How to run international payroll for employees in Germany (Updated 2023)
Apr 7, 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.
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. These come with many limitations: You’re forced to submit payroll up to 30 days in advance. You can’t track, and automatically sync, employees’ time in the same system.
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.
Classify your workers now using Rippling’s Worker Classification Analyzer.
Step #4: Collect information from your employees for payroll
After you’ve registered your company with all of the proper authorities and received your Employer Tax Number and other relevant information, it’s time to put your employees on the payroll. Although there isn’t a master list of all the information you should collect from them, make sure you have the following:
- Name, date of birth, and start date with your company
- Which Tax Class they belong to*
- Whether or not the employee is a member of an official religious organization and is responsible for paying church tax**
*Germany has six Tax Classes; employees are assigned to Tax Class 1-6 based on their marital and family status. Knowing which Tax Class an employee belongs to will ensure you adjust the amount of tax you take out of their paychecks each month accordingly. Tax Class does NOT determine an employee’s tax rate. It’s just intended as a helpful tool.
**If you belong to an official religious institution in Germany, like the Catholic Church, you owe church tax at a rate of 8% or 9% of your monthly income, depending on where you live.
Step #5: Set the employee’s salary in euros
Because Germany is a member of the Eurozone, if your company hires German employees, regardless of where you are headquartered, you must pay them in euros.
Step #6: Run payroll
You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under German law.
Time to run payroll!
Here’s a preview of how Rippling's global payroll system works:
Step #7: File your monthly and annual taxes
The German tax year is the same as the calendar year: January 1 to December 31. Employers have both monthly and annual tax remittance responsibilities.
You’re required to report payroll taxes to the German authorities once a month, by the 10th of the month after the pay period for which you’re paying the tax. (So, for example, you’ll pay your income tax bill for March on or before the 10th of April.) You can do this through any local tax office throughout the country.
You must also file an annual wage tax summary by February 28th each year (February 29th if it’s a leap year).
Frequently asked questions about running payroll in Germany
What are payroll taxes in Germany?
Employers are responsible for paying the correct amount of payroll tax to the German tax authorities each month. Payroll taxes in Germany include:
- Income tax
- Corporate tax
- Social (pension, healthcare, long-term care, unemployment) taxes
- Workers’ compensation
- Insolvency benefit contribution
- Benefits tax
Make sure you check that you and your employees are paying the right amount of each subtype of payroll tax every month. The German tax code is dense but extremely detailed when it comes to explaining the definitions of each type of payroll tax, who’s responsible for the contributions, and the rate they have to pay.
What are the late tax filing penalties in Germany?
Germany’s monthly and annual tax filing requirements make it easy for employers to accidentally miss a deadline. If you’re late, you’ll be charged a penalty of 0.25% of the total amount of taxes you owe; there’s a minimum of 25 euros per month. If you don’t rectify the issue, you can be charged as much as 10% (a maximum of 25,000 euros) of your total tax liability.
What is the average monthly wage for employees in Germany?
According to the Federal Statistical Office, in late 2021, the average monthly wage for employees in Germany was 4,101 euros.
What is the minimum wage in Germany?
Minimum wage in Germany in 2023 is 12 euros per hour.
How much does it cost to run payroll in Germany?
The exact amount it will cost your company to run payroll depends on a variety of factors, including the number of employees you have and which features you want your software to include.
Can I manually run payroll for employees in Germany?
Some small business owners decide they’d rather run payroll themselves in an attempt to cut down their overhead costs. However, running payroll is a time-consuming process, and the complexity of the German tax code and frequent tax filing requirements will require a serious investment of your resources. If you go it alone, there are potential risks to keep in mind, such as:
- Compliance: Running payroll manually in Germany, without using native global payroll software, puts you at risk of manual errors and omissions, which can result in hefty penalties. Rippling handles your compliance work for you, including calculating and deducting the correct amounts of each type of payroll tax.
- Security: Processing payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.
How do you pay independent contractors in Germany?
- First, ensure you’re correctly classifying this individual as an independent contractor (you can use Rippling’s free Worker Classification Analyzer).
- Next, agree on the payment terms with the contractor: the hourly or project rate, the payment cadence, and the method of payment (direct deposit, virtual wallet, etc.).
- Collect their payroll information, including their name, DOB, contact information, and bank account information.
- Use your chosen payroll software to pay the contractor in euros. With Rippling, you can pay German contractors in euros, in a single pay run, without waiting on transfers or conversion.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.