Taxes in Germany are most likely a topic of interest to ex-pats trying to build a life here. Unless you are studying or living off savings, the tax system in Germany will likely be of great concern to you.
Germany is notorious for its bureaucracy, and that includes taxes, which can sometimes get quite complicated.
Depending on your living situation, sources of income, and assets, you may face more complex tax issues.
In such cases, it is advisable to seek the help of a [su_tooltip title=”Steuerberater” text=”German term”]tax consultant[/su_tooltip]. A tax consultant can help you a lot if you want to get significant tax deductions, combine different sources of income, employ people or write off purchases for your work.
However, if you want to start small and get an overview first, here’s everything you need to know about the most important aspects of filing taxes in Germany.
I’ll explain the basic tax classes in Germany, when and where you need to file your tax return, and what clever little ways you can save money without any hassle.
How To Do Your Taxes in Germany
Finanzamt and Steuererklärung
Everyone who earns money in Germany is liable for income tax.
If you are employed, the tax is automatically deducted from your salary, in most cases.
If you are a freelancer, self-employed, have multiple jobs or in certain professions, you have to take care of your yearly tax return yourself.
The authority for taxes in Germany is the [su_tooltip title=”tax office” text=”English Translation”]Finanzamt[/su_tooltip].
All municipalities have their own tax offices, and larger cities sometimes have several. Which Finanzamt is responsible for your tax return depends on your registered address.
The standard tax return in Germany is called a [su_tooltip title=”tax return” text=”English Translation”]Steuererklärung[/su_tooltip]. It is a formal statement of all your income and expenses throughout the year, as well as further relevant information such as family situation, extraordinary circumstances, periods of unemployment, etc.
The annual deadline for filing the tax return is July 31 of the following year; otherwise, you will be subjected to fines.
Tax Number and Tax Identification Number
To file your tax return and pay taxes, you need two important numbers at your local tax office: [su_tooltip title=”tax number” text=”English translation”]Steuernummer[/su_tooltip] and [su_tooltip title=”tax identification number” text=”English translation”]Steueridentifikationsnummer[/su_tooltip]; in some cases (described below), a [su_tooltip title=”VAT number” text=”English translation”]Umsatzsteuernummer[/su_tooltip] is also required.
Your tax ID is an 11-digit number that only refers to you and never changes. It is assigned to you when taxes are first paid on your behalf – whether you are an employee or self-employed.
On the other hand, the 13-digit tax number refers to your particular tax office. This means that if you move and another tax office becomes responsible, you will receive a different tax number. Yet your tax ID number remains the same.
German Income Tax Rates
The German tax rate is based on a sliding scale in which it increases progressively with taxable income. The income tax brackets in Germany for 2022 are as follows:
|Less than 9,744 euros||0%|
|9,744 – 57,918 euros||14% to 42%|
|57,919 – 274,612 euros||42%|
|More than 274,613 euros||45%|
Freelancers and self-employed persons pay the so-called [su_tooltip title=”Einkommenssteuer” text=”German term”]income tax[/su_tooltip], whereas employees and pensioners on the other hand pay [su_tooltip title=”Lohnsteuer” text=”German term”]wage tax[/su_tooltip] (through payroll deductions).
Wage tax differs from income tax only in the way it is levied. Nevertheless, the tax rate is basically the same.
Tax Classes in Germany
The [su_tooltip title=”Steuerklasse” text=”German term”]wage tax class[/su_tooltip] determines the possible tax deduction for non-self-employed work, and to this end, the monthly net salary of employees.
The tax classes in Germany depend on your marital status and the number of parallel jobs you hold.
The following tax classes apply according to marital status:
- 1: single, widowed, separated/divorced
- 2: single parent, living separately
- 3: married (higher income or single earner)
- 4: married (both incomes equal)
- 5: married (lower income)
Tax class 6 applies for every further side job beyond your main occupation, regardless of marital status. Unfortunately, you will have to expect the highest tax burdens here – there are no benefits for this tax class.
How to Register for Tax
There are two ways to register with the tax office:
- In paper form using the tax registration questionnaire that you can find in the Form Management System of the Federal Tax Administration;
- Electronically via the ELSTER portal.
For a successful procedure, you must provide the following information:
- General personal data and bank details
- Information about the business or trade
- Estimate of expected revenues and profit
- Method of profit determination (mostly revenue surplus calculation, applies to freelancers and to companies with a profit of less than € 50,000).
Taxes in Germany for Freelancers
Especially in Berlin, there is an ever-growing number of freelancers, as this type of employment offers more flexibility and independence and is more profitable for both contracting parties (client and freelancer).
Berlin start-ups in particular often need very specific know-how for certain projects, which is why freelancers are so much in demand.
All expats who meet the legal requirements can become freelancers in Germany, although non-EU citizens will need a work visa to do so.
In order to get everything right from the start, every freelancer must register for tax with the tax office by filling out the tax registration questionnaire.
You must do this online over the official German online tax office system “My ELSTER“. Among other things, a forecast of future income must be indicated here.
On this basis, the first advance income tax payment is determined, which must be made every three months.
As a freelancer, you must keep records of your own income and expenses and submit an annual tax return by July 31 of the following year at the latest.
Furthermore, you must regularly prepare tax declarations for Value Added Tax in which you declare your income. VAT in Germany is usually 19%, but depending on the service you offer, it can be as low as 7%. VAT can be paid online via the Elster portal as well.
Be careful when working as a freelancer on large, long-term projects with one and the same client. In order not to fall under the suspicion of pseudo-self-employment as a freelancer, you may not earn more than 83% of your income as a freelancer with a single client.
Taxes in Germany for Self-Employed
The difference between freelances and self-employed persons in Germany is a little vague.
That is because freelancers are self-employed too, but they work for different companies, often on a project basis over a fixed period of time.
In contrast, self-employed people are those who have registered their trade, company, or studio, where clients visit them to use their services or buy their products. Oftentimes, they employ additional staff.
The income tax rate depends on how much you earn from your self-employment – the more you earn, the higher the tax rate is, ranging from 0% to 45%.
Single people with income below the basic tax-free amount are tax-free.
If you are married, the tax-free amount is even doubled (currently €19,488 per year). If your income is above this, the basic tax-free amount is first deducted from your total income, and you have to pay taxes on the remaining amount.
Similar to freelancers, self-employed tradespersons who offer goods and services must also invoice their customers for VAT and then pay this amount to the tax office.
In addition to income tax, you must also pay the so-called [su_tooltip title=”Gewerbesteuer” text=”German term”]trade tax[/su_tooltip] on your business profits.
Tradespersons who run a small business can make use of the so-called [su_tooltip title=”Kleinunternehmer-Regelung” text=”German term”]small business regulation[/su_tooltip], which exempts from this tax payment.
To qualify as a small business, profits from the previous year must not exceed €17,500, and revenues from the current year must be less than €50,000.
This is particularly useful if your business doesn’t involve any major purchases and it’s therefore not possible to later reclaim the sales tax paid. In addition, the small business regulation saves valuable time that you would otherwise spend doing bookkeeping.
Taxes in Germany for Employed
You already know that you don’t necessarily have to file a tax return if your only source of income is your employee salary.
Since the wage tax is automatically deducted from it, you don’t have to worry about anything. Your employer will register you at the tax office and will provide you with yearly statements of the paid amounts.
Yet, as an employee, you can benefit from filing a tax return, as most employees usually pay too much tax.
You can deduct various income-related expenses, including your commuting costs, relocation, and additional health and pension insurance, resulting in a tax refund for you.
However, even as an employee you must file a tax return in one of the following situations:
- Additional income beside your salary of over 410€ in total, or
- Received unemployment benefits, parental benefits, or sick pay of over 410€ in total
- More than one employer throughout the year, or
- More than 2 jobs parallely.
- Married with tax classes 3 and 5
- Divorced and re-married the same year.
Income Tax Forms in Germany
- Questionnaire for tax registration – for each person starting a commercial, or self-employed (freelance), or agricultural and forestry activity.
- Surplus income statement – a simplified profit calculation method prescribed by law. The profit equates to the surplus of operating income over operating expenses.
- Income tax return – a written declaration by a taxpayer of their total income. As such, it serves as the basis for determining the payable income tax.
- Trade tax return – applicable to self-employed tradespersons, commercial enterprises, corporations, and partnerships. Sole proprietors must also file an income tax return.
5 More Things to Know About Taxes in Germany
As a self-employed person or a freelancer, you might qualify as a so-called Freiberufler if your occupation is an independent scientific, artistic, writing, teaching, or educational profession. All Freiberufler are exempt from registering a trade and also don’t pay trade tax. Ultimately, the tax office makes the decision as to whether an activity is a liberal profession.
90% of taxpayers in Germany receive a tax refund when they file their annual tax returns. Anyone with income in Germany can claim back part of the income tax they paid during the year.
Deductible expenses include:
- children under 18 (or even under 27 if they are still in school and have no income)
- certain insurance premiums
- charitable and political donations to German institutions up to certain maximum amount
- unavoidable extraordinary expenses exceeding a certain amount (e.g., illness)
- working space and equipment for self-employed persons
- travel expenses
If you work for an international employer who has neither their residence nor their registered office or a permanent representation in Germany, you won’t have to pay a direct wage tax on your salary.
Instead, you will be acting as a self-employed person under German law, although you are officially working as a contract employee. Therefore, you must report the wages paid by the foreign employer to the tax office yourself and pay tax on them by filing an income tax return.
Depending on their home country, expats may also be liable to pay tax in their home country. Make sure to check if your home country has a double taxation agreement with Germany.
Extensions and Appeals
Failing to submit a tax return in time can be quite expensive.
First of all, the tax office will then estimate the tax, which is almost always unfavorable for the taxpayer.
In addition, you might face a late filing surcharge of up to 10% of the assessed tax. If you do not manage to submit your tax return to the tax office on time, you can apply for a deadline extension.
After the tax office has reviewed your forms and documentation, they will issue an official and binding [su_tooltip title=”Steuerbescheid” text=”German term”]tax notice[/su_tooltip] that includes all information about your eligible income and expenses.
If you have a negative balance, you may have to pay back taxes by a certain date. Otherwise, the tax notice will inform you about the tax refund to which you are entitled.
You have one month to review your tax assessment and file an appeal if you disagree with it. The period begins on the day the tax notice lands in your mailbox. A free-form written statement is sufficient for the appeal. Feel free to add any other relevant documents that might influence the tax office’s decision.
- TV and Radio Licence Fee: It costs 17.50 euros per household per month, regardless of how many people live there – or whether you even own a TV or radio device.
- Dog Tax: It costs 60 to 150 euros depending on the municipality, and you pay an even higher tax for any additional dog (except for service dogs).
- Motor Vehicle Tax: Car owners pay this tax depending on the fuel type, engine size, and carbon dioxide emissions of their vehicles.
- Real Estate Transfer Tax: It’s a one-time tax between 3.5% and 6.5% that applies when you buy a property in Germany worth more than 2,500 euros.
- Church Tax: Payable if you live in Germany and belong to a church that levies church tax. It’s a surcharge tax on the wage or income tax that you pay and amounts to 8% or 9%, depending on the federal state.
All in all, taxes in Germany are quite high, especially for higher incomes and when you can’t claim many deductions. The reason for this is that taxes are percentage-based and progressive, while most benefits are the same for everyone. This is called the solidarity principle. So if you earn ten times as much, you pay more than ten times as much in taxes, but you get the same medical care and child care as someone who is less financially well off.
I hope this sheds some light on taxes in Germany and what you absolutely need to know if you are starting out. The truth is that the first tax return is usually the most difficult and complicated, so a tax consultant can be very helpful if you want everything explained well.
After that, you can become an expert on your own tax return year after year. The ELSTER platform offers you the possibility to copy already submitted declarations and easily change them only where necessary.