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Paying Taxes in Germany

Updated - September 2020

Know your status, both here and in your homeland.

Expatriates living in Germany can be subject to German taxes, especially if they have German source income. The German tax system is similar to the structures in other western countries. You pay income taxes throughout the year, usually with an employer deducting tax from each paycheck. Adjustments are then made at the end of the year for possible under or overpayments.

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Individual Income Taxes

For 2019 a taxable income of less than €9,169 was tax-free for a single person (€18,388 for a married couple). Incomes up to €55,960 for a single person (€119,220 for a couple) were then taxed with a rate progressively increasing from 14% to 42%. Incomes from €55,961 (€111,922) up to €265,326 (€530,652) were taxed at 42%. Incomes over €265,327 for a singe person and €530,654 for a married couple were taxed at 45%.

For 2020 the taxable income amounts have increased a bit. Taxable income of less than €9,408 is tax-free for a single person (€18,816 for a married couple). Incomes from €9,048 (€18,816) up to €57,051 (€114,110) are taxes at a rate of 14% to 42%; incomes from €57,051 (€114,102) to €270,500 (€541,000) are taxed at 42%. Incomes over €270,500 for a singe person and €541,000 for a married couple are taxed at 45%.

In addition to this there is the "solidarity surcharge" of 5.5% of the tax, to cover the continuing costs of integrating the states of the former East Germany.

(Good news: Starting in 2021 the "solidarity surcharge" will be eliminated for 90% of taxpayers. It will be reduced for another 6.5% of taxpayers depending on their earnings. The top 3.5% of earners will continue to pay the full surcharge in full.).

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Deductions

As in many other countries, Germany allows a variety of deductions that can lower taxable income. Deductions are granted for circumstances such as children under 18 (or under 27 if still attending school and without earnings), specified insurance premiums, charitable and political contributions to German entities up to certain limits and unavoidable extraordinary expenses above a certain limit (such as illness).

Deductions from compensation are also made for four social programs: retirement, unemployment, health insurance and long-term nursing care. Payments for these programs are normally borne equally by the employer and the employee. The employer's share of contributions is not considered as taxable income to the employee and the employee's portion is tax deductible up to a certain limit. A tax adviser can tell you more about other deductions and the requirements to earn them. For more information go to our article on German Social Security and Employee Benefits.

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Lohnsteuer and Einkommensteuer

If an individual is subject to German tax, generally most sources of income are then taxable. The Lohnsteuer (wage tax), which alone accounts for a third of the German government's revenue, is withheld at source from compensation. Income from other sources (e. g. self-employment, fees for services, rent collections, investments and the like) are covered by the Einkommensteuer (income tax).

The Lohnsteuer differs from the Einkommensteuer only by the method of collection. The Lohnsteuer is collected at source and paid directly to the Finanzamt (tax office) by the employer while the individual must pay the Einkommensteuer himself.

Based primarily on your final payment for the previous year, the Finanzamt will estimate your tax for the current year and require you to make prepayments (Vorauszahlungen) of a quarter of the tax on March 10, June 10, September 10 and December 10. The total tax liability is determined by filing an income tax return, which includes all types of income from all sources. Wage tax withholding as well as provisional payments are deducted from this total tax liability so that a refund or final tax payment is assessed. The tax assessment is usually issued by the Finanzamt between two and six months from the date the return is filed. No payment will be due before receipts of the tax assessment notice.

Due to the current Coronavirus situation in Germany the Finanzamt may be willing to alter or suspend pre-payments of Einkommensteuer for certain taxpayers. Also, the standard Mehrwertsteuer rates have been lowered to 16% and 5% (from 19% and 7% effective July 1). Consult a Steuerberater (Tax Advisor) for more information.

Every tax return is under audit, therefore if the tax assessment is issued and is not preliminary, the assessment can only be changed in the future by the occurrence of extraordinary circumstances (e. g. tax evasion).

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Tax Returns

You don't necessarily need to file a tax return if your only source of income is your employee salary. This is because the Lohnsteuer is withheld from the salary. But, if you may be eligible for a tax refund or have other items that you may want to itemize (deductions or other income or benefits) or if you are self-employed you need to file a tax return.

Every tax return is under audit, therefore if the tax assessment is issued and is not preliminary, the assessment can only be changed in the future by the occurrence of extraordinary circumstances (e. g. tax evasion).

As a rule, the income tax return (Einkommensteuererklärung) should be filed by July 31 of the year following the one in which the income was received. If you use the assistance of a tax consultant, your tax filing date is extended to December 31. In some circumstances that date can be extended further to February 28. There may be penalties and interest assessed if the return is filed late.

There are a few situations where the taxpayer is required to pay taxes even though the income is less than the personal allowance, especially when tax-exempt income (such as foreign-sourced income) must be considered for the determination of the applicable income tax rate (progression clause). Taxes are then assessed based on a sliding scale.

There is an "unofficial" tax calculator available online that can give you an idea of what your "wage tax" or Lohnsteuer might be. Click here for the calculator.

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Other Taxes

In addition to the various forms of income tax there is also a series of sales taxes that significantly impact both individuals and businesses. The major tax is the Mehrwertsteuer (value added tax), which accounts for a quarter of the government's revenue and is second only to the Lohnsteuer in this regard. The Mehrwertsteuer assesses a levy on each step in the production and delivery of most items available for purchase. It applies to services as well as goods and the standard current rate is 19%. A reduced rate of 7% currently applies to certain products, including food and printed material. Medical and insurance services are generally exempt, as are exports of goods abroad and services rendered abroad.

Numerous other items, including gasoline, alcoholic beverages, tobacco products, tea and coffee, carry sales taxes in addition to the Mehrwertsteuer. There is also a church tax (Kirchensteuer), of 8% to 9% of the Einkommensteuer/Lohnsteuer. But you are not required to pay the tax unless you wish to be officially affiliated with one of Germany's established churches; usually Catholic or Protestant (Evangelisch).

All in all there are approximately 30 different types of taxes, including taxes on inheritances, real estate and motor vehicles. There is even a tax on the gross amounts received by the state-run lotteries, though the distributions to the lucky lottery winners are tax-free.

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Getting Help/More Information in English

If you think you would be able to file your own German tax return you can find help on the internet. There are some sites that have downloadable, printable forms and even online programs and apps to help you file electronically via the internet. Most of them are in German but there are some in English. Many offer help lines and assistance with the process.

The Finanzamt offers free advice and help at some of their offices and you can download a tool they have called ELSTER that allows you to submit your return via the internet.

If you think your tax situation may be a bit more complex (multiple income sources, collecting various government benefits such as Kindergeld, running your own business, eligibility for many deductions etc.), you might consider using a tax consultant (Steuerberater) to help you through the intricacies involved in filing returns as well as to provide some ease of mind during your stay abroad. The tax consultant can also submit the tax forms on your behalf.

If you are interested in further information in English about the German tax system, the Bundeszentralamt für Steuern has information on their website at this link. Also, you can download their English language information brochure (updated in November 2016) on the entire German tax system here.

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German Tax Classes

Employees of German companies are normally assigned a tax class by the tax authorities according to various categories. The "Tax Class" (Lohnsteuerklasse or Steuerklassen in German) is important in determining the amount of withholding (income) tax deducted from a salary as well as in determining the value of a number of social benefits for which the taxpayer may be eligible. A tax class may be assigned to an employee by the authorities based on marital status and other criteria. In some cases a taxpayer can request to be placed in a certain class.

Class I - applies to single (unmarried) people; those living in a registered civil partnership; those who are divorced, widowed or married unless they fall under tax class II, III or IV

Class II - applies to those who are a single parent and living alone with a child or children and are entitled to the child allowance (Kindergeld) and/or other government assistance

Class III - applies, upon request, to married employees if both spouses live together in Germany and one spouse is the sole wage earner; or the other spouse earns a salary but chooses to be categorized under Class V. Also applies to widowed employees for the calendar year following the death of the spouse if both were employees and living together in Germany on the day the spouse died

Class IV - applies to married workers who live together and have not selected Tax Class III or V for one of them

Class V - applies to a taxpayer whose spouse is classified under Tax Class III

Class VI - an optional class available to individuals who may have more than one job and earn money from other employment. The taxpayer may have more than one Lohnsteuerkarte resulting from the multiple jobs.

There may be various family models and permutations of the tax classes. To be sure to have the best classification you may want to consult the tax office or a tax advisor.

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Some Tax Information for the Self-employed

Most taxpayers are taxed on their source of income. A large majority of these people are "employees" and have their wage or salary taxes (Lohnsteuer) automatically withheld from their paychecks by their employer. (Deductions are also withheld for four social programs: retirement, unemployment, health insurance and long-term nursing care.)

However, there are a large number of people who fall under the category of "self-employed" who are also taxed on their source of income. Since they don't receive regular paychecks, taxes (and any contributions to the social programs) are paid directly to the Finanzamt or the appropriate social program agency or government office. The tax paid by the self-employed to the Finanzamt is Einkommensteuer.

There are a number of rules, regulations and laws that govern taxes for the self-employed.

Who is considered "self-employed"?

The "self-employed" cover the gamut of various work and professional categories and for tax purposes a determination must be made as to the exact classification of their work.

The primary categories of the "self-employed" include:

1) Free-professionals (Freiberufler) (sometimes referred to as "Liberal Professions") are those who have academic training - lawyers, doctors, scientific/technical experts, pharmacists, accountants, tax and business consultants etc. This group also includes "freelancers" - writers, artists, performers, independent consultants etc.

2) Business people (Gewerbetreibender) are those who start or own a business (Gewerbe) that allows them to earn money through commercial activity. This can include traders; sales professionals; shop owners; publishers; those in the hospitality, tourism and gastronomy sectors; craftspeople and others. Their business may range from solo owned small companies to small partnership companies.

The local Tax Office (Finanzamt) decides which category a work activity falls under. Being a Gewerbetreibender or Freiberufler makes a difference not only in tax matters, but in other formalities as well. It can have an impact on how a company or business entity should be structured.

It's always a good idea to consult with a tax advisor (Steuerberater) or other outside expert before deciding how you would want your business to be structured once the Tax Office has determined the classification of your work. (For more information about some of the non-tax formalities involved with being self-employed you can read our article on Self-Employment in Germany.)

What Taxes are Important for the self-employed?

1) Income Tax (Einkommensteuer) - This is, of course, the most important tax. It's the tax on personal profit generated by your business after deductions for operating expenses and other allowed items. Being self-employed means you must submit tax declarations each year. After the first year or so, the Finanzamt will calculate a quarterly income tax pre-payment that you need to pay to be applied to successive years' tax payments. (Sometimes, if the pre-payment is more than the tax bill for the year, you could be eligible for a refund.)

2) Value Added Tax (VAT) (Mehrwertsteuer or Umsatzsteuer) - This is payable when you sell goods or services. The current standard rate for most transactions is 16% and the reduced rate is 5%. (Normally the rate is either 19% or 7% but it has been reduced until the end of 2020 because of the Coronavirus situation.) VAT has to be billed to all your customers in Germany and be stated as a separate line item in your invoices.

Depending on the amount of business you are doing, a separate tax return for Umsatzsteuer may not be required, or may have to be submitted quarterly or monthly.

3) Input Tax (Vorsteuer) - This is the amount of VAT you have to pay when you buy goods or services. It is stated as VAT (Mehrwertsteuer) on the invoice to you.

4) Trade Tax (Gewerbesteuer) - this is a quarterly tax paid to your local municipality.

These taxes are normally calculated when you complete and submit your tax return. The amounts of the taxes depend on your profit from each year.

There are many different regulations and rules from the government for entrepreneurs and the self-employed that are designed to make it easier to have a successful business.

In order for the self-employed to properly navigate the ins and outs of the accounting, reporting and other complexities of the tax regime it is recommended that they get outside help.

Help is available from a Tax Advisor (Steuerberater) or by signing up with one of the many new and easily managed digital tax and accounting services available online.

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