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.
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