Payroll in Germany: Comprehensive Guide to Setup and Compliance

Germany is an economy known for its complex employment and payroll regulations and requirements. 

With complex payroll requirements in Germany, employers must ensure that they are compliant with the existing laws and requirements. 

The recent changes in social responsibilities and tax requirements, such as the progressive tax brackets and solidity tax, payroll administration, and reporting in Germany, have become ever-so complicated. 

This article covers everything you need to know if you want to learn more about payroll in Germany and the German payroll requirements.

Negotiations decide the salary package between both the employer and the employee. However, employers must clearly outline the compensation package (including several crucial aspects such as statutory benefits, voluntary contributions, and tax deductions) in the employment contract.

The salaries provided to employees must not be lower than the minimum wages set out by the German labor laws. The statutory minimum wage provided to employees in Germany as of 2022 is EUR 9.82 per hour and shall increase to EUR 10.45 in July 2022. However, Germany’s minimum wages differ based on industries and collective bargaining agreements.

The working hours laid out by the Working Time Act in Germany are a maximum of eight hours per day and forty-eight hours a week. The general workweek in Germany is from Monday to Saturday. 

There are no provisions for overtime in Germany; however, the overtime pay differs depending on the region and the collective bargaining agreement between 

• The employee and, 
• The regional trade union. 

Overtime in Germany is of two types:

• Mehrarbeit defines any additional working hours that exceed a 48-hour work week as laid down by the Working Hours Act. An employer can extend the workweek to ten hours a day for employees who work eight hours a day over six months. 
• Überstunden defines any additional hours an employee works as agreed to in the employment contract. An employee must be fairly compensated for the additional hours worked in such cases.

Overtime hours worked by an employee must be compensated with 

• Additional days off or, 
• Financially 

The employee must agree to either of the options:

• In cases of days off, an employee must be given time off depending on the overtime hours worked in a week.
• The overtime pay in Germany is generally paid along with the employee’s salaries with an addition of 10% to 20% based on the collective agreement. 

When calculating and processing payroll in Germany, there are a few essential elements of salary structure in Germany that you must be aware of — 

Personal Information: Personal information is included in payslips in Germany. This includes name, date of birth, residential address, tax class, tax exemptions, religion, gender, date of hire, and social security number.

Salary breakdown and deductions: Salary breakdown and deductions include-

• Monthly base salary – Basic salary in Germany is calculated based on seniority, education level, and the industry. The basic salary is 10% to 50% of the entire package.
• Benefits-in-kind
• Holiday pay and lump sum payments (Christmas bonus or 13th-month pay)
• Income taxes and other tax deductions
• Social security contributions (social security funds include contributions towards health insurance, long-term care insurance, pension insurance, and unemployment insurance)
• Voluntary contributions
• Net salary

It is mandatory for all employers with employees in Germany to provide payslips. Payslips have all the information mentioned above and can be used as a point of reference for both parties as a part of payroll processing. With constant technology changes, employers can provide an online payslip monthly. 

When looking to employ and set up payroll in Germany, it is important to establish an entity such as a subsidiary. Given several regulations and laws relating to establishing a business entity in Germany, the process takes several months. 

Partnering with an external company, especially a PEO and EOR platform such as Multiplier can help you save time and process payroll in Germany compliantly. At the same time, you focus on your business operations.

Adhering to the German payroll requirements is crucial to avoid penalties. Below are the steps of processing payroll in Germany — 

Establishing your Employer Identification Number (EIN)

EIN is provided to employers by the tax authorities and is a number that the tax department uses to identify you. The tax department ensures the German payroll taxes are filed and other German payroll requirements are complied with.

Collecting employee tax information

Ensuring you collect all relevant information relating to your employee’s tax is crucial. This ensures that all payroll information is in one place and accounts for all benefits, allowances, and employee payroll deductions. It is also necessary to collect information through forms such as 

• A job application form that allows key payroll information is recorded 
• Information relating to deductions ensures that all your employees participate in mandatory and voluntary benefits such as social security and health insurance, and 
• Keeping a record of wage garnishments is mandatory by the provisions of the German payroll regulations.

Choosing the right payroll schedule

Once the relevant legal and tax information is collected, choosing and deciding a payroll schedule that works best for your business requirements and employees is crucial. The most commonly used schedules for processing payroll in Germany include 

1. Monthly 
2. Semimonthly 
3. Biweekly, and 
4. Weekly

Setting calendar paydays after choosing a payroll schedule ensures timely salary payments to your employees, building quarterly and annual tax filing dates and holidays.

This step also involves asking employees to choose from their preferred method of receiving their pay, such as paper checks and direct deposits.

Calculation of gross payments

Ensuring you calculate your employee’s gross payments at the time of hiring that seems fit to your business requirements and the employee’s experience and qualifications help strike the right balance.

The salaries to be paid must also include overtime pay and additional pay for employees working on public holidays.

Calculations of employee deductions

Employee deductions vary depending on the gross salary, statutory deductions, and voluntary contributions. Therefore, calculating the correct payroll deductions in Germany is essential as miscalculations attract penalties.

Calculating net pay and paying your employees

Net pay is calculated by deducting all income taxes and statutory and voluntary contributions from the gross pay. Payroll taxes in Germany must be withheld and paid to the tax authorities quarterly. 

Once the net pay is calculated, you can process the net salaries on the scheduled payday. With the changing times, you can consider several payment modes to pay your employees. The most common ways of processing payroll for your German employees include 

• Direct deposit to bank accounts
• Mobile wallet
• Cash 

Payroll records

As laid out by German laws, an employer must keep payroll records and reports for six years and bookkeeping records for ten years. This is mandated for compliance and tax purposes.

Employers must deduct an employee’s salary as payroll contributions in Germany. Currently, the German payroll deductions include —

Payroll in Germany is generally processed monthly and ideally on the 25th day of every month. A key factor to note is that it is customary to offer a 13th-month pay to all employees in Germany.

German Payroll Options for Companies

There are a few German payroll options available for companies to choose from. These payroll options include –

• In-house payroll processing: Companies can have their payroll processed for their German employees as a separate department. 
• Outsourcing: Another commonly practiced to process payroll for your German employees is outsourcing your payroll from local payroll companies. Outsourcing the payroll process reduces the burden of constantly keeping track of the German payroll compliance checklist
• Partnering with a Professional Employer Organization (PEO): Partnering with a PEO and an Employer of Record platform such as Multiplier helps in processing payroll faster and more effectively. Our team of professionals helps in compliantly processing payroll in Germany.

As an employer, you must provide certain information such as entitlement and termination terms as a part of your employment contract with the employee. These terms and conditions are considered mandatory as laid out by the German payroll rules and regulations.

• The maximum work week in Germany is 48  hours a week and the maximum an employee can work in a day is 10 hours.
• Working on Sundays and public holidays in Germany is prohibited.
• Overtime pay must be provided when employees work longer than the set work hours, Sundays, and public holidays. Overtime pay is an agreement between the employee and the works council.
• The German labor law ensures that employees with a five-day workweek are entitled to 20 days’ paid leaves and 24 days’ paid leaves for an employee with a six-day workweek.
• Contributions toward German social security are mandatory. The German social security covers the following aspects —  

1. 1. Health insurance 
   2. Pension insurance 
   3. Unemployment insurance 
   4. Homecare and nursing insurance

• The maximum probationary period in Germany is six months.
• A written notice of termination to the employees over six months with any employer is a must. Reasons for termination include  

1. 1. Behavioral issues (fraud, theft, harassment, etc.) 
   2. Explanations relating to the employee’s situation (long-term sick leave) 
   3. Business-related issues

• The statutory notice period in Germany is four calendar weeks. If an employer wishes to terminate the employment without a notice period, the employee must be paid severance pay.
• Severance pay is an agreement between the employee and the works council.

Given the complex German payroll rules and regulations, a great way of processing payroll for your German employees is by partnering with a PEO and EOR platform such as Multiplier. You can learn more about the German payroll process by contacting us.

With several payroll policies and procedures in Germany, it often becomes cumbersome to ensure that payroll is compliantly processed. The payroll process involves considering German payroll taxes, contributions, payroll cycle, etc. This inevitably leads to a time-consuming process that ensures the German payroll requirements are met. 

By partnering with Multiplier, you can ensure that payroll for your German employees is processed compliantly and accurately while you focus on expanding your business operations in the country. Our team of professionals ensures several aspects of payroll in Germany are fulfilled while ensuring you are offloaded with the payroll responsibilities.

Talk to us to learn more!