In Europe, Germany is considered home to one of the strongest economies, making it a haven for new businesses. Relative to most countries, Germany can be seen as a country that cordially welcomes any organization to put up an establishment within its borders. However, as with any other country, Germany can also pose complex rules and regulations especially concerning its payroll process.
To help guide you in this process, Rivermate provides global payroll compliance strategies to ensure that your business will successfully thrive in Deutschland.
Termination Rules and Regulations
The German payroll system stipulates that the employer has discretion terminating an employee who fails to perform their duties and responsibilities for the company. This must also be explicitly stated in the employment agreement and must be agreed upon by both the employer and employee.
Mutual consent is also warranted in termination situations. The best thing to do is to provide an advance termination notice. During conflicts, the dominant role is played by the labor courts.
Minimum Wage in Germany
The minimum wage in Germany is €8.50 per hour. However, there may also be a few exceptions for some enterprises depending on what is imposed by the official ruling. A fine of €30,000 to €500,000 is given to any minimum wage rule violation. This fine is also applicable to employees who are under 18 years old, interns, and those who are long-term unemployed employees.
Tax on Capital Assets
In terms of taxes on income from capital assets, an absolute rate of 25% charge is imposed and withheld during the payout period.
This may come quite odd to you, but in Germany, employees are responsible for paying a church tax. Yes, you heard it right. The church tax will be deducted from the monthly salary of each employee. Note that the ruling and amount vary from one federal state to another. Usually, the church tax ranges from 8% to 9% of the employee’s salary.
Employee Benefits Tax
All the non-statutory benefits that employees receive are taxable in Germany. It can be in the form of accident insurance, food transport, retirement funds payment, and more. The good thing for employees is that their employers may opt to pay income tax on behalf of them. The tax ranges from 15% to 25% of the total market value. If the amount does not go beyond €44 monthly, the employee benefits mentioned above are not taxable.
Work Injury Insurance for Employees
If you are an employee, you are no longer responsible to contribute and pay for the work injury insurance fund. For employers, however, it is mandatory for them to allot an estimated amount of 132% of the organization’s wages for the funding of work injury insurance.
Working Hours Policies
Full-time employees in Germany can only be required to work at most 48 hours per week. Employers are not allowed to force employees to work for more than six consecutive hours with no breaks in between. Any employee has to have at least a 30-minute break after a 9-hour dedicated working session.
Compensation for Overtime Work
Every time employees are reminded of the compensation they receive after working during overtime hours, they usually feel delighted and excited at the same time. In Germany, every employee’s employment contract agreement must have a provision that states overtime compensation is provided to the employee, and they must be well compensated according to the rule of the company. However, the standard overtime hours per week must not exceed 12 hours.
The German litigation recommends that the payroll period or more commonly known as payday is included and comprehensively stipulated in the employee’s employment contract agreement. Additionally, the interval of the wage payment should not go beyond one month. In any case where employers exceed one month in wage payment and compensation, penalties may be incurred and the employer will answer to the authorities.
Insurance for Retiring Employees
Employers may also provide company retirement plans for their retiring employees. It must be noted that the retirement pension insurance is not the same as the German Federal government’s statutory social pension. The retirement pension insurance is completely voluntary and is at the discretion of the employer.
Unemployment and other Health-related Insurance
In Germany, 15% of the employee’s total monthly salary goes to their unemployment insurance. Then, 73% of their total wages are allotted for health-related insurance. However, the percentages change and vary on the employee’s total income, and an income of under €50,850 per year is not taxable.
Fringe benefits are extra benefits that supplement an employee's salary. For example, this can be a company car, subsidized meals, health insurance, and the like.
In Germany, some fringe benefits can be in the form of profit-sharing, use of a company car, commissions, supplemental pay, gratuities, and more. However, not all German companies provide fringe benefits to employees. This is because they are not mandated by the labor law to do so. Employees can consider themselves if their company provides fringe benefits.
Leaves and Vacations
It is not new to any employer the responsibility of allowing employees to have leaves for vacation, maternity, paternity, sick leaves, and more. It is separate from the official holidays in Germany.
Some of the holidays in Germany are:
- New Year’s Day
- Three King’s Day
- International Women’s Day
- Good Friday
- Easter Friday
- Labor Day
- Victory in Europe Day
- Mother’s Day
- Ascension Day
- Father’s Day
- Corpus Christi
- Assumption Day
Social taxes in Germany may cover different social insurance programs. One notable technicality in the German social tax system is that the social tax responsibility is shouldered by both employers and employees. In addition, a solidarity surcharge of 5.5% is mandatory for each employee to contribute from their monthly salary for social security programs.
Federal Tax Authorities
The federal tax authorities in Germany subject all the employees, regardless of their German citizenship or residency to income tax. The organizations and employers are the ones who are responsible for the tax payment for their employees. In that case, employers hold back taxes from their employees during the payroll period and in turn remit the held-back taxes to the federal government tax authorities. Federal tax ranges from 15% to 45%, and annual salaries under €8,652 shall be exempted from paying the tax.
Some companies offer stock plans to their employees. These are taxable with vested options upon the exercise. Add to that, employers are mandated to hold back income tax on any earned capital from the exercise of the approved stock plans.
Online Financial Services
One good thing about expanding an enterprise in Germany is that tools for online financial services are always available. With this, the hassle of filing taxes will be easier, and will allow employers to focus on the sole goal of growing and managing their businesses. The online financial services tool is called the “ElsterOnline”. Employees and employers can now file taxes online, using this tool. You just need to mark your calendar on February 28 because this is the day when you have to submit your annual income tax forms for the year.
Income Tax Reporting
Every month, employers are mandated to remit payroll taxes to any local tax office in Germany. The payment and reporting obligations depend from one employer to another. The German tax authorities have set forth different factors to consider when implementing income tax reporting. This usually includes foreign entities, employee population residency status, and more.
It is essential to understand the employment law in Germany as it is more complex than in the other countries. It is stipulated in the provisions of this law that employees may opt to join collective labor agreements, join a union, work council, and more. Contracts are considered partially invalid in circumstances where employees are underpaid.
Regarding the payment methods, based on Germany’s Civil Code, and other agreements, the wages, and salaries of employees are usually transferred using electronic back transfers ensured by the File Transfer and Access Management (FTAM) protocols. Once the payment is approved by the employer, the bank accounts linked to the employees’ records will now be authorized to release their payroll.
The two most important common benefits employers can give to their employees mandated in the law are the 13th month or 13th salary payment and Supplemental pay.
- 13th salary payment. All employees regardless of citizenship who have worked all 12 months of the year are eligible to receive full payment of a monthly salary as a year-end bonus.
- Supplemental pay. From the word itself “supplemental”, is given to employees who have rendered services under difficult circumstances, worked even during weekends, beyond working hours, and more.
Running payroll in Germany is not an easy peasy job. Understanding every section of this article would be a great help to start this sophisticated process. It will be a tough journey but the success of your business is guaranteed once you work hard on it. Besides, Rivermate is more than glad to help your organization drive success. Contact us for more information.