What is the tax payable on?
The income tax payable on the wages and salaries of employees is collected through deduction by employers (and is then referred to as wages tax). This deduction at source usually serves to conclude the taxation procedure, unless the employee is assessed for income tax after the end of the calendar year or unless the employer is required to carry out an annual adjustment of wages tax paid. The employer is obliged to deduct wages tax from each wage or salary payment.
In order to withhold an appropriate amount of wages tax for each individual employee, employers need certain types of information about employees, such as their tax class, any allowances, and any membership in a religious community that requires withholding of church tax. Starting in 2013, the revenue administration will store this information in a database and make it available to employers electronically upon request. This information, referred to in German as “electronic parameters for withholding wages tax” (abbreviated as “ELStAM” in German), serves as the basis for the new electronic ELStAM procedure that replaces wages tax cards, which were made of paper and last issued in 2010.
In order to register an employee with the revenue administration and gain access to the employee’s ELStAM information, employers must submit the employee’s date of birth and tax identification number to the revenue authorities. The revenue authorities then check whether the employer is authorized to access the employee’s ELStAM information and, if so, set up the ELStAM procedure. The employer then downloads the information, adds it to the employee’s wages account, and uses this information for the duration of the employee’s tenure. If any of these parameters change, the revenue authorities make the new information available to the employer. The electronic parameters used to withhold wages tax must appear on employees’ payslips.
The employer pays over the wages tax for all employees in a single sum to the company’s local tax office on certain prearranged dates (monthly, quarterly or annually). To do this, the employer submits a self-assessed wages tax return (usually electronically) to the tax office. This merely states the total amount of wages tax deducted at source; there is no requirement for it to contain further information about the employees for whom the tax has been deducted.
In certain circumstances employees are required by law to submit an income tax return. This is particularly true of cases in which:
- the positive sum of taxable income on which no wages tax has been paid, or the positive sum of income and benefits that are not themselves taxed but influence the rate of tax payable (e.g., benefits for unemployment, sickness and short-time work including seasonal short-time work, as well as parental benefit, supplementary amounts in the case of partial retirement and foreign income) amounts to more than €410
- the tax office has calculated a tax-free allowance and added this as an ELStAM parameter, if the amount of wages or salary exceeds the threshold of €10,700 for individual filers or €20,200 for joint filers; however, tax assessment is not mandatory if the tax office has merely entered the fixed allowance for disabled persons, surviving dependents and care-givers, or the tax relief for single parents in special cases, or has only amended the number of child tax-free allowances available
- the employee received wages or a salary from more than one
- employer at the same time
- spouses/registered partners assessed jointly for tax both received wages or a salary and one was taxed in class V or VI, or both opted for tax class IV using a special factor, for part or all of the assessment period
- the provisions of section 34 of the Income Tax Act serving to reduce the progressive effect have been applied when deducting wages tax
Who is responsible for the tax?
Liability for wages tax attaches to the employee. However, the employer is responsible for withholding and remitting the tax in an orderly manner. If the tax office determines on examination that insufficient wages tax has been withheld, it may enforce payment of the amount still due, collecting it either from the employer or directly from the employee.
Every resident employer is obliged by law to withhold wages tax and to remit it to the tax office. Particular characteristics indicative of a resident employer are that it pays wages or salaries and has its residence, its habitual abode, its place of management, its headquarters, a permanent establishment or a permanent representative in Germany.
Wages tax must be withheld for employees who:
- are subject to unlimited tax liability in Germany (section 1 subsections (1) to (3) of the Income Tax Act)
- are subject only to limited tax liability in Germany – that is, they are resident or have an habitual abode in another country – and receive income as described in section 49 subsection (1) number 4 of the Income Tax Act – for example, if they are employed in Germany (i.e., cross-border commuters) or if their work serves or has served a purpose in Germany
- receive wages or a salary from German public funds
How much is the tax?
Wages tax is withheld from an employee’s wage or salary (classed as income from employment). The wage or salary is defined as all the income accruing to an employee from a current or former contract of employment. This includes not only cash payments, but payments in kind as well (e.g., room and board) and other benefits (for instance, the private use of a company car). It is immaterial whether such income is recurrent or non-recurrent, or whether the employee has a legal right to it; the name given to the income and the form in which it is granted are also of no consequence.
Wages tax on employment income is calculated to correspond to the income tax an employee would pay if he or she derived income exclusively from employment.
To ensure that the actual amount of wages tax deducted is as appropriate as possible, employees are put into different tax classes according to family status. Furthermore, all the statutory tax-free allowances and fixed allowances are taken into account when wages tax is deducted. These are:
- the standard allowance for employees of €1,000 a year (for tax classes I to IV)
- the standard allowance for special expenses of €36 a year (for tax classes I to IV)
- the flat-rate allowance for provident expenses (which is taken into account for all tax classes and has components for pension insurance, statutory health and long-term care insurance, and private insurance for basic health care and compulsory long-term care)
- tax relief of €1,308 a year for single parents (for tax class II)
Employees are categorized into the individual tax classes using the following criteria:
Class I: single and divorced employees, as well as married employees and employees in registered partnerships whose spouse/partner lives outside of Europe or who are permanently separated from their spouse/partner. Widowed employees also belong to class I unless they meet the criteria for class III.
Class II: employees listed under class I if they are entitled to relief for single parents. Such relief is available to employees who are single parents with at least one child living in their household, provided that the employee is entitled to child benefit or a tax-free allowance in respect of the child, and that the child is registered as having a primary or secondary residence with the employee.
Class III: married employees and employees in registered partnerships subject to unlimited income tax liability, who are not permanently separated, if
- the employee’s spouse/partner does not receive income from employment
- the employee’s spouse/partner has been assigned to class V upon application by the couple
- the employee is widowed (in this case, Class III applies only for the calendar year following the year of the spouse’s death
Class IV: married employees and employees in registered partnerships subject to unlimited income tax liability, who are not permanently separated and who both receive income from employment.
Class V: married employees and employees in registered partnerships subject to unlimited tax liability, who are not permanently separated and whose spouse/partner has been assigned to class III upon application.
Class VI: employees who receive a wage or salary from several employers at the same time.
Who collects the tax?
The revenue authorities of the Länder monitor the withholding and remittance of wages tax by employers. The Federation is entitled to 42.5% of the revenue, as are the Länder. The municipalities receive 15%.