Germany, which boasts the largest economy in the European Union, is a home to booming sectors such as tech, banking, and healthcare. As the world’s fourth largest economy, Germany is a hub for some of the world’s top talent, with multinational firms, tech companies, and startups setting their sights on building local HQs in Berlin, Frankfurt, and other cities.
Germany has a wide range of tax laws and regulations that make setting up payroll relatively complex, especially compared to other countries in Europe. Employers will need to hire a tax advisor or have a strong legal team behind them. Alternatively, employers can partner with an EOR service like Via that puts employees on their payroll.
No matter what path you choose, it’s important to maintain compliance with all local and federal regulations. As an employer, you need to pay close attention to details, including individual income tax, social security, health insurance, sales tax, withholdings, and business tax.
This article outlines everything employers need to know about setting up payroll in Germany, as well as what employees should expect when being put on payroll.
The payroll cycle in Germany is monthly. Payments are issued around the 25th day of the month and must be made on a working day. You will also need to pay employees using their bank account information.
However, German laws have strict data protection for employees. You can have their personal data to run and issue payment, but you must keep this data safe and secure. Paying employees can only occur using Germany’s file transfer and access management (FTAM) protocol.
The minimum wage in Germany is 9.50 (EUR) per hour or 1,584 (EUR) per month.
Setting up payroll in Germany is quite complex, as is establishing a business or subsidiary in the country. In addition to setting up a subsidiary, statutory laws require businesses to file a large amount of different financial filings.
If you decide to expand your business by opening up a subsidiary, you will need a tax advisor that can help you navigate different payroll options. You will also need to hire a legal advisor to give you advice about doing business in Germany.
Further, you will need extensive documentation from employees to add them to the payroll:
Tax ID number and bracket
Residence permit/work permit
Social security number
It can take up to six months to meet all of the necessary laws and requirements to run your own internal payroll. For companies looking to hire German talent immediately, partnering with an EOR service like Via can expedite the process.
Germany has an extensive tax system that has specific tax rates. Both employers and employees must contribute.
Employers should plan to pay around 22.33% of the employees salary to social security contributions. Social security costs are split equally between the employee and employer, with the exception of accident insurance, which is paid in full by the employer. These contributions cover sick pay, sick leave, health insurance, pension, and a wide variety of other social rights.
Social security contributions are broken down into 5 parts:
Statutory health insurance
Nursing care insurance
Statutory accident insurance
Employer deductions for employee social security breaks down as follows:
Retirement at 9.3%
Health insurance at 7.3%
Unemployment insurance at 1.2%
Long-term health insurance at 1.53%
Accident security at 2%
Maternity at 1%
The German corporate tax for employers is 15%, plus a 5.5% surcharge. Germany has one of the higher corporate tax rates in the EU.
Further, Germany operates under a progressive income tax scheme, where rates range from 0%-45%, depending on the employee’s salary.
For sales tax or value added tax, there is a flat rate, charged at 19% throughout the country.
To calculate the payroll deductions, including income tax, for employees based on their income, use the Germany (DE) - Salary After Tax Calculator to have a general overview of payroll deductions.
In Germany, there are a few options that you can choose from to set up and run payroll in the country:
Internal payroll is a good option for companies who want to build out a strong presence in the country. Employers should have the resources to directly manage the subsidiary or entity, and hire your own HR team to manage payroll. However, this option requires an extensive knowledge of tax regulations as well as being able to wait 6 months to open a subsidiary. Employers will need a variety of resources to meet all of Germany’s payroll compliances or face legal fines.
Payroll processing companies are another option. You can find a German payroll outsourcing company to manage payroll. However, you will still be legally responsible for all compliance issues, so this option must be taken with caution, to avoid any statutory issues.
PEO services handle compliance with the onboarding and hiring process, but do not shoulder as much legal liability in the case of mismanagement. This is a co-employment model, so your company will still need to open an entity in the country.
Finally, you can hire employees using a global EOR service like Via. Global Employer-of-record services handle all of the legal, payroll, and benefits compliance. An EOR takes on the legal responsibilities associated with paying and hiring compliantly in Germany. Via owns its entities and manages all of the HR responsibilities abroad.
Many people want to hire employees in Germany, but are unsure of how to navigate the country’s complex payroll processes. Via makes hiring German talent and building your global team seamless. Our easy-to-use platform helps you manage the local HR processes for benefits, payroll, background checks, and more. We have a local team of lawyers and on-the ground experts that understand compliance as you expand abroad.
As your employer-or-record/entity in Germany, Via assumes full responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.
With Via’s transparent pricing, you can pay full-time employees or contractors in Germany with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.