Running payroll in Germany

Germany is known for its complex laws and regulations. This also holds true for German payroll. According to the Global Payroll Complexity Index 2023, Germany is the second most complex country in the world for processing payroll.

Not only does the country have a complex social security and welfare system that requires employers to make various contributions and meet different filing and payment deadlines, but income tax calculation can also be quite difficult. With six different tax classes and a progressive tax system with steeply increasing tax rates, withholding the correct amount of payroll tax from employee wages can be challenging.

Unless they decide to outsource payroll to a local payroll partner or hire via an Employer of Record (EOR), employers need to complete several registration processes before they can start processing payroll in Germany. This notably includes:

• Registration for withholding wage tax with the local tax authority, i.e. the one responsible for the area where the company is located

• Registration with the federal employment agency in order to obtain an eight-digit employer number which is needed for subsequent registration with the social security authorities

• Registration for statutory accident insurance in order to obtain an employer accident insurance number and determine the applicable risk tariff

It is not necessary to establish a local legal entity to hire employees and process payroll in Germany. However, foreign employers without an entity in Germany might have to undergo additional registrations to the ones required for locally registered entities.

Also, non-residential employers must appoint a local representative who can act as a point of contact for social security purposes and who stores and manages the business’s payroll records—new law from January 2021.

There is no legal requirement to set up a local bank account, since salary payments and payments to local authorities can be issued from a foreign bank account.

Germany has a comprehensive social security system that requires both employees and employers to make mandatory monthly contributions. The tax system is progressive with a 45% top rate.

Tax Considerations

In Germany, tax on employment income is called Lohnsteuer. Income of up to EUR 12,096 is tax-free. For married couples, the threshold is EUR 24,192 (valid for 2025 tax year). Thereafter, progressive tax rates apply which range from 14% (low rate) to 42% (high rate). Income exceeding EUR 277,826 (for singles) is taxed at a top rate of 45%.

There are six different tax classes which are based on the employee's marital and family status. They determine an employee’s monthly tax burden and which allowances (e.g. child allowance) are deductible before tax calculation. The six tax classes are:

• Tax Class 1: single/widowed/separated/divorced

• Tax Class 2: single parent

• Tax Class 3: married with partner who earns significantly less and is in Tax Class 5 (also used for widowed tax payers in the year of their spouse’s decease)

• Tax Class 4: married with both partners having similar income

• Tax Class 5: married with partner who earns significantly more and is in Tax Class 3

• Tax Class 6: used for second and side jobs (regardless of marital status)

Resident taxpayers in Germany are taxed on their worldwide income, while non-residents only pay tax on income sourced in Germany.

Up until 2021, taxpayers also had to pay a 5.5% solidarity surcharge on their income tax. Since 2021, the solidarity surcharge applies only to high-income earners whose annual income tax surpasses specific thresholds.

Employees who are members of a recognized religious community (e.g. Catholic or Protestant churches) also have to pay church tax. Church tax is paid at a rate of 8% or 9% (depending on the federal state) of the employee’s wage tax. It is collected by the state on behalf of the religious institutions and needs to be paid monthly (due by the 10th of the following month).

Tax Withholding and Reporting 

Employers in Germany are responsible for calculating and withholding the correct amount of tax from employee salaries and wages. The withheld amounts need to be submitted to the competent tax authority along with the respective wage tax return (Lohnsteueranmeldung) on a monthly basis.

The deadline is the 10th of the month following the pay period for which the tax is paid (e.g. tax on income earned in January needs to be paid no later than the 10th of February). Depending on their total annual wage tax, employers may be eligible for filing wage tax returns quarterly or yearly.

In addition, employers need to prepare and file an annual wage tax summary (Lohnsteuerbescheinigung). The filing deadline is the 28th of February of the following year. The tax year in Germany runs from the 1st of January until the 31st of December.

Social Security Contributions

Employees in Germany are automatically covered by the statutory social security system which comprises four different social insurance schemes (contribution rates are valid for 2025):

• Health insurance (14.6% with an additional average supplementary surcharge of 2.5% levied by the individual health fund)

• Pension insurance (18.6%)

• Unemployment insurance (2.6%)

• Long-term care insurance - also known as invalidity insurance (3.6%, plus 0.6% surcharge that applies for employees without children)

Contributions are paid in equal shares by the employee and the employer—with the exception of the long-term care insurance surcharge, which is borne solely by the employee. There is an annual income ceiling up to which contributions to pension, unemployment, health, and long-term care insurance are paid.

Employers have to submit a monthly social security statement (Beitragsnachweis) covering the entire period from the first to the last day of the month. The report must be filed  by the fifth last working day of the month. Payments are due two days later, i.e. by the third last working day of the month.

On top of these monthly reports, employers also need to file an annual social security statement for each employee (Sozialversicherungsmeldung) which is due no later than the 15th of February of the following year. The yearly statement for the statutory accident insurance is due on the 16th of February.

Employees have the possibility to opt out of the public health and care insurance scheme and take out a private insurance scheme instead. However, they must earn more than EUR 73,800 per year to be eligible (2025 threshold).

As mentioned before, employers need to sign up for statutory accident insurance to cover their employees. The average contribution is 1.3%. Furthermore, there is a 0.15% insolvency charge which is levied on employers.

Employers can decide if they want to set up an additional company pension scheme for their employees. However, there is no legal requirement to do so.

* There is a 0.6% surcharge for childless employees aged 23 or older, which brings the total contribution to 4.2%.

Employees in Germany are entitled to various benefits. These include:

• Annual leave and public holidays: at least 20 days of paid annual leave (for employees with a 5-day work week—24 days for employees with a 6-day work week), plus 9 national public holidays (up to 14 when counting additional regional and local holidays)

• Maternity leave: 14 weeks (6 weeks before and 8 weeks after birth)

• Paternity leave: pending official legal implementation of EU regulation granting fathers 14 days of paid paternity leave after birth

• Parental leave: up to 36 months of which 12 or 14 months are paid (14 months if parental leave is taken by both parents with neither parent taking less than two or more than 12 months)

• Sick leave: 6 weeks on normal pay, thereafter employees receive statutory sickness benefits

For more information on employee benefits and other employment requirements in Germany (including severance pay and termination procedures), check out our Global Hiring Guide.

In January 2025, the national minimum wage in Germany reached EUR 12.82 per hour. Pay rates for overtime are not regulated by law, but are determined by the individual employment contract or collective bargaining agreements. Employers are not obligated to pay their employees a 13th salary, but it is common practice to do so. If offered, the 13th salary is typically paid in December in the form of a Christmas bonus.

The typical payroll cycle in Germany is monthly—weekly or bi-weekly payrolls remain exceptions in sectors such as construction or hospitality. Salaries should be paid between three days before the end of the month and the fifth day of the next month.

The exact pay date is fixed in the individual employment contract and should be respected by the employer. Payments to employees can be made from a foreign bank account.

Employers are legally required to provide each employee with a payslip. Payslips can be issued either in paper form or in digital form. The latter must comply with data security regulations. Companies are obligated to keep payroll records for at least 6 years.