus half of any additional contributions).

• Nursing care insurance (Pflegeversicherung): 1.525% of gross wages.

When to pay: These payments must be made monthly.

Accident insurance (Unfallversicherung)

This tax covers workplace accidents and occupational illnesses. It varies by industry and employer risk category, but is typically between 1% and 3% of your employees’ gross wages.

When to pay: This must be paid annually, based on your previous year’s payroll.

Severance insurance (Umlage U1 and U2)

There are two types of severance insurance that you will need to pay, each of which are used to reimburse employers for making leave payments:

• U1 (sick pay reimbursement): This is used to reimburse employers for continued pay during employee illness.

• U2 (maternity pay reimbursement): This is used to reimburse employers for maternity-related costs.

The rates vary depending on your health insurance provider, but you will typically need to pay around 0.1% to 1% of gross wages for U1, and 0.2% to 0.4% for U2.

When to pay: These payments should be made monthly alongside your other social security payments.

Insolvency fund contribution (Insolvenzgeldumlage)

This tax is used to protect employees' wages if their employer becomes insolvent. It’s currently set at 0.06% of your employees’ gross wages.

When to pay: These payments should also be made monthly alongside your other social security payments.

To quickly see a full breakdown of payroll taxes and employment costs for your German hire(s) based on their salary, use our free Employee Cost Calculator tool.

How do you remit and pay payroll taxes in Germany?

To remit and pay employer and employee taxes and contributions, you will need to:

1. Ensure you are registered as an employer with the Finanzamt, where you will receive a tax number (steuernummer). You must also register with a health insurance provider (krankenkasse) to determine your social security contributions.

2. Calculate the correct amounts for withholding, and then add your employer contributions. If you use Remote Payroll or Remote EOR, we will do this for you.

3. Ensure that you adhere to the payment deadlines detailed above.

4. File and pay the income tax and solidarity surcharge through ELSTER, the German online tax portal. Social security contributions should be paid via bank transfer to your relevant health insurance partners. You will also receive an annual invoice for payment of the accident insurance.

How do you manage payroll taxes as an international employer?

When you hire a Germany-based team member from abroad, there are several ways you can manage their payroll and payroll taxes.

If you already have your own legal entity in Germany, you can:

• Handle it in-house. You can hire your own payroll tax specialists and manage everything internally. This can be costly, however.

• Use a local third party. You can hire a local firm to handle payroll, although this can be unreliable, costly, and pose data risks.

• Use a PEO. A professional employment organization (PEO) acts as an outsourced HR provider, and includes payroll.

• Use a global payroll provider. Global payroll providers — like Remote — have local specialists in multiple countries, ensuring that you are fully compliant with all tax requirements in each one. This is especially convenient if you have (or plan to have) employees in different countries, as you can manage all of them through one platform.

If you don’t have your own entity in Germany and you still want to hire there, you can:

• Set up your own entity. This can be extremely costly and time-consuming, but if you plan on establishing your business long-term in Germany, it might be a viable approach. To pay your employees, you would then need to choose one of the options above.

• Use an EOR. Employer of record (EOR) providers — like Remote — enable you to quickly and easily hire anywhere in the world, and also handle all the core HR functions (such as compliance and payroll). As well as being generally more cost-effective than opening your own entity, this option is highly scalable and, again, enables you to streamline all your global HR tasks in one place. How does an EOR work?

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What about independent contractors?

In Germany, independent contractors are classified differently to employees. As a result, they (in most cases) are responsible for calculating, managing, and paying their own taxes.

However, it’s crucial to understand the difference between contractors and employees, as you may inadvertently create misclassification risk. This can result in severe fines and penalties for your business. Learn more about hiring contractors in Germany.

How can Remote help?

Knowing which payroll taxes you need to calculate, withhold, and contribute to requires local expertise, especially as these rules can — and do — change. And if you make a mistake or fail to comply, the financial consequences can be significant.

Whether you have your own entity in Germany or not, Remote ensures that you are withholding and contributing the correct amounts, and that you are fully compliant at all times with local tax and employment laws. We also provide 24/7 support for any guidance you may need.

To see how we can help — and to learn which approach is the most suitable for your business — speak to one of our friendly payroll experts today.

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