Germany, as Europe’s largest economy, offers significant opportunities for businesses looking to hire talent. However, navigating its complex payroll system, employment laws, and benefits structures can be challenging. This guide provides a detailed roadmap to hiring and paying employees in Germany, ensuring compliance with local regulations.
Hiring employees in Germany
Recruitment process and contracts
- Job advertisement: Ensure job postings comply with Germany’s General Equal Treatment Act (AGG), prohibiting discrimination based on gender, age, ethnicity, religion, or disability.
- Employment contract: A written contract is not mandatory but highly recommended. Key elements include:
- Job description
- Salary and payment schedule
- Working hours
- Notice period
- Probationary period (usually up to six months)
Types of employment
- Full-time employees: Typically work 35-40 hours per week.
- Part-time employees: Defined as working less than the regular weekly hours.
- Mini-jobbers: Employees earning up to €520 per month are exempt from standard tax and social security contributions.
- Fixed-term contracts: Allowed for up to two years, with extensions permitted up to three times within this period.
- Freelancers: Self-employed workers who must manage their own taxes and social contributions.
Payroll in Germany
Key considerations for payroll processing
Employee registration
- Register employees with the local health insurance provider.
- Obtain a tax ID and social security number for each employee.
- Notify the German Social Security System (Deutsche Rentenversicherung) of employment status.
Gross to net salary calculation
Employees’ take-home pay is calculated by deducting the following from gross salary:
- Income tax: Ranges from 14% to 45%, depending on income.
- Solidarity surcharge: 5.5% of income tax (only for high earners).
- Church tax: 8%-9% of income tax (if applicable).
- Social contributions:
- Health insurance: 14.6% (shared equally by employer and employee, plus an additional average contribution of 1.6%).
- Pension insurance: 18.6% (split 50/50).
- Unemployment insurance: 2.6% (split 50/50).
- Long-term care insurance: 3.05%-3.4% (split 50/50, with employees without children paying a higher rate).
Payroll schedule
Salaries are typically paid monthly, by the last working day of the month.
Payslip requirements
German labour law mandates detailed payslips, including:
- Gross salary
- Tax deductions
- Social security contributions
- Net pay
- Employer’s contributions
Payroll process in Germany
The payroll process in Germany is regulated by strict laws and requires precision to ensure compliance with tax, social security, and employment regulations. Below is a step-by-step breakdown of the payroll process in Germany.
1. Employee registration
Before processing payroll, employers must register their employees with the appropriate authorities:
- Tax ID and social security number: Employees must provide their Steuer-ID (tax ID) and social security number. Employers use this information to enrol them in the German social security system.
- Health insurance registration: Employees must be registered with a public or private health insurance provider. The employer deducts health insurance contributions from the employee’s gross salary and matches them with an employer contribution.
- Deutsche Rentenversicherung notification: Employers must notify the German Pension Insurance Fund to include employees in the state pension system.
2. Gathering payroll inputs
Employers must collect accurate and up-to-date information for each payroll cycle, including:
- Employee working hours (for hourly employees or overtime payments)
- Bonuses, commissions, or other variable pay elements
- Tax class (determined by the employee’s marital status and family situation)
- Deductions for benefits, loans, or other payments
- Sick leave or parental leave details, as these affect salary payments.
3. Calculating gross salary
The gross salary is the starting point for payroll calculations. It includes:
- Base salary (agreed upon in the employment contract)
- Additional earnings (e.g., bonuses, holiday pay, overtime pay)
- Benefits subject to taxation (e.g., company cars or meal allowances).
4. Deducting income tax and contributions
From the gross salary, several deductions are made to calculate the net salary:
- Income tax (Einkommensteuer): Progressive rates from 14% to 45% apply based on the employee’s taxable income.
- Solidarity surcharge (Solidaritätszuschlag): Applies to high earners and is 5.5% of the income tax.
- Church tax (Kirchensteuer): For employees affiliated with a church, this tax is 8%-9% of the income tax.
- Social security contributions: Shared between the employer and employee:
- Health insurance: 14.6%, plus an average additional contribution of 1.6%.
- Pension insurance: 18.6%.
- Unemployment insurance: 2.6%.
- Long-term care insurance: 3.05%-3.4% (higher for employees without children).
5. Employer contributions
Employers are responsible for paying their share of the social security contributions, which are equal to or slightly higher than the employee’s share. Additionally, employers must cover the full cost of accident insurance (Berufsgenossenschaft).
6. Generating payslips
German labour law requires employers to provide detailed payslips (Lohnabrechnung) to employees. Each payslip must include:
- Gross salary
- Tax deductions
- Social security contributions
- Employer’s contributions
- Net salary
- Details of additional payments or deductions.
7. Payment of salaries
Salaries in Germany are typically paid on a monthly basis, usually by the last working day of the month. Employers must transfer the net salary to employees’ bank accounts and remit taxes and contributions to the respective authorities.
8. Filing and reporting
Employers must:
- Submit monthly Lohnsteueranmeldung (wage tax declarations) to the tax office.
- Report social security contributions to the German Social Security System.
- Keep records of all payroll-related transactions for at least 10 years to comply with audit requirements.
9. Annual reconciliation
At the end of each calendar year, employers must:
- Provide employees with a Lohnsteuerbescheinigung (annual wage tax certificate) summarising earnings, taxes paid, and deductions.
- Submit reports to the tax office and social security authorities to ensure compliance.
Employment law compliance
Working hours and overtime
- Standard hours: 8 hours per day, up to a maximum of 48 hours per week.
- Overtime: Must be agreed upon in the employment contract or through collective bargaining agreements (CBAs). Overtime pay is not mandatory unless specified.
Paid leave and holidays
- Annual leave: Employees are entitled to a minimum of 20 days of paid leave (based on a 5-day workweek).
- Public holidays: Varies by state, with 9-13 public holidays annually.
- Sick leave: Employers must pay full salary for up to 6 weeks of illness; after that, health insurance pays 70% of the employee’s salary.
- Parental leave: Up to 3 years of unpaid leave per child, with job protection. Employees may also receive Elterngeld (parental allowance) for up to 14 months, paid by the government.
Termination
- Notice periods: Ranges from 4 weeks to 7 months, depending on the length of employment.
- Severance pay: Not legally required unless specified in a CBA or settlement agreement.
Employee benefits in Germany
Mandatory benefits
- Health insurance: Universal coverage via public or private providers.
- Pension insurance: Contributes towards the state pension system.
- Unemployment insurance: Provides income support for jobseekers.
- Accident insurance: Fully funded by employers, covering workplace injuries and illnesses.
Additional benefits
- Corporate perks: Many German employers offer meal vouchers, gym memberships, or transportation allowances.
- Company cars: A common benefit, particularly for senior roles.
- Professional development: Employers often subsidise training or language courses.
Tax obligations for employers
- Corporate tax registration: Employers must register with the Federal Central Tax Office (BZSt).
- Withholding taxes: Employers deduct and remit income tax and social contributions on behalf of employees.
- VAT considerations: If providing additional benefits, such as company cars, VAT implications may arise.
Choosing a payroll provider in Germany
Given the complexities of German payroll, many businesses opt for professional international payroll services. When selecting a provider, consider:
- Compliance expertise: Ensure they are familiar with German tax laws and regulations.
- Integration: Look for solutions that integrate with existing HR systems.
- Support: Choose providers offering local language support and real-time assistance.
Conclusion
Hiring and paying employees in Germany involves navigating a robust legal framework, comprehensive social security system, and a detailed payroll process.
Businesses should prioritise compliance to avoid penalties and ensure a smooth operation.
Leveraging professional payroll services and legal advisors can streamline these processes, allowing companies to focus on growth while ensuring they meet Germany’s stringent employment standards.
FAQ
Yes, employees in Germany can select their own public or private health insurance provider. Employers must deduct contributions based on the employee’s choice and register them accordingly.
Employees in Germany can claim tax benefits for various expenses, such as commuting costs, childcare, home office expenses, and education-related costs. These deductions are claimed when filing annual tax returns.
Public health insurance is mandatory for employees earning below a certain threshold (€66,600 annually in 2024) and provides standard coverage. Employees above this threshold can opt for private health insurance, which may offer more tailored benefits but often comes at a higher cost.
A Mini-job is a form of employment where employees earn up to €520 per month. These jobs are exempt from income tax and most social contributions, making them attractive for part-time or supplementary work. However, employers must pay a flat-rate social contribution.
No, supplementary benefits are not mandatory in Germany, but they are commonly provided as part of competitive compensation packages. These perks can also offer tax advantages for both employers and employees.
Employees can change their tax class (e.g., due to marriage or divorce) by applying through their local tax office. Employers must adjust payroll calculations from the effective date of the change.
Expatriates may be subject to German payroll taxes and social security contributions, depending on their residency status and the terms of any applicable double taxation treaties. Employers should review these agreements to determine obligations.
CBAs are agreements negotiated between unions and employers’ associations. They can specify salary ranges, bonuses, working hours, and other employment terms, which may impact payroll. Employers in certain industries are required to follow these agreements.
Yes, payroll audits are conducted by the German Tax Office and the Deutsche Rentenversicherung to ensure compliance with tax and social security regulations. Employers must maintain accurate records to pass these audits without penalties.
If a payroll error occurs, the employer must correct it in the next payroll cycle and inform the affected employee. Employers may also need to adjust filings with tax authorities or social security institutions.
No, bonuses and commissions are treated as part of the employee’s taxable income and are subject to the same income tax and social security contributions as regular salary payments.
Holiday pay must match an employee’s usual earnings, ensuring they receive their standard wage during leave. Sick pay is covered by the employer for the first six weeks and calculated based on the employee’s regular earnings. After six weeks, the health insurer pays a reduced amount.
Non-compliance with payroll regulations can result in significant fines, back payments, and reputational damage. Severe cases, such as tax evasion or failure to pay social contributions, can lead to legal action against employers.
While it is not legally required, it is highly recommended that employees have a German or SEPA-compliant bank account to streamline salary payments and avoid delays.
Remote workers employed in Germany are subject to the same payroll rules as on-site employees, including income tax and social contributions. If an employee works remotely from another country, additional considerations such as cross-border tax regulations may apply.