Payroll in Germany: A guide for foreign employers (2026)

Each month, the employer must complete the following.

Calculate gross-to-net. Start with the employee’s gross salary. Deduct income tax (Lohnsteuer), solidarity surcharge (Solidaritätszuschlag) where applicable, church tax (Kirchensteuer) where applicable, and the employee’s share of social security contributions. The result is the employee’s net pay.

Pay the employee. Transfer the net salary to the employee’s German bank account. Salaries in Germany are paid in euros.

Pay social security contributions. Transfer both the employer’s and employee’s shares of social security contributions to the relevant health insurance fund (Krankenkasse). The health insurance fund distributes the contributions to the pension, unemployment, and long-term care insurance schemes. Contributions are due by the third-to-last banking day of the month.

Pay income tax. Transfer the withheld income tax, solidarity surcharge, and church tax to the Finanzamt (tax office). This is due by the 10th of the following month.

Issue a payslip. German employers are required to provide employees with a written payslip (Gehaltsabrechnung) each month, showing gross salary, all deductions, employer contributions, and net pay.

At the end of each tax year, employers must complete an annual income tax reconciliation (Lohnsteuerjahresausgleich) for each employee and submit the annual social security report (Jahresmeldung) to the relevant authorities. Deadlines are strict. The income tax reconciliation is due by 28 February of the following year.

Rate: 18.6% total, split equally at 9.3% employer and 9.3% employee. Income ceiling: €101,400 per year (€8,450 per month). This is the largest single component of social security.

Base rate: 14.6% total, split equally at 7.3% each. On top of this, the average supplementary contribution (Zusatzbeitrag) for 2026 is 2.9%, also split equally. Total employer share: approximately 8.75%. Income ceiling: €69,750 per year (€5,812.50 per month).

Employees earning above €77,400 per year can opt out of statutory health insurance and choose private insurance. In that case, the employer pays a subsidy capped at the maximum statutory contribution.

Rate: 2.6% total, split equally at 1.3% each. Income ceiling: €101,400 per year (same as pension).

Rate: 3.6% total for employees with children, split at 1.7% employer and 1.7% employee. Childless employees aged 23 and over pay a higher rate of 4.2% (the additional 0.6% is borne entirely by the employee). Income ceiling: €69,750 per year (same as health insurance).

Paid entirely by the employer. The rate varies by industry, typically between 1% and 3% of gross salary. The employer registers with the relevant Berufsgenossenschaft (trade association) based on the industry sector.

Rate: 0.15%, paid entirely by the employer. Income ceiling: €101,400 per year. This funds employee salary payments in the event of employer insolvency.

In addition to the main social security branches, German employers pay Umlage contributions to their health insurance fund.

Umlage 1 (U1) reimburses employers for continued salary payments during employee sick leave. The rate varies by health insurance fund and company size, typically between 1% and 4%.

Umlage 2 (U2) reimburses employers for maternity pay obligations. All employers pay this regardless of workforce composition. The rate varies by fund, typically between 0.2% and 0.6%.

Umlage 3 (U3) is the insolvency levy referenced above (0.15%).

In total, mandatory employer contributions amount to approximately 21 to 23% on top of the employee’s gross salary, depending on the industry, the health insurance fund, and the employee’s personal circumstances. For employees earning above the income ceilings, the absolute contribution amounts are capped, which means the percentage effectively decreases for higher salaries.

Do not calculate total costs manually from these figures. The interaction between ceilings, variable rates, and fund-specific Umlage rates means a simplified calculation will be wrong for many employees. Use the Boundless cost calculator to see the accurate total at any salary level.

Every employee in Germany is assigned one of six tax classes based on their marital and family status. The tax class determines the monthly withholding rate, not the annual tax liability (which is the same regardless of class, reconciled at year-end).

Class I applies to single employees, or married employees whose spouse lives abroad. This is the default class for most EOR employees.

Class II applies to single parents.

Class III applies to married employees where one spouse earns considerably more. The higher earner takes Class III (lower withholding), and the lower earner takes Class V.

Class IV applies to married employees with similar incomes. Both spouses take Class IV. A “factor method” (Class IV with Faktor) is available for more precise monthly withholding.

Class V is the counterpart to Class III for the lower-earning spouse.

Class VI applies to employees with a second job.

For employees hired through an EOR, Class I is most common unless the employee provides documentation of their marital status.

Germany uses a progressive income tax system. The rates for 2026 are as follows.

Income up to €12,348 per year is tax-free (this is the Grundfreibetrag, the basic tax-free allowance). Income from €12,349 to €69,878 is taxed at progressive rates from 14% to 42%. Income from €69,879 to €277,825 is taxed at 42%. Income above €277,826 is taxed at 45%.

The solidarity surcharge (Solidaritätszuschlag) of 5.5% of income tax applies only to taxpayers whose annual income tax exceeds €20,350 (single) or €39,900 (jointly assessed). Approximately 90% of German taxpayers no longer pay the Soli.

Church tax (Kirchensteuer) of 8% or 9% of income tax applies to registered members of recognised churches, depending on the federal state.

The employer calculates the monthly income tax, solidarity surcharge, and church tax based on the employee’s gross salary, tax class, and any allowances. This is withheld from the employee’s gross pay and transferred to the Finanzamt by the 10th of the following month. The employer must also file monthly electronic wage tax reports (Lohnsteueranmeldung).

For details on German tax rates and how they apply to employees, see the Boundless Germany country guide.

This is the most comprehensive option. You register a GmbH (Gesellschaft mit beschränkter Haftung), which requires €25,000 minimum share capital, a notary appointment, entry in the commercial register (Handelsregister), and registration with the Finanzamt and social security authorities. The process typically takes three to six months.

Once established, you run payroll directly or through a local payroll provider. You are fully responsible for all employer obligations, compliance, and reporting.

This option makes sense for companies building a large, permanent team in Germany with dedicated local operations.

It is possible to register as a foreign employer in Germany without setting up a full entity. Under this model, you maintain a direct employment relationship with your German employee and handle payroll obligations through the German tax and social security system.

This avoids the cost and complexity of a GmbH, but comes with its own challenges. You must liaise with German authorities in German, understand and comply with German employment law, process payroll and contributions correctly, and manage ongoing HR compliance. For most foreign companies without in-house German expertise, this is harder than it sounds.

An Employer of Record in Germany handles payroll as part of a complete employment solution. The EOR employs your chosen candidate through its German entity, runs payroll each month, withholds taxes, makes social security contributions, and manages all reporting obligations. You pay a monthly fee per employee and the employee’s total employer cost.

This is the fastest option (employees can typically start within one to three weeks) and removes the need to register with German authorities or manage compliance yourself. For a comparison of providers, see our guide to the best Employer of Record providers in Germany.