Dealing with tax issues is a major issue for companies developing an international presence, particularly as punitive measures can apply for non-compliance. Relax – Bradford Jacobs are the Employer of Record (EOR) payroll specialists for Germany.
Using Professional Employer Organization (PEO) recruitment assistance and EOR payroll services is strongly recommended when entering the German market, and Bradford Jacobs ensure companies always comply with the latest regulations while onboarding their new employees. Our dedicated experts remove the burden of German payroll, tax and employment laws while you focus on building your business in a new territory.
Staff are employed through Bradford Jacobs’ payroll services with their income paid in the form of salary, expenses, allowances or bonuses depending on their circumstances. Employees remain under the daily operational control of the parent company.
All German residents are taxed on their worldwide income, regardless of nationality. Non-residents pay tax only on German-sourced income. Individuals are considered domiciled if they have a residence in, or their customary place of abode (for more than 180 consecutive days) is, Germany. Germany does not have a special tax regime for incoming expats, which means they can also be liable for taxes in their home country.
Personal income tax is charged on a sliding scale and the rates are usually identical for resident and non-resident taxpayers. For income in 2020 those rates are:
For single taxpayers:
For married taxpayers:
In addition there is a ‘solidarity charge’ of 5.5% to cover the continuing costs of integrating the states of former East Germany. Beginning in 2021 this charge will be eliminated for 90% of taxpayers and reduced for a further 6.5% of taxpayers. The highest-earing 3.5% will continue to pay the solidarity charge in full.
Corporate tax must be paid by corporations domiciled or managed in Germany, which means that their domestic and foreign earnings are all taxable in Germany.
Non-resident companies are subject to tax on German-sourced income. Business enterprises operating in Germany are also subject to a trade tax on business income, as assessed by each municipality.
The corporation base tax rate is 15%. In addition, a solidarity surcharge is levied at 5.5% of corporation tax. Businesses are also liable to pay the trade tax. This is a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate (Hebesatz). Depending on where the business has a permanent establishment (PE) this can be as much as 19%.
Employees in the wage tax withholding system are not required to file an annual income tax return, unless they have income from more than one source amounting to more than €410. In all other cases, a German income tax return must be filed with the local tax authorities after the end of the tax year.
Employees are also subject to the compulsory social security system. The employer withholds the employee’s share from wage and salary payments, which contribute to pension, unemployment, health and nursing benefits.
Value Added Tax standard rate is 19%, with a reduced rate of 7% for some categories. Small companies whose turnover in the previous year did not exceed €17,500 and is not expected to exceed €50,000 in the current year are exempt. There is also a Municipal Real Estate Tax on immovable property, residential or commercial, ranging between 1.5-2.3%.
What Taxation Rules exist for Payroll?
Germany’s tax authorities apply precise and stringent regulations to payroll, tax and social insurance contributions which must be paid on time and to the correct authority, at the risk of attracting sanctions and financial penalties. Essential points include:
- Forming a local corporate entity registered according to German law
- The pay-as-you-earn withholding tax system requires calculating and retaining tax from the monthly salary
- Statutory social insurance contributions must be withheld covering pension, nursing, health and unemployment benefits
- Registration with the German Tax Office
- Income tax returns to be filed by July 31 of the following year
- Employers must be sure which tax class their employee belongs to
- Registration with the Social Security Organizations (Sozialversicherungen)
- Submitting wage tax returns and forms for national insurance
What German Payroll Options are available for Companies?
Bradford Jacobs’ Employer of Record (EOR) platforms provide 100% solutions for companies establishing a presence in the powerful German economy, where compliance with a daunting array of laws and regulations is essential for a smooth and hassle-free transition.
We offer dedicated German payroll solutions that are tailored to your specific requirements, because we understand that each business faces unique issues. Bradford Jacobs navigate the administration of the German payroll system for you. As part of our service, we can administer the returns and associated payments for wage tax and social security contributions directly from our payroll system to the tax authority.
Failure to comply with frequently-changing regulations risks severe sanctions and even financial penalties. Staying up to date with these demands is a crucial element of our service, which also features administering returns and associated payments for wage tax, social security contributions directly from our payroll system to the tax authority.
Our role includes:
- Registering with the German Tax Office
- Registering with the Social Security Organizations (Sozialversicherungen)
- Creating employment contracts
- Applying special expatriation status (if applicable)
- Calculating monthly salary and creating pay slips
- Researching available tax free allowances
- Submitting wage tax returns and national insurance forms
- Corresponding with involved parties
- Annual accounts, administration and year end statements
- Creating payment schedules for wage tax, national insurances, and net wages
- Personal income tax returns
This list highlights why the vast majority of German employers use EOR providers to handle their payroll. Outsourcing payroll is a cost-effective, time-saving and simple method of paying employees, filing tax returns and fulfilling social security obligations in full and on time. Bradford Jacobs provide a complete service to remove the anxiety and stress for what would otherwise be a major commitment by your company.
What is required to set up German Payroll?
A company establishing in Germany or locating staff in the country must go through the process of registering with the relevant tax and social insurance authorities. These include:
- Applying for an employer eight-digit number which identifies the name, address and business class of the company
- Applying for a dedicated tax number
- Registering employees for health and social insurance
- Registering for statutory accident insurance (Berufsgenossenschaft)
The registration processes can take up to six weeks during which companies should set up bank accounts. It is not mandatory for foreign companies to hold an in-country account, though this is advisable to facilitate reimbursements from government or tax authorities.
Payroll should be set up to make employee payments through the File Transfer and Access Management (FTAM) system, enabling the employer to authorise the bank releasing payments to all employees, including health and social insurance.
Employers must correctly calculate the income tax payable for each employee based on their tax class and pass the withheld tax to the authorities by the 10th of the following month. Late submission incurs a 10% penalty on the assessed tax with a further interest charge of 6% per year.
These stringent regulations make payroll outsourcing for Germany the sensible solution to avoiding the mass of red tape and possible sanctions and fines. Bradford Jacobs’ success as global payroll service providers for a host of global companies will ensure you comply with all the above issues. Expanding your worldwide presence is your priority – managing all your compliance issues is ours.
What Entitlement / Termination Terms apply to German Payroll?
A host of laws and regulations emphasise the strong social contract that exists in Germany for employees.
- National Minimum Wage (NMW) – Set by law at €9.35 since January 1 2020. Contracts set below the minimum are invalid. If the minimum wage is not met employees can claim from their employer for the difference between the NMW and their pay. Failure to comply can incur fines up to €500,000
- Sick pay – German law dictates employees receive 100% of their pay for the first six weeks of illness, after which statutory or private benefits allow for 70% of normal pay for a maximum of 78 weeks. The employer must be informed immediately and be given a doctor’s note if sickness lasts more than three consecutive days
- Working hours – The maximum is 48 hours on the basis of a six-day working week from Monday to Saturday, with 40 hours the norm for a five-day week. A working day of more than six hours requires a total of 30 minutes’ break in one or two parts, up to 45 minutes for nine hours work. There must be a minimum of 11 hours rest between one working day and the next
- Holidays – The minimum is 24 days per year, though between 25 and 30 days is usual. Full entitlement starts after six months’ employment
- Maternity / Paternity Leave – During six weeks before the birth and eight weeks after, the employee is entitled to the equivalent to their monthly pay during the three months prior to maternity leave. It is illegal to terminate a contract during pregnancy or for four months after unless relevant authorities have granted consent. Both the mother and father are allowed to take parental leave over a period of three years, together or individually.
- Discrimination – Under the Equal Treatment Act, age, disability, race, religious belief, gender and sexual orientation are protected from discrimination
- Termination – Under German law employment can be terminated by mutual consent, at expiry of a fixed term contract or by notice given by either the employer or employee. An employer’s right to dismiss an employee is severely restricted by the Dismissal Protection Act (DPA). Individual dismissals must be given in writing with an ink signature and signed by an authorised representative of the employer. Dismissals delivered verbally, by email or fax are void.
- Severance pay – Since there is no statutory right to severance pay in Germany this usually depends on negotiation between employer and employee
Contact Bradford Jacobs’ Global PEO Payroll Services
Negotiating the difficulties of German employment law requires a meticulous approach and detailed understanding. Bradford Jacobs have the specific experience to remove the burden of dealing with these issues of German payroll. As the Employer of Record for your employees we deal with every aspect of salary, social insurance, registration, withholding tax, allowances, bonuses, entitlements and termination issues while you concentrate on building your business in a new territory.