One of the most imperative compliance factors for employed contractors working in Germany is tax compliance. Understanding the tax classes in Germany is essential for employees as it determines the amount of tax to be paid based on marital status, number of children, and other factors. The six tax classes, from I to VI, have different implications for individuals based on their circumstances. In this article, we will discuss Germany's six different tax classes and how they impact contractors working under an employed model.
All German residents are responsible for fulfilling their tax obligations. For employees or employed contractors, the employer/payroll provider deducts the Lohnsteuer (wage tax) and pays it to the state's tax office. On the other hand, self-employed workers are subject to Einkommensteuer (income tax) based on their earnings. This tax typically applies to those working freelance or operating as a business. This tax must be paid if one's salary after expenses and pension contributions exceed the basic tax-free income amount. Often, those subject to the Einkommensteuer may find that the tax classes do not apply to them, except in select circumstances such as if one employs another individual in their business or if their spouse is an employed worker who pays the Lohnsteuer. This article will focus on contractors working under an employed model, EOR or AÜG (Arbeitnehmerüberlassung).
All employed workers in Germany fall into a tax class (Lohnsteuerklasse) based on their income streams of income and are assigned to a tax class based on factors such as
- Number of dependants
- Tax Allowances
- Marital Status
Workers are typically assigned a tax class by the tax office in their district.
Tax class 1:
Tax class 1 includes employees under and those subject to limited Einkommensteuer. Germany's Tax Class 1 concerns individuals who are single, divorced, or widowed, as well as those whose spouses reside currently or permanently abroad or outside of Germany. Those who fall within this tax class are exempt from deductions on income up to €450 per month. Once one exceeds this amount, they are subject to taxes. The rate of tax will depend on what one's income is; often, those within this tax class are subject to a 17% tax rate. One should note that those assigned to this class cannot claim child allowance/single-parent relief. If one does qualify for these allowances, they may be eligible for class 2.
Tax class 2:
This tax class often includes single parents who reside with their dependents and earn in excess of €450 per month. It is imperative to note that one must apply for this tax class, as one is not automatically assigned to it.
Tax class 3:
Tax Class 3 is specifically designated for married couples where both partners are residing in Germany. In order to be eligible for this tax class, one spouse must be assigned to Tax Class 5. Tax Class 3 offers the lowest tax rates and more allowances. One should note that this class's minimum monthly income requirement is €450.
Tax class 4:
Tax class 4 is an alternative option for married couples who do not fall into tax classes 3 or 5. This option addresses the gender pay gap by alleviating the heavier tax burden on the partner earning a lower wage. The existing gender pay gap often sees women earning less than their male counterparts. This tax class tries to alleviate this gap somewhat. Additionally, married couples can choose a combination of tax classes IV and IV with a factor, allowing the tax office to calculate the annual expected tax liability in monthly amounts deducted from the Einkommensteuer. In doing so, in most cases, back taxes are avoided.
Tax class 5:
This tax class is often assigned to Married employees whose spouses are within tax class 3. Its high deductions and limited allowances often characterise it. However, this class only applies to one couple member, with the other usually assigned to tax class 3, leading to a lower tax burden on the couple.
Tax class 6:
Those with more than one job or stream of income qualify for tax class 6. Although tax class 6 does not include allowances, one can avail of those within another tax class in which they also meet the eligibility criteria. These classes can be combined depending on one's circumstances and whether they meet the eligibility criteria.
International tax compliance:
While ensuring compliance with the tax laws of the country they are living in; all international contractors and freelance professionals must also ensure they comply with global tax laws. Achieving tax compliance is essential, failure to do so may see the contractor face penalties or see their permits affected. Many countries use the 183-day rule to help determine where an individual is a tax resident and liable for taxation on their worldwide income. Generally speaking, the 183-day rule applies to the number of days within a 12-month rolling timeframe or calendar year an individual spends in that country. One important distinction to note is that the criteria for this varies from country to country. Please check out our article here to learn more about the 183-day rule and how it impacts you. To best ensure compliance, speak with taxation experts before embarking on your contracting journey in Germany. Our team at 3C Global are experts in European tax compliance and can help you ensure you comply with the relevant tax laws.
Confused? We can help.
Navigating tax compliance successfully as an international contractor in Germany is essential. International contractors and freelancers must be well-informed about their tax obligations and seek expert guidance when necessary. If you still feel confused or overwhelmed, worry not! Whatever your international contracting query, our knowledgeable team at 3C Global Group is on hand to help. We work with contractors from various countries to help them achieve compliance and peace of mind.
Please do not hesitate to contact us today.
Our contractor solutions:
At 3C Global Group, we pride ourselves on our comprehensive contractor solutions. We provide Employer of Record (EOR) and labour leasing (Arbeitnehmerüberlassung/AÜG) solutions for contractors in Germany. Our solutions provide full compliance for our clients. To learn more about our EOR and AUG solutions, check out our article or contact our knowledgeable team today!
Want to see more content like this? Sign up for our newsletter for the latest industry insights and company news.
