One of the primary concerns for investors intending to set up a business in Germany is the average cost of employee they would have to bear. For this, they need to consider various factors, the most important of these being the personal income tax rates and other taxes as applicable within the country. Since the country has a relatively complex taxation system, gaining a clear understanding of the same can help overseas businesses to calculate the appropriate compensation and cost of employee in Germany in a more effective manner. The different types of taxes that employees in the country are expected to pay are discussed below.
Personal Income Tax
Like in most other countries across the globe, the personal taxation system is based on different income slabs of the employees. This means that the personal tax rates vary as per the total income of an individual and married couples. The taxes rates are progressive, starting from zero and ending at 45%. The various tax rate applicable for different income slabs are listed as follows.
Single individuals earning up to 9,000 euros and married couples having a total income of up to 18,000 euros annually are exempted from paying any tax.
Individuals and married couples with an income in the range of 9,001 – 54,949 and 18,001 – 109, 898 euros per annum respectively, are required to pay a tax starting at 14%, which then increases geometrically up to 42%.
Single individuals earning between 54,950 and 260,532 along with married couples earning between 109, 899 and 521,064 per annum are charged a flat tax rate of 42%.
Individuals and married couples having an income of more than 260,533 and 521,065 respectively are also charged a flat tax rate of 45%.
Solidarity Surcharge
This is an additional income tax having a maximum limit of 5.5% that employees are expected to pay. However, people from low-income groups may be totally exempted from paying this tax or might have to pay it only partially. Individuals, who pay a tax of less than 972 euros annually are not required to pay this tax. However, people paying an annual tax ranging between 973 and 1,340 euros annually have to pay the solidarity surcharge that increases geometrically from zero to 5.5%.
Church Tax
In addition to the above two taxes, employees are also required to pay a church tax of 8 or 9%, depending on the federal state in which they are employed. This tax is levied on the total taxable income and is payable by all registered church members in Germany. Foreigners working in Germany can avoid paying this tax by avoiding mention of their church affiliation in any official document. It is also important to be aware of the fact that the amount paid in lieu of this tax is completely tax-deductible.
Tax Deductions
The German taxation laws also allow for various tax-deductions which may be related or not-related to taxable income. It is advisable for foreign business organizations to hire professionals offering the services of payroll Germany for gaining an in-depth understanding of these deductions. This information can prove critical to help business decide the right employee compensation.
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