Payroll Services in Germany

The figure almost every guide quotes is about 21%, and it is the sum of the four branches’ employer halves and nothing else. For 2026 that is 9.30% pension, 1.30% unemployment, 7.30% health at the general rate, 1.45% as half of the average health supplement and 1.80% long-term care – 21.15% in total. It omits real employer-only costs, and it assumes an average that no individual employee is actually on.

The health supplement is where the simplification breaks. Three different things get conflated. The general health rate of 14.60% is fixed in statute and has not changed since 2015. The average Zusatzbeitrag, announced by the health ministry each autumn, rose from 2.50% to 2.90% for 2026 – but it is a reference value, not a rate anybody deducts. What goes in the pay run is the rate the employee’s own Krankenkasse has set, which varies considerably from fund to fund. Since 2019 the supplement has been shared equally between employer and employee, so any guide describing it as employee-borne is years out of date.

Long-term care insurance has the most intricate rate table in German payroll, and all of the movement is on the employee side. The base rate is 3.60%, split evenly. An employee aged 23 or over with no children pays an extra 0.60 percentage points; from the second child under 25 the employee pays 0.25 points less per child, up to the fifth. The employer’s share stays at 1.80% in every case. The exception is Saxony, where the employer pays 1.30% and the employee correspondingly more, because the state kept a public holiday the rest of Germany gave up in 1995 – and the test is the place of work, not where the employee lives.

Three employer-only costs sit outside the 21%. Accident insurance through the Berufsgenossenschaft is compulsory, employer-funded in full, priced by a risk tariff against the activity, and billed in arrears against a wage report filed by 16 February – so there is no monthly accrual unless you create one. It runs from well under 1% for office work to several percent in construction. The U2 maternity levy is payable by every employer regardless of size or workforce, and foreign employers routinely omit it on the reasoning that they employ no women, which is simply wrong. U1 applies only to employers with 30 or fewer staff. Both levies are set by each Krankenkasse. Add them and a realistic all-in figure is about 25% for a small office employer and about 23% for one above 30 people – not 21%.

Germany has two contribution ceilings and they are different numbers, which is the most common structural error in foreign-run German payroll. Pension and unemployment are capped at EUR 8,450 a month, or EUR 101,400 a year. Health and long-term care are capped lower, at EUR 5,812.50 a month or EUR 69,750 a year. The pension and unemployment ceiling has been the same nationwide since 1 January 2025, so a payroll configuration still carrying a separate eastern figure is running a pre-2025 setup.

Because the two ceilings are at different levels, the employer’s effective rate steps down twice rather than once. On our office assumptions it holds at about 25.05% up to EUR 5,812.50 a month, falls to about 23.26% at EUR 7,000, to about 21.64% at EUR 8,450, and then declines continuously – about 15.68% at EUR 140,000 a year, 10.97% at EUR 200,000 and 7.32% at EUR 300,000. For an employer with more than 30 staff, and so no U1 levy, the same curve runs from 22.85% down to 6.57%.

The consequence worth putting in front of a board is that German employer social insurance is hard-capped in absolute terms. The health and care element stops at about EUR 613 a month and the pension, unemployment and levy element at about EUR 1,141, so the employer’s social insurance caps at about EUR 1,754 a month – roughly EUR 21,050 a year, or about EUR 21,950 with office accident insurance – for a small employer. An employee on EUR 110,000 and an employee on EUR 400,000 cost the employer the same in social insurance. Germany is expensive in the middle of the salary range and comparatively cheap at the top, which is the opposite of what most country pages claim.

Two practical notes on the ceilings. They are annual as well as monthly: a one-off payment such as a Christmas bonus is tested against a pro-rated annual ceiling rather than the monthly one, which is why a bonus can attract more contributions than a monthly test suggests. And the Märzklausel means one-off payments made between January and March may have to be allocated back to the previous year. Both are routine in German payroll and both are commonly missing from a system configured abroad.

Wage tax is deducted by Steuerklasse, and the class comes from the federal ELStAM database rather than from the employer. Class I covers single, divorced and widowed employees and is the default for most foreign-employer hires. Class II adds single-parent relief. Classes III and V are the married combination that lowers one spouse’s deduction and raises the other’s. Class IV is the balanced married default, with an optional factor method. Class VI applies to second and further jobs and carries no allowances at all.

Class VI is the one that generates complaints. The employer must also apply it where ELStAM cannot be retrieved at all, which happens whenever an inbound hire has no German tax identification number yet. The employee sees a punitive first payslip, the employer is blamed, and the calculation was correct throughout. The fix is to start the tax ID and, where needed, a certificate from the tax office before the first pay run rather than after the complaint.

The 2026 tariff has a tax-free allowance of EUR 12,348, a 42% rate from EUR 69,879 and a 45% rate from EUR 277,826. The solidarity surcharge is 5.5% of the wage tax, but an exemption threshold of EUR 20,350 of annual tax for a single filer removes it for the large majority of employees. Church tax is 8% of wage tax in Bavaria and Baden-Württemberg and 9% elsewhere, determined by where the employee lives, and delivered to the employer through ELStAM – the employer never asks.

One thing needs stating carefully because a lot of commercial content gets it wrong. Steuerklassen III and V have not been abolished. Replacing them is a government plan, but no abolition has been enacted with a start date, and as at September 2026 both classes remain fully in force. The factor method that would replace them is already available today on joint application.

The statutory minimum wage rose to EUR 13.90 an hour on 1 January 2026 and rises again to EUR 14.60 on 1 January 2027. Both steps are set by the same ordinance, so the 2027 figure is legislated rather than expected. Together the two steps are about 13.9%, the largest two-stage increase since the minimum wage was introduced in 2015. The independent minimum wage commission recommended them in June 2025 and the federal government made them binding by ordinance later that year.

Sector minimum wages sit above the general rate in a number of industries – among them roofing, electrical trades, painting, scaffolding, building cleaning, care, waste and temporary agency work – made binding by ordinance under the posting legislation. They override the general minimum where higher and, importantly for a foreign employer, they bind companies posting workers into Germany. Enforcement sits with customs, not with a labour inspectorate.

The Minijob threshold is not a fixed figure and has not been one since October 2022: it is the minimum wage multiplied by 130 and divided by 3, rounded up, which is ten hours a week at the minimum wage. For 2026 that is EUR 603 a month, up from EUR 556, and it moves to EUR 633 in 2027. On a commercial Minijob the employer pays flat-rate contributions of 13% for health insurance where the employee is in the statutory system, 15% for pension and optionally 2% flat-rate tax, plus the levies – all of it to the Minijob-Zentrale rather than to the employee’s own Krankenkasse.

Above the Minijob threshold sits the transition zone (Übergangsbereich), from EUR 603.01 to EUR 2,000 a month. The employee’s contributions taper up across that band from near zero to the full share, and the employer’s share is raised at the bottom of it – so it is a subsidy to the employee that the employer partly funds, not a saving for the employer. The lower limit rises every year with the minimum wage while the upper limit has stayed at EUR 2,000 since 2023, so the band narrows each year.

Dismissal protection under the Kündigungsschutzgesetz applies only where the employer has more than ten employees and the individual has more than six months’ service – both tests must be met. Below that threshold a dismissal needs no justification, which makes Germany considerably more flexible for a small operation than its reputation suggests. Above it, a dismissal must rest on conduct, capability or operational grounds, and an operational dismissal needs a social selection weighing length of service, age, maintenance obligations and disability across comparable employees. Statutory notice under §622 BGB starts at four weeks to the 15th or the end of a month and extends with service to seven months at twenty years.

There is no general statutory right to severance. Abfindung is a matter of settlement and negotiation, and the rule of thumb of half a month’s salary per year of service comes from the optional §1a route rather than from a general entitlement. Where a works council exists it must be consulted before any dismissal, and a dismissal issued without that consultation is void. Collective redundancies above the statutory thresholds must be notified to the employment agency, and the Court of Justice confirmed on 30 October 2025 that a missing or defective notification voids the dismissals and cannot be cured afterwards – when much 2024 commentary expected the rule to be relaxed.

Holiday is where foreign employers build up real balance-sheet exposure. The statutory minimum is 24 working days on a six-day week, which is 20 days on a five-day week, and market practice for a professional role is 27 to 30. The statute says leave expires at the end of the year – but European and Federal Labour Court case law has largely overridden that. Leave does not expire, and does not even become time-barred, unless the employer actively enabled the employee to take it: telling each employee individually how many days they have, by when they must be taken, and that they will otherwise be lost, in time for it to be possible. The burden of proof is on the employer. Where that is not done, untaken leave accumulates and becomes a cash payment on termination.

On working time, be precise about what exists. The Federal Labour Court held on 13 September 2022 that employers must record working time, reading the existing health and safety statute in line with EU law. That duty is real and applies now. What does not exist yet is implementing legislation: the labour ministry circulated a draft amendment to the Working Time Act in June 2026 that would require electronic recording, but it has not been adopted, so there is no statutory format and no dedicated penalty regime. Any page telling you Germany has a time-recording statute is wrong, and so is any page telling you there is no obligation.