What exactly is wage tax (Lohnsteuer), how is it calculated and how can the net wage be optimised? In this article, you’ll find basic information about wage taxes in Germany, how to report them, wage tax classes, wage tax compensation and net wage optimisation.
Wage tax is an advance on income tax (Einkommensteuer) paid by the employer for his or her employee for payment and non-cash benefits (geldwerte Vorteile). The wage tax is thus a direct tax levied on income from employment. The wage tax, together with the social security contributions (Sozialversicherungsbeiträgen), is the difference between gross and net wages and is calculated using various characteristics that now have to be electronically reported in the ELStAM (electronic wage tax deductions) system.
The following characteristics of an employee are relevant for wage tax:
- Tax class (Steuerklasse)
- Child allowances (Kinderfreibeträge)
- Tax allowance and additional amount
- Contributions for private health and long-term care insurance (private Kranken- und Pflegeversicherung)
- Church affiliation (Kirchenzugehörigkeit)
The employer is always liable for the correct payment of wage tax and is responsible for underpaid wage tax. The rate of wage tax is progressive, which means that the more the employee earns, the higher the percentage of wage tax. However, if he or she only earns a minimum, this remuneration is exempt from wage tax.
The employer calculates the wage tax according to the electronic income tax card (elektronische Lohnsteuerkarte). Personal characteristics such as marital status are recorded here and are taken into account when calculating the wage tax.
The wage tax amounts payable are deducted by the employer in advance, tax-deductible allowances or income-related expenses are only claimed retrospectively in the so-called wage tax compensation (Lohnsteuerjahresausgleich). For this, the employee simply turns in his or her wage tax return for the previous year. The paid wage tax can be partially reclaimed, because the annual tax amount is calculated through the tax declaration so that it corresponds to the income tax for the wages received. Further information on the income tax return follows in the section below.
5.5 per cent of the wage tax will be deducted by the employer as a solidarity surcharge – but only if the monthly wage tax does not exceed 81 euros. Depending on the state and religious affiliation, eight or nine per cent still incur church tax, which is also deducted from wage tax.
The most important tax types for entrepreneurs (articles are all in German):
Lohnsteuerklassen (wage tax classes)
As already mentioned, there are different wage tax classes (Lohnsteuerklassen) for calculating the wage tax. With the wage tax classes, marital status determines how the deduction of the wage tax is structured.
|Tax class||Applicable for:|
|I||Single, (permanently) separated, divorced, widowed persons|
|III||Spouse or civil partner who are sole earners or who have a significantly higher income (partner in tax class V)|
|IV||Spouse or civil partner with similar income|
|V||Spouse or civil partner with lower income (partner in tax class III)|
|VI||Second job or several part-time jobs|
Lohnsteuerklasse I (wage tax class I)
The wage tax class I is the common wage tax class for singles and singles in an employment relationship. It covers all employees who are fully liable for income tax. Wage tax class I also applies for couples who live in an unregistered partnership. Divorced, permanently separated or widowed persons are also assigned to the wage tax class I.
Lohnsteuerklasse II (wage tax class II)
This tax class applies to persons who are single parents after a separation, divorce or the death of the partner and with no other guardian living in the household. For single parents, wage tax class II offers tax relief, since they can use an additional allowance for themselves. The application for tax allowances must be made separately by the single parent at the tax office. As soon as the reason for the allowance is eliminated, for example through a new partnership, it will be necessary to change back to another tax class.
Lohnsteuerklasse III (wage tax class III)
This wage tax class combines married couples and persons in civil partnerships. In this case, wage tax class III applies to a partner, provided that the other person is not employed, self-employed or in tax class V. Tax class III continues for the current calendar year should a separation, divorce or the death of the partner occur. In the following year, however, it must be changed. Wage tax class III is suitable for the partner who has the higher income (60/40 distribution). The combination of wage tax classes III and V is popular with married couples who both work and in which one partner earns more than the other.
Lohnsteuerklasse IV (wage tax class IV)
This wage tax code covers married couples who earn about the same amount – the classification is done automatically after marriage. The child tax credit in tax class IV is shared between the two partners. In tax class IV, there is also the subclass IV with factor. This tax class can be used on request. Tax class IV with factor can be used by couples who have different levels of income, but want to avoid back taxes resulting from a change to the combination of tax classes III/V.
Lohnsteuerklasse V (wage tax V)
Wage tax class V is only possible for married partners – and only in combination with the tax class III of the spouse. The allowances are reserved here for the partner in tax class III. The shared income of the partners means that there is more money for a monthly direct wage tax deduction than for the wage tax combination IV/IV. However, no tax savings can be expected with the wage tax compensation or the tax return, but rather a back payment.
Lohnsteuerklasse VI (wage tax VI)
Employees who have multiple jobs are placed in wage tax class VI. This tax class is the one with the lowest tax credits and the highest deductions; Tax class VI does not include a basic or child allowance. In this tax class, the second job should be classified with the lower income.
Changing wage tax classes: What should be considered?
There are several reasons why someone may want to change the tax code or a change may even be mandatory. In addition to marriage, divorce or separation, the birth of a child or a salary jump for a partner may all be reasons why the tax class is no longer optimal.
It should be noted that in principle only married couples and registered partners have the freedom of choice regarding the tax code; there are three different tax class combinations possible for them. As a rule, all other taxable persons do not have the opportunity to change their tax class.
Changing wage tax classes: Married couples
After marrying, couples are automatically assigned to tax class IV. This is always favourable if both partners have about the same amount of income. However, if the incomes are very different, the combination of classes III/V may be more useful. The possibility of IV/IV with factor is also available if the couple wants to avoid long-term back taxes. Married couples can use the tax class change form to apply for a change of tax class at the tax office.
Payroll tax change: Singles with and without children
Single persons without children are in most cases assigned to tax class I, singles with children mostly in tax class II. A change is not possible here, except of course in the event of marriage and/or new children.
Changing wage tax classes: Registered civil partnerships
Registered civil partnerships (Eingetragene Lebenspartnerschaft) were for a long time not a factor in changing the tax class and this often left the partners in tax class I or II, only in certain circumstances, a change in III/V was possible. However, registered civil partners are equated with married couples and the tax code combinations of IV/IV, III/V and IV/IV with factor are possible as well as the change between them.
Registered civil partners must also use the relevant form to change the tax class and submit it to the tax office.
Want to experience the freedom that outsourcing Lohnabrechnung can give you?
Try our payroll services free-of-charge for one month and see for yourself!
For employers: Reporting wage tax
The wage tax has to be reported and paid by the employer at the workplace office (Betriebsstättenamt) – at the latest by the tenth day of the following month. The application is due when the employer has paid the employees, but the offices approve the said ten-day extension. Depending on the amount of wage tax deducted in the previous year, wage tax may also be applied for and paid off for a larger period:
- not more than € 1,080: calendar year
- € 1,080 to € 5,000: quarter
- from € 5,000: month
Since 2005 wage tax registration is only possible electronically (via the ELSTER portal) and must be done with the officially provided form.
As part of the employment tax declaration, each employee receives his own wage tax number. This can be found later on all tax statements and in the case of back taxes also on the account statements.
Lump sums and flat rates
To find out which flat rates and lump sums employers and self-employed can use, see this article. Which allowances workers can benefit from in addition to the basic allowance, which reduce the wage tax:
|Basic tax-free allowance (Grundfreibetrag)||€9,000||€9,000||€9,000||€9,000||–||–|
|Employee lump sum (Arbeitnehmer-Pauschbetrag)||€1,000||€1,000||€1,000||€1,000||€1,000||–|
|Special expenses for lump sums |
|Relief amount for single parents (Entlastungsbetrag für Alleinerziehende)||–||€1,908||–||–||–||–|
Basic tax-free allowance (Grundfreibetrag)
In the case of wage tax, employees can benefit from a basic tax-free allowance (Grundfreibetrag). This will be increased from € 9,000 to 9,168 in 2019 for single persons and from € 18,226 to 18,816 for spouses. From this height, the wage tax rate starts at 14 per cent, the income that exceeds this value is thus taxed at 14 per cent. Taxation increases progressively and extends to the top tax rate of 42 per cent with an income starting at € 55,961. From an income of € 265,327 (2019), the wealth tax (Reichensteuer) and the wages are taxed at a whopping 45 per cent.
Due to the fact that employees in tax class VI who work in several employment relationships, often do not exhaust the basic allowance due to the usually low pay, the employer adds the so-called additional amount Hinzurechnungsbetrag. This prevents the remuneration from the second and/or third employment being fully taxed starting with the first euro and resulting in an inappropriately high wage tax payment.
Employee lump sums (Arbeitnehmerpauschbetrag)
The employee lump sum (also: professional expenses lump sum) is set at the rate of € 1,000 for compensation from employment – but only if the employee is not employed all year round. The lump sum cannot be duplicated in case of multiple employment, so it only applies once. The employee lump sum applies to tax classes I to V, but not to the wage tax class VI which is applicable to multiple employment.
Pension lump sums (Vorsorgepauschale)
The pension lump sums (Vorsorgepauschale) always depends on the remuneration and can be credited against the wage tax. The pension lump sum includes insurance premiums with the exception of contributions for property insurance, such as household or comprehensive insurance. In the joint assessment of spouses, who bore the expenses for benefits is not relevant; however, spouses can only deduct what they have actually paid in a single assessment.
Special expenses for lump sums (Sonderausgaben-Pauschbetrag)
Employees can also use a lump sum of € 36 per year for other expenses. This is also granted in the tax class V – for tax class III; however, it can only be credited once.
Child allowance (Kinderfreibetrag)
Parents may choose between two forms of support for their offspring: child benefits or child allowance. While the child benefit is distributed monthly, the tax office calculates the child allowance annually; this remains tax-free. When filing a tax return, the tax office checks which of the two funds better supports the child and selects it for the employee. The child allowance increases in 2019 to € 2,490 per parent, i.e. € 4,980 in total.
Lohnsteuer: How is it calculated?
Using a wage tax calculator that can be found online (for example, the official calculator from the Federal Ministry of Finance), employees can easily and quickly calculate how high their income tax on the specified income will be.
However, there are also the so-called 36-euro table levels for the wage tax calculation, by means of which employees and employers can easily see how much income tax inclusive or even exclusive child allowance has to be paid. It makes it immediately clear which tax class could be beneficial. In the case of the table levels, however, it must also be considered whether the wage tax can be calculated using the general or the special wage tax table:
- The general wage tax table is for employees subject to social security contributions with the complete pension lump sums.
- The special wage tax table is suitable for employees who are not covered by social insurance and have a reduced pension lump sum – wage tax contributions are higher due to a reduction in the pension lump sum.
On the webpage the German Federal Ministry of Finance, employers can find program sequences with which they can create their own wage tax tables for calculating wage tax – official wage tax tables haven’t existed since 2004. Employers can use accounting programs or official online calculators to calculate wage taxes or outsource payroll accounting to a service provider or accountant.
We can remove payroll accounting from your entrepreneurial equation.
How employees can optimise their wage tax
Many employees who have a high wage tax look to optimise their wage taxes. While this is not always possible, employees may consider some factors that affect the level of wage tax.
- Tax class of the employee: The wage tax classes contain different lump sums and allowances; Different tax classes lead to a higher wage tax burden for the same gross salary. A change may be possible; Married persons or persons in a registered partnership may be able to choose a different tax class.
- Amount of the taxable gross pay: The wage tax burden may be reduced by influencing the pay.
- Any registered allowances: By using the possible allowances (child allowance, flat-rate lump-sum expenses, allowance for single parents), the wage tax burden can also be reduced. To do this, employees must apply for a wage tax reduction; The wage tax exemptions are then entered into the electronic wage tax deduction characteristics and the employer then keeps less wage tax. You can also use this form to request the additional amount for tax class VI.
- Church tax: Employees cannot reduce their wage tax by leaving the church, but only the church tax, which is deducted with the wage tax.
Wage tax declaration: What needs to be considered?
Employees can use the annual wage tax return to reimburse the flat-rate and overpaid wage tax. In contrast to self-employment, employees are in most cases not required to file a tax return but can benefit from the voluntary tax, as the final tax liability can only be determined by filing the tax return. Insofar as an employee is not required to pay a wage tax return, it may be granted up to four years retroactively.
Who has to pay taxes?
Anyone who does one of the following must file the annual wage tax return:
- has applied for a tax deduction allowance in ELStAM
- uses the tax class combination III/V, IV/IV or IV/IV with factor
- has several employment relationships
- receives wage tax benefits worth than €410 (parental, sick, unemployment benefits)
- has applied for individual assessment as a married couple
- earns capital income
- makes more than € 410 in extra income as an employee
- newly married after the former marriage was dissolved by death/divorce
- receives a pension of over €16,000
Starting in 2019, the deadline for everyone to declare is 31.07. of the following year. If the wage tax return is prepared by a tax consultant, taxpayers even have until 31.12. of the following year. Anyone does their own tax declaration can also apply to the tax office to extend the deadline until 30.9.
What’s required for the wage tax return?
For wage tax declaration, only the forms provided by the tax office are required. Since the wage tax declaration now has to be digital, a user account must be created on the ELSTER portal in advance. It’s been possible to view a pre-filled tax return online since 2014. In this, all tax data for employers, health and pension insurance or banks, which have been transferred to the tax office, are automatically transferred to the appropriate form for wage tax return.
Employees who only have ordinary sources of income tax can also benefit from the simplified tax return. This is limited to a two-page form and is more time-saving than the full wage tax return.
Anyone who submits a wage tax return (Lohnsteuererklärung) no longer has to submit his supporting documents, but should still be available if the tax office demands access.
Wage back payments: Who’s affected?
Wage tax must be paid if too little was paid to the tax office (Finanzamt) in the previous year (or the previous accounting period).
In general, the risk of wage tax back payments applies only to a few groups of people. For example, single people who are employed by only one employer are more likely to not have to have back tax payments. A back payment may arise, however, if a tax declaration obligation exists.
The state has excluded the categories of persons who are not at risk of paying too little wage tax. These persons usually receive a tax refund after submitting the tax declaration. Conversely, this means that the obligated groups of people may well be affected by wage tax back payments.
The information published on our site is all written and checked by experts with the greatest care. Nevertheless, we cannot guarantee the accuracy of this information, as laws and regulations are subject to constant change. Therefore, always consult an expert in a specific case – we would be happy to connect you with the right professional.
firma.de assumes no liability for damages caused by errors in the texts.