Income Tax for Employees

Who is subject to income tax?

Every physical person is subject to income tax with domicile or habitual residence in Germany. This also includes minors, and elderly people. They all fall under the same rules. Sometimes it might be a good idea to share income – especially with minors. This will be able to use the statutory set-offs.

How high is income tax and when is it due?

Taxable income starts at € 8,004 with 16% income tax and leads in brackets up to approx. 52% starting € 52,882. Double these thresholds for married persons (§32a EStG). Starting this year, taxpayers have two months longer to turn in their tax returns. The tax deadline is now 31 July. Anyone who gets help from a tax consultant has even more time: until the end of February. If you file too late, you have to expect surcharges of at least € 25 per month. An extension to turn in the receipts later as there was before, is no longer in place.

How is the taxable income to be determined?

The general principle income taxation in Germany is based on the individual performance. Your world-wide income will generally be taxed in Germany but double taxation agreements will usually prevent you from paying taxes in Germany and at home. The very basic and crude formula is simple income - expenses = taxable income.

Computing the Taxable Income

– pursuant to §2 EStG. (N.B. This overview covers about 90% of the rules!)

(earnings before
income-related deductions)
(Einkünfte vor Abzug
von Werbekosten
  earnings (= profit) Einkünfte (= Gewinn)
minus contribution to assistance for old-age Altersentlastungsbeitrag
minus relief for single parents Entlastungsbeitrag für Alleinziehende
  = total amount of earnings = Gesamtbetrag der Einkünfte
minus special expenses Sonderausgaben
minus extraordinary expenses Außergewöhnliche Belastungen
  income = Einkommen
child benefits or exemptions
Kindergeld oder Kinderfreibetrag
  = income to be taxed or taxable income = zu versteuerndes Einkommen


Why is the tax law and taxation in Germany so very complicated?

The law on taxes in Germany is as regular as the irregular verbs in the English language. This fact is due to the Germans’ attitude toward the fiscal authority. It is considered as a sport, comparable to a cat and mouse game, for a German to outwit the fiscal authority in order to reduce tax payments as much as possible. This corresponds with the difficulty of tax law. The eagerness for this game supposedly derives from the general dissatisfaction with Germany’s political and/or commercial situation.

Do I not have to pay any value added or sales tax when I buy something? I have been always paying the price on the tag and nothing more.

Sure, you are paying value added tax. Here we typically have all inclusive prices. Taxes and service fees must be included in prices for the end consumer (§1 I 1 PAngV). As a businessman on the other hand, you will often find two or three sums as the “price” (net/gross sum, VAT). What ever the price structure may be, do take a good look for the final price.