We won’t sugarcoat this: Learning how to do payroll in Germany can be a challenge. It has complex payroll and tax requirements and strict working hours and employment laws. But Germany is the largest economy in Europe, offering businesses prime opportunities to expand internationally.
A note about currency: Germany’s currency is the Euro. For comparison, we’ll note the equivalent US Dollar figure, where applicable, using the conversion amount relevant at the time of writing this article. The conversion rate used is 1 Euro = 1.09 USD. Make sure you check current conversion rates to ensure accurate calculations.
Use these seven steps as a guide on how to do payroll for German workers.
Step 1: Set Up Your Business as an Employer
The first thing to do in Germany is to get your Employer Identification Number (EIN). Any company paying employees in the country must register at the local tax office. Much like in the US, the German EIN is used to identify a business, ensuring that it remits the correct taxes for both the company and its employees. If you don’t want to go through the complicated process of getting a German EIN and recruiting workers, consider working with a local employer of record (EOR) that can manage your workforce.
We recommend Remote if you want a solid EOR partner with robust intellectual property protection solutions. It can handle global recruiting, payroll, and employee benefits for you. Plus, its compliance solutions can help you avoid worker misclassification issues.
Before hiring your first German employee, we need to discuss the differences between an employee and an independent contractor, as partnering with an independent contractor in Germany can be compelling to avoid the complicated process of setting up a business. However, much like in the US, it’s important to be aware of differences between employees and independent contractors in Germany.
In the German Commercial Code (Handelsgesetzbuch), it states that an independent contractor has the ability to determine when and how they work. In contrast, an employee is someone who does not have that freedom and takes instructions from their employer about how and when to work. However, this is somewhat vague, so the German Federal Labor Court (Bundesarbeitsgericht) has clarified that the distinction is better described as a dependent employee and an independent contractor. Under this model, if a worker is dependent on the company for when to work, how to work, where to work, and graded on performance, the worker is likely an employee. Much like the US, this requires an assessment of the details for each situation.
Why is this important? Independent contractors in Germany do not get access to mandatory benefits like regular employees. Companies are not required to withhold taxes from independent contractor payments or provide any paid time off or sick leave. If your worker is deemed to be an employee but you’ve been paying them as an independent contractor, your company will be subject to steep fines and penalties, including covering the worker’s Social Security contributions retroactively for up to 30 years. Business owners may also be held criminally liable, facing up to five years in prison.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process to follow so you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees?
- Type of employees: Full- vs part-time?
- Tracking time: How will you track employee hours, and how will it be reported to you? (Note that this is now a mandatory requirement per the German Federal Labor Court—more on this below.)
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
Under German law, the workweek cannot exceed 48 hours. The standard German workweek runs from Monday through Saturday and averages eight working hours daily. Most Germans work slightly less than 40 hours per week. With few exceptions, German law prohibits employees from working on Sundays or public holidays.
Employment contracts are not required by law but are common and used in almost every situation. These are long documents detailing the entire relationship between your company and employees, including whether overtime is allowed and how it’s compensated. If your employment contract states the employee works 40 hours per week, then they don’t have to agree to work more than that—and if they do, you don’t have to pay them more than their regular wage, unless the contract states otherwise.
To ensure your company processes payroll in Germany effectively, you should also have policies on:
- Benefits: What benefits are required, and how do you remit payments?
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees’ overtime, and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Step 3: Determine Salaries & Ensure Compliance
The cost of living in Germany is substantially less than in the US—currently about 35% less expensive. The average annual salary in Germany is about €47,700 ($51,863). When determining what you’re going to pay your German workers, consider their experience and skills, in addition to the cost of living. You may be able to save money by having German workers, but you’ll still need to pay competitive rates to ensure you attract and retain the best talent. You’ll also need to factor in the mandatory benefits that will increase your cost to employ workers in Germany.
Payroll & Employment Law Compliance
Germany has similar employment laws to the US, but some provide additional benefits to employees. You must understand these differences so that you remain compliant.
Germany has a federal minimum wage of €12.00 per hour. Higher minimum wages are often set by collective bargaining agreements and by employment contracts.
Germany bases the workweek on eight-hour days, six days per week. Germany has a maximum of 48 hours per workweek, even though most employees work around 40 hours per week.
Germany requires employers to provide at least 24 paid days off per year for employees that work 6-day work weeks, and 20 days for a 5-day work week. Be aware that employees under a collective bargaining agreement may have more days off required. Employers may offer unlimited PTO, but you must ensure that employees actually take off the minimum amount.
There are nine public holidays in Germany. Each state has additional holidays that vary, but they all follow the same nine national holidays.
- New Year’s Day
- Good Friday
- Easter Monday
- Labor Day (May 1)
- Ascension Day (39 days after Easter)
- Whit Monday (7th Monday after Easter)
- German Unity Day (Oct. 3)
- Christmas Day
- St. Stephen’s Day (Dec. 26)
While not required in Germany, the 13th month salary payment is customary. Most German workers expect their employer to provide this benefit. It’s generally paid as an additional salary in December.
Every employee who has been employed for at least four weeks is entitled to sick leave. For the first six weeks out of work, an employee will receive 100% of their salary, paid completely by the employer. From six weeks through 78 weeks, the employee will receive between 70% and 90% of their regular pay. This pay is provided through insurance that both the employer and employee pay into. The total 78 weeks is available every three years. For any illness lasting longer than three days, the employee must provide a written doctor’s note to their employer.
Maternity leave in Germany is protected, and workers are entitled to 14 weeks of paid maternity leave. Workers can receive an additional four weeks if the pregnancy or birth has complications.
Maternity leave is broken into prenatal and postnatal. Pregnant employees must take a minimum of six weeks off work before the expected due date for prenatal leave. Postnatal leave requires employees to take eight weeks off starting on their child’s birth date.
Employees receive the average of their net wages for the three months before prenatal leave starts. The public health insurance fund covers up to €13 per day. If the employee’s net wages are higher per day, the employer must cover the difference.
Paternity leave is available to German workers, but it’s classified under the more general parental leave (Elternzeit). Parental leave is 36 months and can be shared between parents. Any parental leave is unpaid, and employees must give their employer at least seven weeks’ notice.
Parents must take at least 12 months of parental leave within the first three years of their child’s birth. The remainder must be properly scheduled with their employer and can be taken at any point and for any duration up to the child’s seventh birthday.
German workers can receive up to 10 days of unpaid leave to care for close relatives. Under certain circumstances, employees may take up to six months of full or partial leave. Employers cannot terminate employees while out on caregiver leave.
In most cases, your employment agreement or your employee’s collective bargaining agreement will determine the termination process. The German Protection Against Dismissal Act protects employees once they’ve passed their initial employment period, usually six months.
One of the most important pieces of this law is the notice period required. When terminating an employee, you must give notice based on the following timelines, or those described in the employment contract or collective bargaining agreement:
Years of Service
Fewer than two years
Two to five years
Five to eight years
Eight to 10 years
10 to 12 years
12 to 15 years
Over 15 years
Severance payments are required when a company terminates an employee because of company restructuring or other operational changes. In this case, two weeks’ salary for each year of service is common.
Employers can terminate employees without the notice period described above. If you do, however, you’ll need to pay severance in an amount equal to the notice period.
A Note on Language
While the official language of Germany is German, roughly half of the population speaks English daily. The vast majority of the population also speaks some level of English, even if they don’t use it daily. Partnering with a German worker is possible if you don’t speak a word of German. However, knowing at least some German will help improve your relationship and ensure there’s clarity on your terms.
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your German employees. This often includes:
- Employee’s full name
- Employee’s permanent address in Germany
- Documents proving the employee’s identity
- Bank account information
- Employment contract
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, it often uses paper time sheets. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve timesheets before they get to your payroll team for processing.
Compliance Note: Germany’s Federal Labor Court recently ruled that employers must record working hours for each employee. The court specifically said that employers must set up a policy and process for recording working time which must record the beginning and end of working hours each day, plus include any break times, overtime, and time off. Employers can require employees to be the ones to record their time, and the recording can occur manually or electronically.
Once payroll gets the time sheets, they should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved. Based on the recent Federal Labor Court ruling, it’s also important to regularly audit your time recording process to ensure accuracy.
When calculating your German payroll, you’ll need to account for tax and payroll deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from German government agencies.
Type of Payroll Deduction
Long-term Care Insurance
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Here are the current tax brackets in Germany.
Income Tax Withholding
Up to €10,347
€10,348 to €61,971
€61,972 to €277,825
For reference, the top tax bracket in the US is about $302,000. There are no local or state income taxes in Germany.
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule that you’ve previously outlined. Luckily, you do not need a German bank account to pay employees in Germany.
Looking for a US bank account that can handle international transactions? Check out our guide to the best banks for small businesses for some ideas.
If you have a single worker or just a handful of employees in Germany, you may want to outsource your payroll to a local provider. It will be licensed and familiar with German payroll laws and processes. While you’ll pay a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your German workforce, you may want to do payroll in-house. Make sure you or your payroll team are familiar with German payroll laws and deductions to ensure you’re making the right deductions from employees’ paychecks and sending tax payments to the right German government authorities.
Step 7: Document & Store Your Payroll Records
Payroll records in Germany must be kept for at least six years. Your payroll records should include, at a minimum:
- The dates of employment and rate of pay
- The frequency of pay
- Total regular and overtime pay
- Net employee pay
Based on the Federal Labor Court’s ruling, it’s also a good idea to retain your time sheets for the same period of time. These records could be inspected, so having everything is better than not having enough.
Doing payroll in Germany for the first time is slightly more challenging than in other countries. There are a few more hoops to jump through and several mandatory deductions. However, with similar business practices to the US and most Germans speaking at least some English, expanding your business into Germany can be a good strategic decision.