Discover how income tax in Germany works for employees, including details of what social security contributions you’ll need to make.
All German residents are liable for income tax on their worldwide income and assets. Non-residents are subject to German income tax in respect of German-source income. Unlike some other countries, Germany does not have a special tax regime for incoming expats, and you may also be liable for taxes in your home country.
The annual tax return and assessment
All persons subject to German income tax must file an income tax return annually with the appropriate local tax office (depending on the place of residence).
You must file a German income tax return with the local tax authorities after the end of the tax year – in Germany, the tax year is the calendar year. The normal deadline is 31 May, which is automatically extended to 31 December if the tax return is prepared by a tax professional. After filing, the tax return is reviewed by the tax authorities and once the review is finalised, an assessment notice is sent out.
Individual income tax rates 2019
The first €9,169 (or €18,338 for married couples submitting a combined return) earned each year is tax-free. Any higher amount is subject to income tax.
Income tax is progressive, starting at 14% and rising incrementally to 42%, or for very high incomes, 45%. The top tax rate of 42% applies to taxable income above €55,961. For taxable income above €265,327, a 45% tax is applicable.
In addition to income tax, everyone has to pay solidarity tax, which is capped at 5.5% of your income tax.
Finally, if you are a member of a church registered in Germany, you will also have to pay a church tax of 8 or 9% of your income (depending on which federal state you live in).
So what is taxable income in Germany?
Any income from the following categories counts as taxable income:
- income from agriculture and forestry;
- Income from a trade or business;
- income from independent personal services;
- income from employment, including compensation from past employment;
- income from capital investment;
- rental income from immovable property and certain tangible movable property;
- income from royalties; and
- other income (gains from private transactions, alimony, annuities, etc.).
In general, all income except interests, dividends and capital gains on stocks is taxed at the tax rates mentioned above.
Interests, dividends and capital gains on stocks are subject to a flat tax of 25% plus the solidarity charge and church tax if applicable.
Some types of income are tax exempt but are used to determine the tax rate, like unemployment benefits, maternity leave payments and certain income that has been taxed in another country due to a double tax treaty.
Social security contributions in Germany
The compulsory social insurance scheme includes the following:
- Pension insurance (Rentenversicherung)
- Unemployment insurance (Arbeitslosenversicherung)
- Health insurance (Krankenversicherung)
- Nursing insurance for disability and old age (Pflegeversicherung)
Employees are subject to the compulsory social security system. The employer withholds the employee’s share from wage and salary payments. Social security contributions are generally paid 50% by the employer and 50% by the employee.
The employer must withhold the employee’s part from the salary and transfer it together with the employer’s part to the health care institution, which then distributes the relevant amounts to the other social security institutions. The contributions depend on the employee’s salary up to certain maximum levels.
For 2017, the rates (including both the employee’s and the employer’s parts) are seen below:
Nursing care insurance
Germany’s social security system applies to all employees who work in and are paid in Germany. It also applies to employees working abroad if their employer seconds them for a limited period of time.
Employees who are seconded to another EEA country (EU Member States, Iceland, Liechtenstein and Norway) or Switzerland, avoid a double levy of social security contributions by EU Regulations. An employee can apply for an exemption from social security contributions in the other EEA country for 12 months with a further 12-month extension. If it is in the employee’s interest, an exceptional exemption for a period of 5 years may also be applied for. In such cases, the German employer continues to withhold German social security contributions.
The same provisions also apply to employees who are seconded from another EEA country or Switzerland to Germany. They may be exempt from German social security contributions during their temporary activity in Germany. In these cases, there are no withholding obligations as regards German contributions.
Employees who are seconded to Germany for a limited period and continue to be paid by their non-resident employer are not subject to German social security contributions. An obligation to withhold social security contributions, therefore, does not generally arise for non-resident employers.
Outside the area of application of the EU Regulations, double charge of social security contributions is avoided by bilateral agreements.
Filing US taxes from Germany
Despite the fact that every US citizen and green card holder is required to file a tax return with the IRS even when living abroad, many expatriates still fail to do so. Many are unaware of these obligations, thinking that as an expat they do not need to pay or file tax returns in the US. You do! For more information and help filing your US tax returns from Germany, contact Taxes for Expats and see our Guide to taxes for American expats.