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What Overseas Employers Need to Know About Payroll and Tax in Germany

As you might expect, German payroll and tax regulations are very specific with mandatory withholding and payment rules for your employees on assignment.  There are many different social contributions to keep track of, and they must be paid on time and to the correct government entity.

The first hurdle is that you must have a local corporate entity that is registered and capitalized according to German law.  Otherwise, you will need to engage a third party such as Shield GEO to run payroll using our local employer of record.

You can see an overview of all German employment and payroll requirements here but here are a few of the key points to keep in mind:

1.    File Transfer and Access Management (FTAM) Protocol in Germany 

Most salary payments to your employees in Germany will use the electronic FTAM system, including any payments for health insurance.  So, while having a German bank account is not a requirement for running payroll, it does allow you to use this efficient payment system.

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2.    13th Month Bonus Payment in Germany 

Since your employees are on a German payroll and subject to local employment laws, they may be entitled to (or come to expect) a ‘13th month’ of salary as an annual bonus.  This amount should be calculated into the full year’s compensation package before the assignment begins.

3.    PAYE Tax Withholding System in Germany 

Germany does use the PAYE system for tax withholding, that requires the employer to calculate and withhold taxes from the monthly salary.  This amount must be forwarded to the tax authorities by the 10th of the following month, or you will pay penalties.

4.    Statutory Withholding in Germany 

Compared to some countries, Germany has many statutory social insurance contributions required of both the employer and employee.  These contributions must be withheld from the monthly paycheck and include:

  • Health Insurance (almost 15% of employee’s gross salary, split equally with the employer)
  • Pension Insurance (nearly 19% of gross wage, also divided equally with the employer)
  • Unemployment Insurance (3%, divided equally)
  • Nursing Care Insurance (2.55% divided equally)

Given these amounts (almost 20% deducted from salary), employees on assignment to Germany may be concerned about their net pay, and may need additional compensation or incentives.

5.    Tax Rates in Germany

Tax rates in Germany are 0-14% up to $52,000, but jump to 42-45% on amounts above $52,000, which would include most employees sent on assignment.  When you factor in the social contributions, the total of tax and employee contributions can reach over 60% of gross salary.  For many employees, some tax equalization will be necessary.

If all of these computations and rules for payroll seem daunting, then you may want to consider letting the Shield GEO local employer of record handle all of your German tax and payroll needs.  We can make German employment simple for your company, allowing you to focus on supporting your staff in their business activity.

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