When living in Germany, you will naturally be subject to German taxes, especially when you have a German source of income. The German tax system is similar to the tax structures of Western countries. You can pay income taxes throughout the year, usually with the employer deducting the tax from your paycheck. Some possible adjustments are made at the end of the year for underpayments or overpayments. Here are a couple of the main things you should know about how the tax-paying system functions in Germany.
Individual Income Taxes
For 2019, the taxable income was less than 9,169 euros for a single person and 18,388 euros for a married couple. Conversely, the income was up to 55,960 euros for a single person and 119,220 euros for a married couple. Depending on the income, there are tax rates that increase progressively from 14% to 42%. Incomes from 55,961 euros to 530,654 euros are taxed at 42%. On the other hand, incomes that are over 265,000 euros for singles and 530,654 for couples are taxed at 45%.
In addition to the standard taxes, there was also a “solidarity surcharge” of 5.5% of the tax to cover the continuing costs of the integration of the East German state. German tax system law can be quite detailed and tangled especially for the businessmen who just want to take care of their business instead of dealing with taxes. Luckily, tax advisors such as gmbhtax.de leave businessmen more space to handle the business while leaving professionals to deal with complex tax fillings. Tax advising can be very useful for both businessmen and individuals as it will help them avoid mistakes that can cost them a lot of money.
Deductions
As with many other countries, The German tax systems also allows a variety of deductions that can lower taxable income. Some of these deductions include the cases when the children are under 18 or even under 27 when they are attending school and are without earnings, with the specified insurance premiums and charitable and political contributions to the German entities, subject to certain limits such as illness, disabilities, and some other health conditions. In addition, the deductions from compensation are also made for four social programs:
- unemployment
- retirement
- health insurance
- long-term nursing care.
Payments for these specific programs are usually borne equally by the employer and the employee. The employer’s share of the contributions is not taken as the taxable part and is not taxable income to the employee, and the employee’s portion, on the other hand, is tax deductible to a certain extent.
Lohnsteuer and Einkommensteuer
If the individual is subject to German tax, then the majority of sources of income are taxable. The Lohnsteuer, or wage tax, which is individually observed and accounts for a third of the German government's revenue, is withheld from compensation. Income from some other sources, such as self-employment, investments, rent collection, and others, is covered by the Einkommensteuer, or income tax. Let us clarify the difference between these two. The Lohnsteuer and Einkommenstuer differ only by the method of collection.
To this end, the Lohnsteuer is collected at the source and paid directly to the Finanzamt, or tax office, by the employer, while for the Einkommensteuer, the individuals need to pay themselves.
Tax Returns
You will not need to file a tax return if your only source of income is an employee's salary. This is because Lohnsteuer is withheld from the salary as the primary source. But if you are eligible for the tax refund, will have to itemize (deductions or some other benefits), or are self-employed, you will need to file a tax return. Every tax return is audited, so if a tax assessment is given, the assessment is not preliminary and can only be amended in the future if certain unusual circumstances arise.
Other Taxes
In addition to all of the different types of income taxes, there are also some sales taxes that can significantly impact both businesses and individuals. The major tax is the Mehrwertsteuer, or value-added tax, which accounts for a quarter of the government's budget. The purpose of the Mehrwertsteuer is to assess the levy on every level in the production and delivery of the majority of the items available for purchase.
This type of tax applies not only to services but to goods as well, with a standard rate of 19%. The reduced rate of 75 currently applies to some products, such as food and printed material. In addition, medical and insurance services are generally exempt from the export of goods abroad, just as services rendered abroad are.
A great number of items, such as gasoline, tobacco products, alcoholic beverages, coffee, and tea, are subject to additional taxes under the Mehrwertsteuer. Also, there are church taxes of 8 or 9% of the Einkommensteuer and Lohnsteuer. But you are not required to pay for these taxes unless you want to officially subscribe to one of the German churches.
The Classes of the German Tax System
Employees of German companies are typically assigned a tax class before they start paying taxes. The tax rate is determined by the amount of income, social status, social benefits, and many other factors influencing this state. The authorities may also decide what tax class to assign the employee based on their marital status and a variety of other factors. In some cases, taxpayers can also request to be placed in certain classes.
Class I
The first category includes single or unmarried persons whose lives are recorded under a civil partnership. On the other hand, there are those who are divorced, widowed, or even married, unless they come within the tax classes of the second, third, and fourth degrees.
Class II
The second class is the one referring to single parents and to those living alone with children or who are entitled to the child allowance (Kindergeld) and some other government assistance.
Class III
This is the class that applies to married employees in cases where both spouses are living together in Germany or one of the spouses is the sole wage earner and the other spouse earns the salary that chooses to be categorized under Class V. It also applies to widowed employees for the calendar year following the death of the spouse if both spouses used to live in Germany on the day when one of the spouses died.
Class IV
This single class refers to the married workers who live together and have not selected Class III or V for one of them.
Class V
Class V is different since it applies to the taxpayer whose spouse is classified under Tax Class III.
Class VI
This one is optional, as this class is available to individuals who have more than one job and earn money from different sources of employment. The taxpayer may also have more than one Lohnsteuerkarte resulting from the various jobs.
Information for the Self-Employed
The majority of taxpayers are taxed based on their source of income. A great number of people are employees and have their salary or wage taxes automatically withheld from their paychecks by their employers. Deductions are withheld as well for the four social programs, which include health insurance, unemployment, retirement, and long-term nursing care.
However, there are also a huge number of people who fall under the category of self-employed and are also rated based on the source of their income. Since they do not receive regular paychecks or taxes, any other contributions to the social programs are directly paid to the Finanzamt, the appropriate social program agency, or the specific government office.
People who are considered self-employed are the ones who cover the gamut of various work and have some professional categories, and for tax purposes, a determination must be made for the exact classification of their work.
The Categories of Self-Employment
Free Professionals are also referred to as Liberal Professionals who have received special academic training, such as lawyers, scientists, technical experts, doctors, accountants, pharmacists, tax and business consultants, etc. The group of Liberal Professionals also includes freelancers such as writers, performers, artists, and independent consultants.
Businesspeople are the ones who start and, moreover, own their businesses. This allows them to earn more money through commercial activities. This can also include people who are dealing with trading, sales, shop owning, gastronomy, publishing, tourism, and others. Their businesses may also range from small, solo-owned businesses to small partnership companies.
What Are the Most Important Taxes for the Self-Employed?
The German tax system income taxes are inevitably the most important. It is a type of tax based on the personal profit that is generated by the business. Value-added tax is the one that is payable when goods and services are sold. Some other types of taxes that play essential roles are input taxes, trade taxes, and even added expenses for services such as tax advisors.
When you are dealing with taxes, you will need to take all of the factors into consideration. First and foremost, understand what class you belong to and what your tax duties are based on the income you receive. You should sign up for many of the programs that allow you to understand all of the essential parameters so that all of your taxes are sorted out and you avoid negligence.
FAQ
- What are Lohnsteuer and Einkommensteuer?
Lohnsteuer is the wage tax, while Einkommensteuer is the income tax.
- What determines the tax class?
Tax class is determined by income, social status, social benefits, and some other determining factors, such as marital status.
- What are the categories for self-employment?
Two main categories for self-employment are free professionals and businessmen.
- What are the most important taxes for self-employment?
Income taxes and value-added taxes are the most important taxes for self-employment.
- When the deductions from compensations are done?
If the individual is a user of one of the four social programs such as retirement, unemployment, long-term nursing care, and health insurance.
