Germany Payroll and Benefits Guide

What global businesses need to know about payroll in Germany.

For many businesses looking at expansion into Europe, it’s natural that Germany is their first port of call: after all, it’s Europe’s most populous country, and its GDP is the largest in Europe and the fourth-largest in the world.

While the German economy has become increasingly dominated by services in recent years, its strong manufacturing and heavy industry sector remains its backbone, still contributing 30% of its GDP. That means there are plenty of opportunities to explore across various industries. Opportunities are made easier by political stability, membership in the European Union, and a population of around 84 million that is highly skilled and educated.

Though Germany is generally a welcoming country to overseas investment, its reputation for highly organized processes is reflected in a relatively complex procedure for starting businesses there. This guide covers all the key basics from a payroll perspective.

Getting Started

If starting a business in Germany, you will probably be looking at setting up a limited liability company, known as a GmbH: this requires a minimum of €25,000 (approximately £22,000; $26,500) in startup capital.

To launch a business located in Germany, you must complete all applicable registrations to the country’s tax and social security authorities. That includes applying for an employer number – an eight-digit identifier for the name, address, and economy class of the company – that is necessary in order to hire employees and register them for social and health insurance. The company must also apply for a dedicated tax number and for statutory accident insurance (also known as ‘Berufsgenossenschaft’), and will most likely also need to register your business with the trade office in order to receive a trading license.

It can take up to six weeks for all such registration information to be fully processed. During that time, organizations should set up bank accounts. While it is not mandatory to pay employees from an in-country account, it is advisable for employers to have at least one German account where government entities can send any reimbursement payments. In agreement with their local work councils and local or global payroll providers, organizations must also determine the timing, place, and form of payments and payslips. 

Employment Considerations

Germany’s Employment Law governs all the key requirements from an employment and payroll standpoint. For example, the law dictates that all employees have the option to join a union, work council, or collective labor agreement, which may decide issues relating to working decisions, working times, and wages. 

Probation periods in Germany are generally six months, with a notice period of two weeks during this time. Shorter probation periods are applied to apprentices. Notice periods start at one month for employees that have passed their probation, gradually rising over time to a maximum of seven months’ notice for employees with at least 15 years’ service.

Germany’s Employment Law also mandates a maximum of 48 working hours per week. Employees can work a maximum of ten hours per day, but must not average more than eight hours per day across any six-month period.

Compensation, Bonuses and Severance Pay

Germany’s national minimum wage increased to €12 (approx. £10.50; €12.70) per hour on October 1, 2022. Exceptions apply based on employees’ age, status, or any applicable collective agreements. Trainees, those in entry-level qualifications, or those working as part of an apprenticeship or university course may also be exempt on a case-by-case basis. As with many countries, this rate could be subject to change in the months and years ahead, especially at a time of high inflation, so you should check for any future adjustments regularly.

Discretionary bonuses at the end of a fiscal year are common in Germany, as a reward for good performance over the year, as are Christmas bonuses. Additionally, certain collective agreements enshrine a ‘13th month’ salary payment.

There is no legal requirement to provide severance pay in Germany, but many employers choose to offer half a month’s salary per year of service to ease the severance process.

Tax and Social Security in Germany

Employers should be aware of the regulations regarding payment of salaries and wages, which are governed by Germany’s Civil Code, its Industrial Code, and various collective agreements. Payments to employees and third parties usually take the form of electronic bank transfers under the country’s standard File Transfer and Access Management (FTAM) protocol. Once an employer approves a given payroll, it can authorize its bank to release payments to all employees and make any other required contributions, such as payments to health insurance companies.

Germany’s progressive income tax rates start with a zero-rated exemption for the first €10,347 (approx. £9100; $11,000) of earnings each year (although a slightly more advantageous exemption applies for married taxpayers). After this figure, rates gradually rise from 14% to 42%, with a high rate of 45% applied to earnings beyond €277,825 (approx. £244,000; $295,000) per year. In addition, most taxpayers are also required to pay a 5.5% solidarity surcharge tax. The employer must withhold the appropriate amount from employees’ gross payments each month, then submit payment to the appropriate tax office by the 10th of the following month. 

Non-residents who are working in Germany are only subject to income tax there if their income is closely relevant to Germany.

The following social security contributions are also required:

  • Pension insurance: 9.3% employer, 9.3% employee
  • Unemployment insurance: 1.2% employer, 1.2% employee
  • Health insurance: 7.3% employer, 7.3% employee
  • Long-term care insurance: 1.525% employer, 1.525% employee (childless employees over 23 are subject to higher rates)

Work accident schemes and insolvency contributions vary, depending on the level of risk and income ceiling respectively.

Holidays and Leave

Germany has nine days of nationally observed public holidays each year. Additionally, there are a number of public holidays that are observed by some states but not others.

Paid leave is a minimum of 20 days per year (or 24 for those who work six days a week); however, granting more than the statutory minimum is commonplace and many employees enjoy up to 30 days of paid leave a year. Sick leave entitlement is six weeks, as long as they have been employed for at least four weeks previously, while employees can also receive ten days of compensated leave if needing to care for a close relative.

Maternity leave is 14 weeks: six weeks before the due date and eight weeks after birth, funded by public health insurance. Paternity leave is considered part of unpaid parental leave, which can be a maximum of three years shared between the two parents.

 German Public HolidayDate in Calendar
 New Years Day  January 1st
 Good Friday Friday before Easter Sunday
 Easter Sunday Easter Sunday
 Easter Monday Monday after Easter Sunday
 Labor Day May 1st
 Ascension Day Forty days after Easter
 Whit Monday Seventh Monday after Easter
Day of German Unity October 3rd
 Christmas Day December 25th
 Second Day of Christmas or St. Stephen’s Day December 26th

In Summary

As this guide demonstrates, there is plenty to consider about running payroll in Germany. But the potential complications are more than outweighed by the opportunities on offer in Europe’s biggest economy. 

Nonetheless, if you feel you need help getting started on the right foot, it’s worth considering the support of a global payroll partner, who can cut through the complexity and make sure your payroll is efficient and compliant.

This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay

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