German Tax System

All residents who live in Germany for more than 6 consecutive months are liable to pay income tax. Anyone who is getting paid; be it a daily wage or a monthly salary, has to pay an income tax. When the annual income in Germany is above €8,820 for singles and €17,640 for a family of two (either residents or Non-residents of Germany) one is obliged to pay income tax.

If you are new to Germany, one of the crucial first steps (other than registering your address, insurance, etc) includes registering at the Finanzamt for a Steurnummer and Tax class (Lohnsteuerklasse or Steuerklassen).

Income Tax (Lohnsteuer)

Depending on the Tax class, the taxation is calculated. The six types of taxes classes are categorized below.

Class I –single (unmarried) people. If you are single, are divorced or widowed, you come under the Tax class I

Class II – Single Parent .Single parents living with children and getting child allowance (kindergeld) from the government come under Tax class- II

Class III – Married and Civil partners. Married people or civil partners living together come under Tax class III. If both the partners work, the person who earns more money chooses Tax class III and the other spouse choose Tax class V.

Class IV – Married couples. If you are married and do not want to select between Tax classes III and V, both partners can select Tax class 4, especially when both partners are equally contributing towards the family income.

Class V - Married and Civil partners, When one of the spouse are classified under Tax Class III, the other’s select Tax class V

Class VI – It is entitled for a person who’s having more than one Job.

The employer deducts the income tax from your Gross salary and transfers to the Tax office on your behalf. After detecting the Tax and Social security contributions (health insurance, nursing care, pension, unemployment and accident insurance), the Net salary is transferred to the employee bank account and the Salary slip (Entgeldabrechnung) is sent out as a detailed reference.

The Annual Tax Return (Steuererklärung)

Every person paying a German Income tax must file an income tax return annually with the local tax office (Finanzamt). The tax consultants can help you with the tax filing and the detailed advice can be given by them regarding the tax claims.

For the Calendar year Jan to Dec, the annual tax return filing can be done before 31st of May in the following year. In case of a missed Tax filing, an extension is also possible. It is however essential to be noted that there are a few criteria in which case the person is obligated to file their Income tax without fail.

After filing, the tax statements are reviewed by the tax authorities and refunds are made when eligible. This process might take a few months, especially considering public and summer holiday. Once the review is complete, an assessment notice is sent out.

Social Insurance (Sozialversicherung)

Every person is entitled to get Social Security card/Social Security number. This number has to be kept safe. Social security contributions are generally paid 50 percent by the employer and the rest 50 percent by the employee. The major components of the Social Security contributions from a person’s salary include:

Health insurance (Krankenversicherung): Health insurance is mandatory in Germany. There are Public and Private health insurance providers and the coverage depends accordingly. One can register with one of these providers as Single or family at the earliest on arrival in Germany.

Nursing care insurance (Pflegeversicherung): This insurance is to support during old age and in case of disability.

Pension insurance (Rentenversicherung): Contributions towards Pension is automatically deducted from your salary. And if you opt for higher pension coverage, a Voluntary Pension contribution can also be made (VBL). After retirement, a regular Pension is paid according to the number of years worked and the pension contribution accumulated.

Unemployment insurance (Arbeitslosenversicherung): This insurance covers only during unemployment considering most importantly the number of years a person has contributed to the insurance (which should not be less than 12 months) and the net family income (for married couples). In other words (considering a single person) the more number of years one is employed, the longer he/she is entitled to receive unemployment benefits. The unemployment benefit includes basic financial support for sustenance and support from Federal Employment Agency in finding the next job.

Accident insurance: This insurance is payed only by the employer to cover any occupational hazards/accidents.

Below is the Employer-Employee contribution cut offs revised in 2017.

Other than the Income tax and Social Security, two more components that are deducted automatically from the Gross income are;

• Solidarity surcharge (Solidaritätszuschlag): An additional fee on Income Tax levied to cover the costs of German Unification (The existence of this surcharge has been highly debated)   
• Church Tax (Kirchensteuer): This is optional and religiously oriented. Any person who attends the Church is entitled to pay this tax.