The German social security system explained
May • 17th, 2021
by the Expat in the City Team
Paying for social security in German: what do you pay as an expat and why?
Once you start working in Germany as a foreigner and get your first German paycheck, you may find yourself being a little disheartened - this is not the amount you negotiated with your boss, but a significantly lower amount ending up in your account. Thanks to several taxes and other duties, such as income tax, church tax, solidarity surcharge and social security contributions, almost half of your monthly income gets cut.
As an international professional it is not easy to understand what terms like „Solidaritätszuschlag“ or „Lohnsteuer“ actually mean and to what extent they affect the net amount that you ultimately get paid. So what did you really earn and where does the other half of your income go?
Here is an overview of all positions that are legally deducted from the employee's gross salary in Germany:
1) Wage tax or income tax
The wage tax, or also called income tax is the largest deduction of your gross wage and is transferred directly to the tax office by your employer. The amount of wage tax is not a flat rate, but depends on the amount of income and follows one fundamental principle: The more you earn, the more wage tax you need to pay. The percentage is between 14 and 45 percent of total annual income.
In addition, each German employee is divided into a wage tax class, which also decides on the amount of wage tax. There are six tax classes in Germany and depending in which employee is assigned, more or less wage tax is deducted from gross wages. Single persons are automatically classified into tax class 1 by the tax office, single parents fall into tax class 2, married people can choose between several tax classes.
2) Church taxes:
Whoever is a member of the church also pays monthly church tax, which is also deducted directly from gross wages as a percentage of your wage tax. The amount of the deduction depends on the salary and the state in which the employee lives. In Bavaria and Baden-Württemberg, employees pay eight percent of their wage tax, in all other federal states nine percent. With this money churches finance, among other things, the staff, the construction of churches and charitable purposes such as care services. Church tax is not only levied on the Evangelical and Catholic Church, but also on Jewish communities and other state-recognized religious communities.
3) Solidarity surcharge:
In Bavaria and Baden-Württemberg, 5.5 percent of wage tax is paid directly to the tax office as a solidarity surcharge, that Germans call the ’Soli’. Like the church tax, the solidarity surcharge is calculated based on the income tax. Originally introduced in 1991 for a period of one year, this tax introduced to finance the German unity has now already existed for almost three decades. However, the reduction of the solidarity surcharge has been under discussion for a while now. In the course of the Corona crisis, the ’Soli’ is likely to be completely abolished, probably as early as summer 2020.
4) German social security contributions
Germany has a well-developed and unique social security system. If you work in Germany and are subject to social security contributions, you will usually be a member of the following five statutory social security organisations:
- health insurance
- long-term care insurance
- pension insurance
- accident insurance
- unemployment insurance
A fixed percentage of your work income goes to pay your membership of these social security funds. All social security contributions - including health, pension and long-term care insurance - are paid half by the employee and half by the employer. You can also deduct all insurance contributions that appear on your payroll from tax.
Employees pay around 8 percent of their wage tax for statutory health insurance, 1.275 percent for long-term care insurance, 9.35 percent for pension insurance and 1.5 percent for unemployment insurance. The employer is responsible for billing, withholding taxes on gross wages and paying contributions to the respective health insurance companies.
What else you need to know:
Employee benefits, such as housing or a car, and additional company pensions are also deducted from your gross wage. Monthly pay slips and annual income tax certificates should be kept by employees in any case, since they serve as proof of a regular income.
Furthermore, all insurance contributions that are noted on the pay slip can be deducted from tax. Employees therefore have to factor in deductions for taxes and social security contributions, but can sometimes claim them in the annual income tax return.
More information about TK Health Insurance