Social Security & Taxation
Taxes in Germany
The following article provides an introductory overview of taxes in Germany. However, it is definitely not legal or financial advice on the tax you’ll have to pay. To get a better idea of how German taxes work, especially regarding income from foreign sources, you should talk to a tax consultant. Moreover, this outline refers to taxes in Germany usually paid by individuals.
Businesses are subject to various other taxes in Germany, such as corporate tax, trade tax, and turnover tax. The type and tax rate depend on the size of the company, its legal form, and the classification of the tax-paying owner as an entrepreneur, small business owner, or self-employed professional (e.g. a doctor or lawyer).
Among the various sorts of taxes in Germany, income tax is the most important. However, tax law in Germany distinguishes between Einkommensteuer (income tax in general) and Lohnsteuer (pay-as-you-earn tax / withholding tax for employees).
PAYE Tax for Employees
This subcategory of German income tax applies only to employed wage earners. The employer automatically deducts the contributions to social security in Germany and the actual PAYE tax (Lohnsteuer) from employees’ monthly gross income. Tax rates for Lohnsteuer are the same as those for income tax in general.
In 2014, an annual salary lower than EUR 8,354 for singles / EUR 16,708 for a married couple will not be subject to PAYE taxes in Germany. The starting rate for the lowest taxable income is 14%. The tax rate then rises progressively.
For annual gross incomes between EUR 8,355 and EUR 13,469, the rise is pretty steep, followed by a more gradual increase for incomes of up to EUR 52,882. People earning more than EUR 52,882 per year are subject to a tax rate of 42%. For top incomes of over EUR 250,731, the highest tax rate of 45% applies.
In addition to Lohnsteuer, you have to pay the so-called solidarity surcharge (5.5% of your income tax) as well as church tax (Kirchensteuer). However, the latter kind of tax in Germany only applies if you are a registered member of the Catholic or Lutheran-Protestant religion in Germany.
Tax-relevant information on employees, such as their number of children or their religious affiliation, is registered in their electronic tax card (elektronische Lohnsteuerkarte). You just need to provide your employer with your tax identification number and date of birth, and then they can access all your relevant tax information from the German central revenue service (Bundeszentralamt für Steuern) and add you to the company payroll.
As mentioned above, an employee’s Lohnsteuer may merely be a part of their overall income tax. You also have to pay taxes in Germany on your personal income from the following sources:
- income from agriculture and forestry (1)
- income from business operations (2)
- income from self-employed work (3)
- income from employed work (4)
- capital income (5)
- income from letting property (6)
The tax on “income from employed work” (4) is identical with the Lohnsteuer we have just explained. Categories 2 and 3 (income from business and self-employment), on the other hand, are relevant for freelancers who run a small business or trade (Gewerbe) or who are self-employed artists, accountants, physicians, etc.
However, if you have additional income from any other category, like interest on your savings (5) or rental yields (6), it is also subject to income tax. Tax rates range from 14% to 45%, as described above.
The basic tax-free allowance (Steuerfreibetrag) is the same as that for PAYE tax, i.e. EUR 8,354 a year for singles and twice as much for a married couple.
In addition to a basic allowance for low-income earners, there are numerous deductibles that may apply to your taxes in Germany. You can get deductions for raising children, commuting to work, paying for work uniforms, being a single parent, joining a trade union, contributing to private pension funds, paying for selected insurance premiums, donating to charity, etc.
You have to list all these factors in your annual tax return. If you don’t pay PAYE tax on any income from employed work, you have to submit income taxes in Germany each quarter. For this purpose, the taxable income is based on that in the previous year.
Filing the income tax return by May 31 is mandatory for everyone who is not a student, pensioner, or an unemployed person and whose majority of income does not stem from employed work. However, most employees do file a tax return, since it is the only way of benefiting from tax reductions. Once you have filed your tax return, the tax office will decide if you owe them money or if you get reimbursed. You will receive their final calculation in the Einkommensteuerbescheid (notification of income tax assessment).
General Advice for Expats
Once you have lived and worked in Germany for six months, you will probably be considered a fiscal resident and will have to pay income tax in Germany. In order to avoid double taxation, Germany has entered into tax treaties with over 100 countries. They apply in case a resident also has to pay taxes on their income in other countries. The Ministry of Finance lists all the countries that have agreed upon such a double taxation treaty with Germany (German only).
However, if you have multiple sources of income or if you are self-employed, consulting a tax advisor should be your first priority. They can help you minimize the amount of taxes you owe in Germany.
We do our best to keep this article up to date. However, we cannot guarantee that the information provided is always current or complete.