If you live in Germany, you’ll have to pay Einkommensteuer (income tax) on the money you earn. This tax is one of the most important sources of income for the state, accounting for around a third of tax revenue. Below is your primer on income tax in Germany. We’ve helped over 15,000 companies beat bureaucracy in Germany. We’ve seen everything that can go wrong. Let us show you how to get it right.
Einkommensteuer (income tax) is a tax on the Einkommen (income) of natural persons. Its legal basis is the EStG (income tax act). Lohnsteuer (wage tax), which employees also comes out of employee remuneration, is also included in income tax.
Income tax is a direct tax because the same person is both liable to pay and bears the tax. It is also a Gemeinschaftssteuer (joint tax) because it is due to the federal, state and local governments.
German tax law recognises seven types of income that are subject to income tax:
Some income is exempt from income tax:
This income is added to the basic tax-free amount. If you exceed the limit, you could be taxed on the excess income.
Income subject to progression includes:
Lohnsteuer (income tax) on employment, Kapitalertragsteuer (capital gains tax) and Zinsabschlag (interest deduction – income tax on capital assets) are paid directly to the tax office by a third party (employer/financial service provider). If a financial service provider has an exemption order for capital gains tax, no capital gains tax has to be paid. This method of collection is also known as Quellensteuer (withholding tax but literally “source tax”) because the tax is deducted directly from the (income) source.
Only later, when the income tax return is filed, does the tax office check whether the tax paid corresponds to the actual tax liability and whether it must be refunded in full or in part.
In principle, only natural persons pay income tax. But this does not mean that income tax plays no role for companies.
Persons who have their Wohnsitz (domicile) or Aufenthalt (permanent residence) in Germany are subject to unlimited income tax liability on their income. Income earned abroad is also subject to German income tax.
Individuals who are neither domiciled nor permanently residing in Germany and who receive domestic income may be subject to limited taxation. This is particularly the case if you rent domestic property, work as an employee in Germany or run a business in Germany. Possible double taxation is avoided using double taxation agreements with various countries or by crediting taxes paid abroad against German income tax.
Personengesellschaften (partnership businesses) are not subject to income tax, but their Gesellschafter (partners) are. The partnership files a joint tax return. The income (profit or loss) of the partners is divided according to their shares or according to the partnership agreement. The tax office then sends the partners an “Einheitliche Feststellung der Besteuerungsgrundlagen” (uniform determination of the basis of taxation), which shows the respective share of each partner. Taxation is then based on the individual financial circumstances of each partner.
The same applies to corporations such as the GmbH and UG. As a legal entity, it is not subject to Einkommensteuer (income tax). Instead, it pays Körperschaftsteuer (corporation tax). Shareholders in corporations, on the other hand, have to pay income tax on their income from the company as natural persons – not only on salaries but also on dividends (Ausschüttungen) and the like.
Businesses usually have to pay Gewerbesteuer (trade tax). Especially for Einzelunternehmer (sole traders), this tax burden can be crushing when added to Einkommensteuer (income tax).
As per § 35 EStG, you can have the trade tax credited against your income tax at a rate of 3.8 times the trade tax assessment amount. Always use the calculated amount, NOT the trade tax actually paid.
Anyone who earns more than the basic tax-free amount is generally required to file a tax return. Self-employed persons or business owners must always file a tax return, even if they have no income or made a loss (negative income).
In addition, other income is subject to the obligation to file a tax return (§ 46 EStG). These include the following situations:
For these groups of people, the employer has already paid the income tax.
It can sometimes be financially advantageous to file a tax return, even if you are not required to do so. This is especially the case if you can claim high special expenses, income-related expenses or extraordinary burdens that the tax office would otherwise not take into account. You can read more about this in the section ‘How can I reduce my income tax’ below.
The basic income tax table provides information on the income-related tax burden – as a percentage and in euros. In addition to income tax, the Solidaritätszuschlag (solidarity surcharge) and Kirchensteuer (church tax at a rate of 9%) are listed.
The values are given in €100 increments, starting with an income of €9,405 up to €270,044. Income up to €9,408 per year is tax-free (as of 2020).
In 2020, the initial tax rate is 14% and the top tax rate is 42% from a taxable income of €57,052. On top of that, there is a solidarity surcharge of 5.5% of taxable income and a church tax of eight or 9%, depending on the federal state (only applies to members of a church).
Extract from the basic income tax table 2021
The values of this basic table result from the income tax scale as per § 32 EStG.
The standard income tax rate (Einkommensteuertarif) is based on taxable income. It is divided into five tariff zones (Tarif zonen):
| Tariff zone 1 | Nullzone (zero zone) | Up to €9,744 (Grundfreibetrag = basic allowance) | 0 |
| Tariff zone 2 | Progression zone 1 | €9,745 to €14,753 | (995.21 * y + 1,400) * y |
| Tariff zone 3 | Progression zone 2 | €14,754 up to €57,918 | (208.85 * z + 2,397) * z + 950.96 |
| Tariff zone 4 | Proportional zone 1 | €57,919 up to €274,612 | 0.42 * x – 9,136.63 |
| Tariff zone 5 | Proportional zone 2 | over €274,613 | 0.45 · x – 17,374.99 |
y = taxable income
In progression zone 1, the rate increases most sharply, and in progression zone 2 to a lesser extent. It then remains constant at the top rate of 42%.
There are several ways to reduce your Einkommensteuer (income tax):
The Grundfreibetrag (basic personal tax allowance) is available to all taxpayers and is not offset against income tax. In 2021, it will be €9,744 for a single person.
Sometimes married couples have very different incomes. In such circumstances, Ehegattensplitting (spousal splitting) is particularly advantageous. The income of both partners is added together and divided by two. This can result in a much lower tax rate. Married couples who are assessed jointly have an exemption of €19,488 on their joint income.
An individual tax-free allowance is set for each state pension. Pensioners are also entitled to a Werbungskostenpauschale (income-related expenses allowance) of €102.
In 2021, the Kinderfreibetrag (child allowance) per parent and child is €5,460. In addition, there is a Betreuungsfreibetrag (care allowance) and an Erziehungsfreibetrag (education allowance) of €2,928. In most cases, these amounts are assessed together, resulting in an amount of €8,388. This allowance is only taken into account if the tax savings exceed the child benefit paid, which is currently €219 per month (for the first and second child, then gradually more). The tax office itself determines this in the context of a favourable tax assessment. There is also an Ausbildungsfreibeitrag (vocational training allowance) of €924.
Single parents can also claim an Entlastungsbetrag (relief amount) of €4,008 for the first child, plus €240 for each additional child living in their household.
An allowance of €1,000 is also known as the Werbungskostenpauschale or Arbeitnehmerpauschbetrag (work-related expenses allowance). The tax authorities automatically deduct it from your earned income. If your work-related expenses exceed €1,000, you must document them and you can claim a higher amount.
Work-related expenses include everything you spend on working. Examples include work equipment, train tickets, the cost of a second vocational training course or a second degree, professional clothing, the cost of applying for a job, moving house for a job-related reason or having two households and, of course, travelling to your place of work.
For travel to work, you can deduct 30 cents per kilometre (one way!) as a work-related expense from your tax. This is your Entfernungspauschale (commuting allowance). It is normally limited to €4,500 per year, but if you drive to work, the tax authorities will accept a higher amount if you can prove it.
Tax deductible Sonderausgaben (special expense) are things like:
Außergewöhnliche Belastungen (exceptional costs) include things such as medical expenses or maintenance payments.
A reduced income tax rate of 28.25% (plus solidarity surcharge and church tax, if applicable) applies to retained (not withdrawn) profits. This is also known as the reduced Thesaurierungsteuersatz (retention tax rate). If the money is withdrawn in a later tax year, it will be taxed at 25% plus additional taxes. This is usually worthwhile if the distribution is made after several years. It is best to have this checked by your Steuerberater (tax adviser).
You can work out your taxable income using the following calculation:
The BMF (Federal Ministry of Finance) offers an income tax calculator on its website. This helps you to calculate your income tax liability. You enter your taxable income (zvE) and get the tax amount.
The Finanzamt (tax office) in whose district the taxpayer is resident is always responsible for assessing and collecting income tax.
The Einkommensteuererklärung (income tax return) must always be submitted for a calendar year (Veranlagungszeitraum = assessment period). Starting with the 2019 tax year, taxpayers will have an extra two months to file their tax returns. If you use the services of a Steuerberater (tax adviser) or a Lohnsteuerhilfeverein (income tax assistance association) the deadline is extended further.
This deadline can also be extended on request. And if you use a tax adviser or an income tax association, you have until 31 December of the following year. The tax return is submitted via the electronic portal Elster (= electronic tax return). The tax office processes tax returns in chronological order. Depending on the workload, it may take longer or shorter to receive your tax assessment. This is usually a few weeks after you have submitted your tax return. The tax assessment can then also be accessed via your Elster account.
Not everyone has to file a tax return. If you have no income, you don’t have to declare that you have no income.
Depending on what you’re claiming, annexes and supporting documents must accompany your income tax return. Which ones you need will depend on your personal circumstances. The main form is called the Mantelbogen – it contains information about your person, special expenses and exceptional costs. You will need to ‘attach’ supporting documents to this form. The most common examples are:
In the Einkommensteuerbescheid (income tax notice), the tax office tells you whether you owe income tax or whether you can get a tax refund. Together with this tax assessment notice, the tax office will send you an Einkommensteuer-Vorauszahlungen (advance income tax payment) notice showing your quarterly advance payments of income tax for the next (or current) year.
Tip: Tax assessments are not always correct. Check them carefully or have them checked by a tax advisor. You can appeal against a tax assessment within one month of receiving it.
Normally, income tax is not due until after the end of the year, but to save taxpayers from having to pay a large amount of tax in arrears and to ensure that tax is paid promptly, the tax office can set up advance tax payments. These are calculated based on the previous year’s income and are due quarterly: ten days after the end of each quarter, the tax office will deduct one-quarter of the previous year’s income tax from your account.
For some entrepreneurs, income fluctuates greatly. Depending on when a large project is invoiced, one year’s income might be half of the previous year’s income. If your current accounts and incoming orders show a sharp drop in income, you can apply to the tax authorities to reduce your advance tax payments.
We’re building a library of accounting-related articles in English to help you understand what’s involved in managing a business’s finances in Germany. The Master List can be found here, here’s a sampling that may be useful: