Looking to dip your toe in the water of European markets? Germany is a strong and stable choice. The German economy is the healthiest in Europe, and the country offers plenty of benefits—including favorable employer taxes. In fact, Germany started offering a new tax credit in 2020 for companies contributing to research and development to foster more innovation.
But before you start making moves in Germany, it’s important to understand the regulations that will affect your payroll and human resources activities.
The basics of employing and paying people in Germany
In Germany, the German Trade Union Federation regulates things like compensation, working hours, paid leave and employee terminations.
There is a lot of legwork to establish an entity in Germany and legally begin hiring and onboarding employees—and a lot of opportunities to slip up. Even if you have some familiarity with German employment taxes, the game changed in a big way in 2021 because of the COVID-19 pandemic. Employers must provide new benefits and extensions to old benefits—mostly affecting compensation for parents who had to take time off to care for children.
When you employ workers in Germany, the government regulates employer taxes through federal, state and local governments. The amount of taxes to be paid is subject to both local municipalities and individual income.
But it's OK to play it safe. Many companies outsource these duties to an employer of record or a third party who is already established in the German market and has expertise with local labor regulations.
What taxes are collected in Germany?
The ins and outs of paying Germany’s employer taxes are similar to those paid in the United States and in other countries. There are a number of corporate taxes collected to fund things like insolvency (unemployment) and municipal projects that benefit the business district. There are also graduated income taxes for individuals, which must be withheld by employers and paid to the German government.
As an employer in Germany, you can expect to pay:
- Company tax
- Solidarity surcharge
- Municipal surcharge
- Individual income tax (progressive, up to 45%)
- Insolvency benefit
It may seem straightforward, mirroring familiar tax structures in other countries. Germany even makes it a little easier by offering to allow corporations to pay a flat-rate corporate tax to cover all of these items.
But there's still more.
One of the key differences when it comes to paying taxes in Germany is that Germany collects social taxes to fund healthcare and long-term or retirement care. In the United States, these categories are privatized and may be electively withheld from an employee’s paycheck, but the government does not typically require it. In Germany, employers are responsible for withholding taxes to cover a variety of social benefits, like:
- Pension insurance
- Statutory health insurance
- Long-term care
- Unemployment insurance
How do German employer taxes apply to internationally mobile employees?
What if your employees don’t stay put in one location? To what extent do you have to factor in German employer taxes when your employees work in Germany part of the year? How about when your company has an office in Germany, but the employees travel internationally?
Germany wants its taxes just as much as any other country. So, it’s a good idea to be clear on what definitions qualify your company for tax liability to the German government. Skipping these tax payments can lead to a hefty 10% penalty.
Who is required to pay Germany employment taxes?
- Employees who work in Germany for more than 183 days per tax year
- German employers who pay employees
- Multinational companies who pay employees through a permanent presence in Germany
Employee leave considerations
Withholding the appropriate taxes and benefits is a big part of the job that payroll does. But Germany has laws regulating sick leave and maternity leave that also affect how these taxes are calculated. The German government favors protecting individuals and their jobs—and it’s important to know this going into the game.
Sick pay is mandated for employees after four weeks on the job, and employers must pay 100% of the salary for the first six weeks. After the first six weeks, private insurance benefits kick in.
German maternity leave is even more generous. Companies must provide 100% salary for up to six weeks before birth and eight weeks after birth.
Germany also offers parental leave for the first three years after a child is born. This allows mothers or fathers to work reduced hours per week or take time off without losing their job. These regulations may prevent an employer from terminating an employee.
At the end of the day, Germany’s employer tax policy may be favorable for employers—but it’s not without complexity.
Ready to employ workers in Germany? Learn more about how an employer of record in Germany can help your company gain the legal expertise needed to operate compliantly in the local market.