If you’re an investor looking to expand your business into Germany, it’s important to understand the country’s payroll and tax laws. In this guide, we’ll outline the basics of German payroll, including when and how you need to pay your employees, as well as some of the deductions and taxes that are applicable. By understanding the basics of German payroll, you can ensure a smooth transition into the German market.
Germany is a leading industrial nation with a highly skilled workforce and a well-developed infrastructure. Its economy is the largest in Europe, and its per capita income is among the highest in the world. The main industries include machinery, chemicals, automobiles, and metals. From these come the main sectors driving growth, which are construction, manufacturing, and services. Germans have a strong export-oriented economy, and their exports account for about one-third of their GDP.
The German labor market is going through some major changes in the next few years. The most important labor law change that took effect this year 2022 is the “Equal Treatment of Employees” law. This law provides for equal treatment of employees in all aspects of employment, including recruitment, training, and promotion. The law also prohibits discrimination based on ethnic origin, religion, or sexual orientation.
Amidst numerous changes in policies, the overall labor market is still strong. In fact, the unemployment rate in Germany is currently at its lowest level since reunification in 1990. With a strong labor market and new laws that protect employees’ rights, Germany is an attractive place to work for both local and foreign workers.
UPDATES FOR 2022
At the beginning of the year, Germany implemented a number of changes to its labor and employment laws. One of the most significant changes affects the minimum wage. The minimum wage was increased to €9.35 per hour, an increase of 5.4%. However, in June the Parliament accepted a new increase to €12.00 per hour, effective at the beginning of October 2022.
Additionally, employers will also be required to provide additional allowances and provisions to employees working on Sunday or public holidays. Finally, unemployed individuals will now have access to online registration in addition to in-person agencies. These changes are designed to improve the lives of workers in Germany and ensure that they are able to earn a fair wage for their work and better access to their benefits.
PAYROLL IN GERMANY: THE ESSENTIALS
As of October 2022, Germany’s minimum wage has been established at €12.00 per hour. Workers are limited to a maximum of 8 hours per day, of which can be extended up to 10 for overtime, and 36-40 hours per week, no more than 45 with overtime. The country uses a common monthly payroll cycle, the payment usually being made at the end of the month. The German government has set the following rules for minimum wage payments: workers must be paid in full and on time, and they must be given a payslip that details their gross and net pay.
Income taxes in Germany are levied by the federal government and are imposed on all taxable income. Taxable income includes wage and salary earnings, self-employment income, interest and dividend earnings, capital gains, and rental income. Certain items may be deducted from taxable income in order to arrive at the final tax liability. These include expenses such as health insurance premiums, retirement savings contributions, and charitable donations.
Like other countries, the German income tax system is based on a progressive tax rate schedule. This means that higher earners pay a higher tax rate than lower earners. There are currently four income brackets in Germany, the specific tax rates for each are as follows:
| Bracket | From (EUR) | To (EUR) | Rate (%) |
| 1 | 0 | 10,347 | 0 |
| 2 | 10,347 | 58,596 | 14-42 |
| 3 | 58,596 | 277,825 | 42 |
| 4 | 277,825 | Above 277,825 | 45 |
Germany has a social security system that is financed through contributions from employers and employees. The biggest contributions to the social security system are to the pension and health insurance schemes. Pension insurance amounts to 9.3% of an individual’s gross salary, while health insurance is 7.3%. Unemployment insurance and long-term care insurance are significantly lower, at 1.2% and 1.525% respectively. Value-added tax (VAT) is also levied on most goods and services in Germany, at a standard rate of 19%. While the social security system in Germany is among the most generous in the world, it is also one of the most expensive to maintain.
The German government is working hard to ensure that businesses are compliant, and they are willing to enforce the law by levying significant penalties. Businesses that are not in compliance with German payroll regulations could face serious financial consequences. Recent changes to the Notification Act require German employers to provide additional detailed information upon contract signing to potential employees. This information includes end dates of the contract, duration of the probationary period, overtime opportunities, additional allowances, among other stipulations. Noncompliance to these amendments may result in an administrative fine to the company, which can be up to €2,000 per incident.
PAYROLL IN GERMANY: BENEFITS
In Germany, social security contributions are paid by both employees and employers. The money that is collected through these contributions is used to fund a variety of social welfare programs, including health insurance, pension benefits, and unemployment insurance. Employees typically pay around half of the total contribution, with the remainder being paid by the employer. Self-employed individuals are not expected to pay social security contributions themselves. These contributions in Germany are compulsory and are generally deducted directly from an individual’s salary. They cover pension, health, unemployment, and long-term care insurances.
Employees are also entitled to other payroll benefits calculated according to their time at the company. This includes an annual paid leave of 20 to 24 days aside from national holidays, and 6 weeks of paid sick leave. If the leave is of more than 3 consecutive days, the employee must provide a doctor’s note to receive a full pay while away.
For expecting mothers, they may take a 14 week leave, six weeks before the birth and eight weeks after, with an allowance calculated from their average earnings. Fathers, however, do not get a paid parental leave, but they are encouraged to apply for a parental allowance that can provide an income from 2 to 12 months to these families. Germany has a well-developed social safety net that helps to protect its citizens from economic hardship.
INVESTING IN GERMANY
Germany is a country with a rich history and a bright future. For investors, this country presents as an opportunity to tap into a growing economy with plenty of potential. It has the largest econom