Income Tax in Germany: Rules and Obligations

Income taxation in Germany applies to both German citizens and foreign residents living in the country. This type of tax is divided into two main categories: Lohnsteuer and Einkommensteuer. Lohnsteuer applies to employees, while Einkommensteuer applies to freelancers, self-employed individuals and professionals like lawyers and doctors with their own practice.

Various factors are taken into account when calculating the tax amount, such as tax class, tax deductions, social security contributions, solidarity tax and church tax. At the end of the year, the final amounts may be adjusted depending on whether taxes have been underpaid or overpaid.

Income tax in Germany is payable by a tax resident, who is taxed on all his or her income, even if it is earned outside Germany. A foreign citizen who holds a residence permit (HGV) and lives in Germany for more than 183 days per year automatically becomes a tax resident. Non-resident persons only pay tax on income earned within Germany.

Income tax returns of salaried employees are filed with the tax authority by the employer. Other taxpayers, such as individual entrepreneurs, file their own declarations electronically.

The obligation to file a tax return arises in the following cases:

Non-employment employment.
Receiving income outside of Germany.
Divorce if the taxpayer or his or her former spouse remarried in the same year.
Receiving social benefits such as maternity, unemployment or child benefits.
To request tax deductions.
At the request of the IRS.

German citizens and residents file annual tax returns with their local tax office. For details on which tax office to contact, you can contact the municipality where you are registered.

Tax obligations in Germany include both taxable and non-taxable types of income. Let's take a look at which incomes are taxable and which are exempt from taxation.

The following types of income are not subject to income tax in Germany:

Non-taxable minimum:German tax residents do not pay income tax on the part of their income that does not exceed the non-taxable minimum. For 2021, this minimum is €9,744 per year for a single person and €18,816 per year for a married couple.
Income not subject to tax:This includes unemployment benefits, maternity benefits, and income that is already taxed in another country under a double tax treaty.

Income that is generally subject to income tax in Germany includes:

Salary for Hire:This is income derived from employment and it is taxable.
Income from investments and savings:This includes interest, dividends and capital gains. The tax on dividends received from any country is 25%, with an additional solidarity surcharge of 5.5%. The standard tax deduction for residents is €800 per year for a single person and €1,600 per year for a couple.
Income from business and self-employment:Self-employed individuals and freelancers are liable to pay tax on their income.
Income from the sale or rental of real estate:Income tax is withheld on the rental or sale of real estate, unless otherwise provided for in a double tax treaty.
License fees, private transactions, alimony or annuities:These incomes are also taxable.
Benefits and Rewards:Taxes are withheld on benefits and gratuities.

Also, it is important to note that the following mandatory deductions are withheld from an employee's paycheck in Germany:

Income tax (Einkommensteuer / Lohnsteuer):The income tax rate varies from 14% to 45%. Income tax is assessed on the portion of income that exceeds the non-taxable minimum.
Solidarity tax (Solidaritätszuschlag):This tax amounts to 5.5% of the income tax. From 2021, only high-income earners pay the solidarity surcharge.
Church tax (Kirchensteuer):If you belong to a church, you will have to pay church tax, which is 8% in Bavaria and Baden-Württemberg, and 9% in the other federal states.
Health Insurance:Health insurance contributions are 14.6%, split between employee and employer.
Retirement Insurance:Pension contributions are 18.6%, also divided equally between employee and employer.
Unemployment Insurance:This contribution is 2.4% and is also split between the employee and the employer.
Long-term care insurance:Pflegeversicherung insurance is 3% and is also shared between the employee and the employer.

The total contributions to these social funds amount to about 20% of the employee's salary and are withheld from the employee's paycheck.

Income tax rates in Germany

Germany has a progressive income tax scale, which means that the tax rate depends on the taxpayer's income level and increases as income increases.

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Here is the income tax rate scale for German residents:

Income less than €9,744 per year - tax rate 0%.
Income between €9,744 and €14,754 per year - tax rate varies between 14% and 24%.
Income between €14,754 and €57,919 per year - tax rate varies between 24% and 42%.
Income between €57,919 and €274,613 per year - tax rate 42%.
Income over €274,613 per year - tax rate 45%.

Rates are applied to the difference between the amount of income and the non-taxable minimum. Therefore, only the part of income that exceeds the non-taxable minimum is taxable.

Tax classes in Germany

There are several tax classes in Germany, which are determined by the taxpayer's marital status. Here are some of the tax classes:

Class 1 (Lohnsteuerklasse I):For single persons, divorced or widow(er)s, or for taxpayers whose spouse lives in another country. Also used by default in the first year of employment in Germany.
Class 2 (Lohnsteuerklasse II):For single parents living with children.
Class 3 (Lohnsteuerklasse III):For a spouse who earns a low income or is not working.
Class 4 (Lohnsteuerklasse IV):For married couples with equal incomes.
Class 5 (Lohnsteuerklasse V):For the husband or wife of a spouse who is assigned Class 3.
Class 6 (Lohnsteuerklasse VI):Used if the taxpayer has a second job or special tax circumstances.

It's important to remember that your choice of tax class affects the amount of tax deductions and your obligations to the IRS.

Deadlines for paying income tax on wages in Germany

In Germany, tax returns are usually sent and paid after the end of the tax year, which coincides with the calendar year. The return is usually sent to the client by December 31 and must be paid by July 31 of the following year. For example, the return for 2020 must be sent and paid by July 31, 2021.

After you file your return, the IRS will send a tax assessment that contains information about tax credits and additional fees. You will then be given time to pay the additional fees, if applicable.

Tax deductions

There are various tax deductions available in Germany. For example:

Spouses raising children can claim a tax deduction of €8,388 for each child (for 2021). This amount is divided in half if the parents do not live together or are divorced.
There are also education deductions if the child attends a private German school. The deduction is 30% of the tuition fees.
Deductions may also be available for certain expenses such as moving expenses, professional equipment, and other expenses that were not reimbursed by the employer.
Deductions are also available for insurance premiums, including health insurance, pension contributions, and unemployment contributions.

Penalties for late payment of taxes

There are penalties for late payment of taxes in Germany. If a tax return is not filed on time, a penalty is assessed for each month of delay. This penalty is 0.25% of the assessed tax for each month of delay. If the delay in payment continues, the penalty increases to 1% of the unpaid amount for each month of delay.