How to run international payroll for employees in Germany (Updated 2023)

Companies seeking to expand their operations overseas often select Germany due to its robust economy and supportive start-up culture. The most populous European Union Member State also has a world-class transportation infrastructure and top-quality internet networks, making it ideal for both commuters and remote employees. Many employers also appreciate the frank, direct approach Germans take to doing business—as well as the nation’s proficiency in English.

While Germany is a fantastic choice for an overseas branch, setting up your business, hiring employees, and running payroll will be challenging. The German payroll and tax laws are complex and notoriously tough to navigate, and you need to take numerous steps to stay compliant. 

This comprehensive guide to running payroll for employees in Germany will walk you through the process of setting up your business, hiring employees, and putting them on the payroll to ensure you remain legally compliant and get your company set up smoothly.

Table of Contents

• Step #1: Register as an employer with the Federal Agency of Employment
• Step #2: Pick a global payroll software solution
• Step #3: Determine your workers’ employment status
• Step #4: Collect information from your employees for payroll
• Step #5: Set the employee’s salary in euros
• Step #6: Run payroll
• Step #7: File your monthly and annual taxes 
• Frequently asked questions about running payroll in Germany

Step #1: Register as an employer with the Federal Agency of Employment

If you decide to set up your own entity in Germany rather than using an EOR—which we’ll discuss below—be forewarned, the bureaucracy you’ll be navigating has a well-earned reputation for being notably complex and long. Sometimes, it takes employers months to get their business registration approved, so plan accordingly. 

Before you can hire and pay employees in Germany, you need to register your company with the appropriate authorities. These include:

• The public commercial register
• Your local trade office
• The tax and social security authorities for your area
• The Federal Central Tax Office (BZSt)

Start the registration processes with the public commercial register and your local trade office. They’re the first places you need to register.

You cannot pay employees until you’ve registered your business and insured it under the statutory accident insurance plan, are able to provide your employees with health insurance, and have your Employer Tax Number.  When you fill out the registration forms, make sure you have either the Employer Company Number from the Employment Agency (Betriebsnummernstelle) or a copy of your Foreign Company Registration document.

Can I use an EOR instead?

Yes, it’s perfectly okay to use an Employer of Record (EOR) instead of trying to expand an independent branch of your company to Germany yourself. Many companies who decide to operate in Germany utilize EORs to complete the multiple registrations required of new entities, run payroll, issue benefits, and navigate international compliance issues. Setting up a business in Germany requires a significant time investment, and most smaller companies don’t have the resources to spare.

What information should I bring with me when I start the registration process?

If you decide to register your company yourself, you’ll need to bring the following information with you to kick off the process:

• Your company’s German bank account information
• A valid form of identification, like your passport
• Your official articles of association
• A complete, formal list of your shareholders

Be prepared to provide documents certifying all of your shareholders are German or EU citizens, permanent residents of Germany, or foreigners with a valid multi-entry visa. And, you’ll need a notary to confirm that your company truly exists.

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Step #2: Choose a global payroll software solution

First, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.

• Global payroll processors actually process your payroll, transmit funds, and calculate and file taxes in every country through their own software. Put simply: global payroll processors allow you to pay your international employees just as easily as your local employees: together in a single pay run.
  
• Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.

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Step #3: Determine your workers’ employment status

Before you onboard new workers and start running payroll, you need to classify the workers you hire as either employees or independent contractors. Classifying team members correctly is crucial to staying compliant with German laws.

German lawmakers developed specific criteria for employers to use when they’re determining if a new hire is an employee or an independent contractor. The lists cover issues such as:

• Mutuality of obligation: Whether there is a binding commitment on the company to offer work and on the consultant to provide work.  
• Personal service: An employee is required to provide their services personally, and if there is a right to appoint a substitute, this will typically be qualified such at the employer’s discretion.  
• Control: The degree of control the employing entity has over a worker’s hours and place of work.  
• Other activities: Whether the worker can undertake other work outside of the employing entity and if so, to what extent.  
• Pay and benefits: An employee will be paid a fixed amount on a regular payment date according to their hours worked, and irrespective of performance targets or project completion. 
• Integration: How involved a worker is in the company and its management and how they are perceived by third parties. 
• Facilities and equipment: An independent contractor will usually provide their own equipment and materials in order to perform the services while an employee will rely on the employer to provide the same.  
• Financial risk: Which party has liability for any losses arising from the agreement. An employee will be paid even where there is insufficient work to keep them occupied, and will assume no financial risk in working for the employer. 
• Taxation: Which party bears the liability for tax arising from the engagement.  A self-employed independent contractor will be responsible for the payment of their own income tax and social security contributions whereas the employer will account for these in the case of employees.