An Overview of German payroll Statutory deductions, compliance & - - PowerPoint PPT Presentation

An Overview of German payroll Statutory deductions, compliance & reporting

Presented by Denis Barnard

Covered in this module:

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The German Tax System

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Social Security

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Employer Responsibilities

Tax

The German tax system

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The tax department (or Revenue administration) is responsible for collecting and assessing taxes

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The Federal Ministry of Finance is the supreme authority of the Federal Revenue Administration http://www.bundesfinanzministerium.de/Web/DE /Themen/Steuern/Steuerarten/Einkommensteuer/ einkommensteuer.html

What is required of a company in order to run a payroll

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The company must be registered as a legal entity in Germany, otherwise the company cannot be registered with the tax and social security authorities and will be unable to fulfil the payroll reporting obligations. The tax authorities require a tax number which is allocated at the time of registration and an authorisation for the transfer of electronic tax data. The social security requires a business number for which the company applies at the local employment office. All returns and employee certificates are submitted under the allocated number.

Understanding some of the terms and regulations

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Tax Identification Number

u An 11 digit number used as the unique identifier of the employee in the

tax system

u Stays with you your whole life and does not change when you move or

marry

u It must be used in all submissions, applications and communications with

the tax authorities

Understanding some of the terms and regulations

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Tax Information Centre

u The Federal Central Tax Office’s tax information services u Information and services are provided by qualified teams in call centres and on the web

site

u Information on fiscal responsibilities u General information on tax within the scope of duty of the federal tax office u A central point of contact for foreign investors

Tax Categories

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1: Individuals who are single, in a civil partnership, divorced, widowed or married, unless category 2, 3 or 4

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2: Applies to those from category 1 if they are entitled to solo parents allowance

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3: Applies (when requested) to married persons who both reside in Germany and

u The workers spouse does not earn a wage, or u The workers spouse works but both spouses have requested they be classified under

category 5

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4: Applies (when requested) to married persons where both work, live in Germany and are not living apart permanently

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5: Applies to a spouse where both parties have applied for the other spouse to be classified under category 3

u It is quite common for a married couple to opt for this combination when for

instance, one of the persons works part time. The class 5 deductions are higher in comparision, but are then compensated by the fact that the other person has the lower class 3 deductions.

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6: Applies to workers earnings multiple wages from more than one employer, in order for wage tax to be withheld from the second and subsequent employers

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In addition to the tax class the parameters also include the number of children the individual has and also his/her religion.

Tax Categories

Tax

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There are three tax elements which are deducted from the salary paid: income tax, solidarity tax which is 5.5% of the income tax deducted and church tax which is either 8% or 9% of the income tax deducted, depending

• n which federal state the company is registered in

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Income and solidarity tax are compulsory deductions

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The employee may apply for exemption from the church tax which would involve the person officially renouncing the church

Tax

Tax

Cold Progressive rate from 14% to 42% http://www.bundesfinanzministerium.de/Content/DE/Bilderstrecke n/Mediathek/Infografiken/teaser-bildergalerie-kalte- progression.html?notFirst=false

Tax

The income tax calculations are based on the following criteria for single people:

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A non-taxable base income of maximum € 8,652/year

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A linear progression zones which include income from:

u € 8,653 to € 53,665/year u In these zones the tax percentage is progressive and non-cumulative, starting

at 14% and rising to 42%

Tax

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A third proportional zone which includes an annual income from €53,666 to € 254,446 per year and is taxed at a base rate of 42%

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A fourth proportional zone for an annual income of over € 254,446 is taxed at 45%

Tax

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Each employee must apply to their local tax office and have their personal tax data documented and filed. Based on the information for the individual, a tax classification is allocated and is binding for all payroll tax matters. Any changes must be made directly at the tax office by the employee.

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As a rule, employer payroll taxes are not levied in Germany, however there are certain pay elements, for instance reimbursement of season tickets for public transport, which are taxable at a flat rate and the employer may opt to carry the tax. It is also acceptable for companies to pass the tax burden to the employee.

Tax

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All payroll taxes must be reported and paid on a monthly basis for the current pay month. The payment must be received by the tax authorities by latest 10th of the following month

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There are of course many more details and various parameters which need

• consideration. An example of the German tax deductions can be found at:

http://www.imacc.de/berechnung/steuertabellen/index.html Where you can download the latest tables

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The complete income tax table is some 800 pages long!

Church Tax

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Liability to pay this starts on the first day of the calendar month following the month in which membership commences

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Jewish, Protestant and Catholic religions are covered under this tax

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This liability is in addition to income and capital gains tax

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The standard rate of Catholic church tax in Saxony is 9% of the taxable income, but is capped at 3.5% of total income

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Other religious communities are not currently recognised under this scheme

Church Tax (Kirchensteuer)

u The fund supports religious:

u hospitals u Schools u Day Care u Other services u A healthy percentage of catholic tax goes to the Vatican

u Those who opt out cannot receive/take part in:

u Sacraments (except last rights before death) u Confessions u Confirmation u Work in religious organisations u Parish Activities u Become a godparent

Church Tax (Kirchensteuer)

u When applying for a German Tax ID card or completing an

ameldung form, there is a section to specify if you belong to a taxable faith

u If the form is left blank but the person declares a

certain faith (or is from a country of an certain faith), the Finanzamt may assume a religion and begin charging

u In this case the individual will receive a letter u They will need to renounce the church, even though they never

joined it

u The process differs between states, see

http://www.kirchenaustritt.de/deutschland.htm for details u Renouncing the church does not mean

excommunication

Social Security

Social Security deduction % table

Social Security limits 2016

Earnings Caps Monthly € Annual € Health and nursing insurance 4,237.50 50,850 Pensions and unemployment (west) 6,200 74,400 Pensions and unemployment (east) 5, 400 64,800

Social Security

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Includes Pension, Health, Nursing, Accident and Unemployment Insurance

u The monthly contributions are calculated as a percentage of the total gross pay with a cap

level of € 6,200/month for pension and unemployment contributions and € 4,237.50 /month for medical and special care contributions. u

The pension insurance providers notifies workers of their social security ID

u Deduction are from gross pay, with a cap of max. €6,200/month

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Pension insurance is compulsory

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The premium is 18.7 percent of the gross wage and is divided equally between employee and employer

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The legal health insurance fund bears the cost of your medical care

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Employees earning a gross wage of less than EUR 4,575 per month are compulsorily insured by one of the public health insurance providers (Gesetzliche Krankenversicherung, GKV)

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Employees whose earnings are above this income threshold can choose from both public and private insurance companies (Private Krankenversicherung, PKV).

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The basic flat health insurance contribution rate (public health insurance) amounts to 14.6% of the employee’s gross income and is equally shared between the employer and employee

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At this point it should be mentioned that currently there are 132 medical insurance institutes (Krankenkassen) and that a separate monthly return must be submitted for each one where one of the employees is registered.

Social Security

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Legal Accident Insurance is compulsory if you are in training or have an employment contract

u Insurance premiums are paid by the employer, not the employee

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Unemployment Insurance has the same cap as the pension insurance. The premium for the mandatory unemployment insurance is 3.0 percent of the gross wage and is shared equally by the employer and employee.

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Nursing insurance has the same cap as the health insurance. For employees

• ver 23 years of age and/or who have no children an additional 0.25%

contribution is levied.

Social Security

Social Security

Additional employer contributions In the social security, there are also mandatory additional contributions as follows:

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U1 which covers the employer for up to 80% of sick pay cost and is a percentage of the gross pay ranging from 1% to 2.7% depending on which medical insurance institute the employee belongs to. This additional contribution is mandatory up to 30 employees. Over and above 30 the company may opt out of the scheme.

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U2 under which the employer can reclaim maternity pay disbursed within the month. The percentage here ranges from 0.25 to 0.5% again depends on the medical insurance institute

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U3 insolvency insurance which is 0.15% of the gross pay

Social Security

u Nursing care insurance is organized in more or less the same way as

health insurance, with a contribution rate of 2.35 percent of the gross wage

u Employer and employee both pay half of the contribution rate, with

childless employees paying an extra 0.25 percent on top of their contribution

u The premiums are deducted in the course of payroll accounting and

transferred to the nursing care insurance company via the health insurance company

u Specific regulations apply in the federal state of Saxony.

Social Security

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State Accident Insurance (Berufsgenossenschaft) – payable annually. The contributions are dependent on the total gross pay for the year and the classification of the employees

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State Accident Insurance (Berufsgenossenschaft) is payable annually

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Statutory accident insurance provides coverage if an employee suffers an accident at the workplace or on the way to work

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In contrast to the other four obligatory insurances (health, nursing, pension, and unemployment), the costs for accident insurance are exclusively borne by the employer

Social Security

u Every employer must inform the relevant trading association

about the establishment of his or her business and register with this organisation

u The accident insurance rate is determined on the basis of

the company’s total remuneration sum and the hazard category of the work concerned (the hazard category is determined by the relevant employers' liability insurance association)

Social Security

u Disabled Persons Fund – payable annually. The

contribution is defined according to the total number of employees, this being the basis for the determination of the number of compulsory jobs for disabled persons

u The charge is then made for all non-occupied

jobs over the calendar year

Employer Responsibilities

Employer responsibilities and obligations

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The employer has a legal obligation toward the employee, the terms and conditions are defined in the contract of employment. This contract must include:

Ø Start date Ø Position Ø Salary Ø Fringe Benefits Ø Weekly working hours Ø Annual leave allowance Ø Termination conditions

Electronic Payroll Files

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Based on the data from the contract, the electronic payroll file will be set up and the monthly payslip duly generated. The employer is responsible for the correct calculation of tax and social security deductions and also for the payment of these, which are considered held in trust - to the appropriate authorities at the correct time. An income tax return and the corresponding payment is due by latest 10th

• f the month following the current pay month, however social security

returns are due monthly on 20th – 23rd of the current month. The dates are published annually by the social security body and must be monitored carefully. The payments are the due three days before the last banking day of the current month.

Registration: starters and leavers

Starters Within 6 weeks of the employee starting the employer is obliged to register the employee with the appropriate social security body. The registration is made electronically within the payroll system and must contain the following data: Ø Name of employee Ø Date of birth Ø Start date Ø Name of medical insurance Ø State pension insurance number Ø Employer’s company registration number Ø A 9 digit employment code

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Registration: starters and leavers

Leavers Ø The de-registration certificates must be handed to the employee together with the final pay slip. Ø If an employee registers him/herself as out of work, the local employment agency will require a confirmation of employment (Arbeitsbescheinigung) which contains details in regard to duration of employment, salaries paid, terms of termination etc. Ø The employer is bound by law to issue this document and to use the special 4 page form provided.

ELStAM

ELStAM is the electronic tax deduction data system that was introduced in 2013 and is legally binding for all employers from January 2014. Each employee must supply his tax identification

• number. This is the key factor for the data transfers

between the tax office and the employer. The data transfer can only be initiated when this ID number is quoted. The employer receives confirmation of the income tax details for each ID number and reads the information into the payroll system. There is no possibility to change the tax data manually. If the employee does not submit his tax ID number, then the employer MUST make the tax deductions in the tax bracket 6 (which automatically gives the highest monthly tax deductions) until the ID number is supplied.

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Compliance

Monthly Reports and Returns: Ø Social security returns: due latest 23rd of the current salary month which in most cases involves a pre-calculation on non-recurring salary elements. Late filing incurs quite high penalties with a further charge levied in cases of late payment. Ø It is advisable to consider the possibility of direct debit (the tax authorities prefer this) for the social security payments. The alternative would be the direct deposit as the tax authorities do not accept cash and also advise against cheque payments Ø Reimbursement claims (U1 or U2) Ø Social security registration (starters) and de-registration (leavers) Ø Income tax returns: due latest 10th of the following month. Relatively high penalties are levied for late filing and even higher penalties are levied for late payment.

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Compliance

End of year form Submission date Authority Who is responsible Method of delivery Document signed by Social security statements 31st March Individual social security companies Employer Electronic to authorities Hard copy to employee & employer Employer Annual wage statements 31st March Individual tax authorities Employer Electronic copy to authorities Hard copy to employee & employer Employer

Compliance

End of year form Submission date Authority Who is responsible Method of delivery Document signed by Remuneratio n statement for accident prevention and insurance association 11th February BG Employer Hard copy to authorities and employer Employer

BG - Berufsgenossenschaft

Compliance

End of year form Submission date Authority Who is responsibl e Method of delivery Signed by Annual statement for disability contribution 31st March Employment Office Employer Electronic copy to authorities and hard copy to employer Employer Employee annual return 31st May – can be extended to 31st December if prepared by tax consultant Individual tax authorities Employee Electronic

• r hard

copy to authorities Employe e

Annual Reports and Returns:

• Annual employee tax certificates
• Annual social security certificates
• Annual state accident insurance return
• Annual return under the disabled persons law

All of the above will normally be generated by the payroll system and are transferred electronically to the appropriate authorities. Printed copies of the tax and social security certificates must be handed to the employee.

Compliance

Payslip

Payslips are mandatory for Germany and must have a format as defined in the salary statement regulations (Entgeltbescheinigungsverordnung) dated 01.07.2013. The payslip must include Ø Employer name and address Ø Employee name and address Ø Employee social security number Ø Employee tax ID number Ø Name of medical insurance Ø Tax class, number of children Ø Salary month Ø All gross pay items

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continued…

Ø For hourly paid employees: hourly rate, number of hours worked and the gross amount paid Ø For salaried employees: monthly salary full time or part time indicators Ø All social security deductions Ø All tax deductions Ø Private pension scheme deductions if applicable Ø Bank details Most companies still use the paper form for payslips since the electronic version falls under extremely stringent data protection regulations.

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Payslip

Thank you for your watching

If you have any questions please contact The Global Payroll Association help@globalpayrollassociation.com 0203 751 1510

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