How can I withhold income tax

Paying wage tax correctly to the tax office - what you have to pay attention to

What is wage tax anyway?

The wage tax should probably be known to every employee in Germany, because it is only applied to income from non-self-employed work - this includes both the wages themselves and pecuniary benefits. The tax liability of each employee is deducted directly from the gross wage or withheld directly by the employer, who then pays the wage tax to the tax office. Employees are assigned one of six tax brackets for calculating wage tax - depending on income and marital status, other wage tax rates are taken into account in order to exclude any preferential treatment or disadvantage for the taxpayer.

The wage tax is converted to income tax at the end of the year - this is done within the framework of the (wage) tax return, which every employee can submit voluntarily. The wage tax can therefore also be described as an advance payment on the income tax. Together with the social security amounts, the solidarity surcharge and, if applicable, the church tax, the wage tax for employees forms the difference between gross and net.

Pay wage tax for employees

Everyone who employs employees has to pay this income tax to the tax office. Registration via the electronic tax portal (Elster) is mandatory for entrepreneurs. The wage tax must be registered and paid to the tax office responsible for your own company, not to the tax office of the employee you hired.

Especially founders who are dealing with the subject of wage tax for the first time must note that wage tax is not only due on cash benefits, but also on so-called pecuniary benefits or other benefits in kind that the employee uses. Typical examples are the private use of a company car or meal vouchers. In order to avoid unnecessary mistakes right from the start, it can be helpful to turn to specialized tax consultants for payroll accounting.

How do you pay the wage tax in detail?

As an employer, each of your employees has to withhold the corresponding wage tax amount from their gross wages. This is paid in one sum to the tax office responsible for your company on certain due dates. To do this, you must regularly and electronically send a Income tax registration in which you explain the relevant amounts and their composition (wage tax, solidarity surcharge and, if applicable, church tax) - the old paper wage tax card has now been replaced by a mandatory electronic procedure. The system is called in official German Electronic income tax deduction characteristics (ELStAM).

How does the ELStAM process work?

The former paper income tax card was replaced by the online ELStAM procedure in 2014. The following employee data (with the exception of mini-jobbers) are required so that employers can call up all information relevant to income tax from the tax authorities:

  • StID number
  • Date of birth
  • Date of start of employment
  • Indication of whether there is a further employment relationship

Access to ELSTER and a wage program that ELStAM supports are required.

If you do not leave the accounting of wage tax to the tax advisor, you need a program for payroll accounting that supports ELStAM or has a corresponding interface. The common programs for accounting have already integrated what is known as income tax reporting.

You then have to register once as an employer with ELStAM for the income tax registration. Later on, you will also have to register every employee you hire with ELStAM in order to be able to correctly deduct their income tax.

How is wage tax calculated?

The wage tax of an employee is calculated from different characteristics, the so-called Wage tax deduction features. These include:

  • Tax class
  • Child allowances
  • Tax allowance
  • Additional amount
  • Contributions to private health and long-term care insurance
  • Information on avoiding double taxation
  • Denomination or church affiliation (since the employer also withholds church tax)

In addition, every employer needs the unique identification number of its employee in order to pay the wage tax. Every person subject to tax in Germany has such a number. For employees who do not have this number, for example because they do not have to report in Germany or who have lost it, the tax office can give the company a certificate for the deduction of wage tax.

Payment deadlines: When is wage tax due?

The wage tax, like many other taxes (e.g. sales tax), is to be paid no later than the 10th of the month following the due date.

Depending on how high the company's registered wage tax is, you have to pay wage tax for your employees monthly, quarterly or even annually: If you paid less than 4,000 euros in wage tax for your employees in the previous year, you can pay wage tax once a quarter; If you paid less than 1,000 euros in the previous year, you can only make the payment once a year. The less wage tax you have to pay, the longer the payment interval in which you have to pay wage tax.

Especially with longer intervals, however, you have to be careful - as with all tax issues (especially with sales tax) - not to run into liquidity problems when the taxes are actually due. So, especially if you only pay employee income tax once a year or quarter, you should put the money aside during the year.

An overview of income tax brackets

Based on the aspects mentioned above, employees are assigned to one of six tax brackets:

Tax classTo be classified ...particularities
I.Singles, unmarried people (even after divorce or the death of a partner), unmarried couples living togetherBasic tax allowance, employee flat-rate, special expenses flat-rate
IISingle parent workers

Basic allowance, flat-rate employee amount, special expenses flat-rate amount, relief amount for single parents

IIIMarried employees whose partner has no or a significantly lower income; married employees whose partner is classified in income tax class V.Basic tax allowance, employee flat-rate, special expenses flat-rate
IVMarried couples (or registered partnerships) with roughly the same incomeBasic allowance, flat-rate employee amount, flat-rate special expenses
VMarried workers whose partner has a significantly higher income; married employees whose partner is classified in income tax class IIICustomer lump sum, special expenses lump sum
VIWorkers with multiple jobs

Special features of the income tax brackets

  • Income tax class I: The common wage tax bracket for single employees.
  • Income tax class II: Single parents are classified in this income tax bracket after the divorce / death of their partner, provided that no other potential legal guardian lives in the household. Persons classified here can also benefit from the relief amount; However, this must first be requested from the relevant tax office.
  • Income tax class III: This is where married people are classified whose income is different (around 60/40), with tax class III being selected for the partner who has the higher income.
  • Income tax class IV: Married couples who earn roughly the same amount and who would have a tax disadvantage due to the III / V combination are classified in this tax bracket. Married couples who want to switch from the combination IV / IV to III / V can also submit an application for subclass IV with a factor in order to avoid back tax payments that result from the switch.
  • Income tax class V: Married people are classified here, whose partner is assigned to tax class III, i.e. the higher income.
  • Income tax class VI: The most common tax bracket for employees who do multiple jobs. This is where the (second) job with the lower income is classified in order to keep tax contributions as low as possible, since tax class VI is the tax class with the highest deductions and the lowest tax allowances.

Allowances and lump sums for income tax

Employees in tax classes I to IV also benefit from the basic tax allowance of 9,744 euros for 2021; the special expenses lump sum of 36 euros and the employee lump sum of 1,000 euros can also be used by almost all tax brackets (I to V).

How is wage tax calculated?

The Federal Ministry of Finance (BMF) issues updated wage tax tables every year to calculate the correct amount of wage tax. Based on the wage tax deduction characteristics, these tables calculate how much wage tax the founder has to withhold from his employees and pay it to the tax office. Basically, the current wage tax table is integrated in the common programs for payroll accounting. In this way, the correct wage tax is automatically calculated with the characteristics you have saved. If you do not want to use an income tax program, you can also find freely available income tax calculators on the Internet.

When using income tax programs or calculators, you should definitely bear in mind that you are responsible for possible errors in the calculation and that, in case of doubt, you cannot shift the responsibility to a faulty or incomplete program. For this reason, it is advisable to use reliable providers for the calculation of wage tax.

Leave the calculation of wage tax or the entire wage accounting to an experienced tax advisor. This saves you time and nerves, and you can be sure that your taxes are correct.

Outsource payroll accounting now

Income tax for the self-employed: what should be considered?

The calculation of wage tax for employees may seem complex at a glance at the wage tax tables, but in principle it follows relatively simple rules. But what about the income tax for the founder himself?

It is important that you register your self-employment no later than one month after starting your job. You will then receive a form for tax registration from the tax office; alternatively, you can also report to the tax office yourself to avoid possible delays. You should take enough time to fill out the form and, if in doubt, seek the advice of a specialist advisor, as the information can have a significant impact on your tax burden.

It makes a difference, for example, whether the tax office classifies the start-up as a freelance activity or as a commercial enterprise. In the latter case, you will have to pay trade tax from a profit of over 24,500 euros - the trade tax exemption applies to all income up to this amount. Sole proprietorships and partners in partnerships (for an overview of the various legal forms) do not have to pay income tax if the company generates losses. You can read more about income tax for the self-employed here.

Income tax as managing director of a corporation

Most founders start their own business with a sole proprietorship or a civil law partnership (GbR). With strong growth of the company, however, a company with limited liability (GmbH) often makes more sense later. Then there is also the question of wage tax for the founder, who is then not only a partner but also a managing director - that is Shareholder-managing director - the corporation is.

First of all, however, the tax status of the managing partner must be determined. Is he the controlling partner (more than 50 percent of the shares), can he get his way and is not authorized to issue instructions? Then the partner-managing director is considered an entrepreneur, also from a tax point of view. However, if these points do not apply, the managing director is to be treated as a salaried employee with regard to wage tax. This means that the salary and other remuneration must be offset against tax law and paid as wage tax or other deductions. In case of doubt, the clearing house's status determination procedure can help to assess the situation and act correctly from a tax point of view.

Caution is advised with the amount of the remuneration of the shareholder-managing director. It is to be selected in such a way that it appears appropriate to the workload and the performance in the event of a neutral examination. So the question is: Would the founder also pay this wage to an externally employed managing director? If the founder, as a shareholder-managing director, allows himself a significantly higher remuneration, there is probably a hidden profit distribution. This is punished by the tax authorities; if it is discovered, the managing director has to pay the supposedly "saved" taxes.

Profit distributions are tax-relevant for the company because - as the name suggests - they derive from the company's profit and should not be accounted for as regular, tax-reducing costs. This is also relevant for the partner-managing director, since profit distributions, i.e. capital income, are taxed differently than wages.

As a partner-managing director, you are doubly liable in these cases: On the one hand, as a private person, you will get into trouble with the tax office if you suspect that you are incorrectly declaring income (e.g. capital income as a salary component). On the other hand, as managing director, you are liable for the correct reporting and payment of wage tax - including your own. This is also checked by the tax office as part of the tax audit.

Payroll and payroll

The wage tax is one aspect of the tax obligations with regard to employees. We have put together further details on payroll accounting in separate chapters.

Which payroll program suits you and your company? We compared 8 software.

Compare wage software

Outsource payroll accounting

If creating the payroll yourself is too complicated for you or if you want to use your time for something better - e.g. B. for your core business - you also have the option of completely outsourcing your payroll accounting. For this purpose, we offer you an offer from a tax advisor that is tailored to your company. Simply answer a few questions about your employees and your current payroll accounting situation - we will put you in touch with a specialized tax advisor who will put together the perfect payroll accounting package for you at start-up prices.

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Author: Für-Grü editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Grü for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Grü, he advised listed companies in the field of financial market communication.