Many founders still know the wage tax from their time as employees, when the income tax was deducted directly from their own wages. As a founder, one gets to know the income tax from the employer's point of view as soon as employees are hired.
But what do founders, who are now in the role of the employer, have to consider when paying the wage tax?
We show what is important in wage tax and its payment, which wage tax classes there are and what especially shareholder-managers should know about wage tax. Those who work a lot can also simply outsource their payroll accounting to a professional.
What is the wage tax anyway?
The wage tax is probably known to every employee in Germany, because it is applied exclusively to income from non-independent work - this includes both the wage itself and monetary benefits. The tax liability is deducted directly from the gross wage or directly retained by the employer, who then pays the wage tax to the tax office. Employees are assigned to one of six tax categories for the calculation of the wage tax - depending on income and marital status, different wage tax rates are credited in order to exclude any advantage or disadvantage to the taxpayer.
The wage tax is converted to income tax at the end of the year - this is done in the context of the (wage) tax return, which every employee can submit voluntarily. The wage tax can therefore also be described as an advance payment on the income tax. Together with the social security contributions, the solidarity surcharge and, if applicable, the church tax, the wage tax for employees forms the difference between gross and net.
Paying wage tax for employees
Everyone who employs employees must pay this wage tax to the tax office. Registration via the electronic tax portal (Elster) is mandatory for entrepreneurs. The wage tax must be registered and paid at the tax office responsible for your own company, not at the tax office of the employee you have hired.
Especially founders who are dealing with the subject of wage tax for the first time have to keep in mind that wage tax is not only payable on cash benefits, but also on so-called non-cash benefits or other benefits in kind that the employee uses. Typical examples are the private use of a company car or meal vouchers. To avoid unnecessary mistakes right from the start, it can be helpful to contact specialized tax consultants for payroll accounting.
How to pay the wage tax in detail?
As an employer, each of your employees has to withhold the corresponding amount of income tax from their gross wages. This amount is transferred in one sum to the tax office responsible for your company on certain due dates. To do this, you must submit a regular electronic wage tax return, in which you explain the relevant amounts and their composition (wage tax, solidarity surcharge and, if applicable, church tax) - the old paper wage tax card has now been replaced by a mandatory electronic procedure. In official German, the system is called Elektronische LohnSteuerAbzugsMerkmale (ELStAM).
If you do not leave the payroll tax accounting to your tax consultant, you will need a payroll accounting program that supports ELStAM or has a corresponding interface. The common programs for accounting have already integrated the so-called wage tax reporting system.
Afterwards you have to register once as an employer with ELStAM for the wage tax registration. Later on, you will also have to register each employee you employ with ELStAM in order to be able to pay their wage tax correctly.
How is the income tax calculated?
The income tax of an employee is calculated from different features, the so-called income tax deduction features. These include:
- Tax class
- Child allowances
- Tax allowance
- Additional amount
- contributions for private health and nursing care insurance
- Information on the avoidance of double taxation
- Denomination or church affiliation (since the employer also withholds the church tax)
In addition, every employer needs the unique identification number of his employee in order to pay the wage tax. Every person liable to tax in Germany has such a number. For employees who do not have this number, e.g. because they are not obliged to register in Germany or who have lost it, the tax office can provide the company with a certificate for the deduction of the wage tax.
Deadlines for the deduction: When is the wage tax due?
Like many other taxes (e.g. value-added tax), wage tax must be paid by the 10th of the month following the due date at the latest.
Depending on the amount of the company's declared wage tax, you must pay the wage tax for your employees monthly, quarterly, or even annually: Those who paid less than 4,000 euros in wage tax for their employees in the previous year can pay the wage tax once a quarter; those who paid less than 1,000 euros in the previous year can pay it only once a year. The less wage tax you have to pay, the longer the payment interval in which you have to pay the wage tax may be.
Especially with longer intervals, however, you have to be careful - as with all tax issues (especially sales tax) - not to run into liquidity problems when the taxes really become due. Especially if you pay the wage tax for employees only once a year or in a quarter, you should set the money aside during the year.
Overview of wage tax classes
Based on the above-mentioned aspects, employees are assigned to one of six tax classes:
|Tax class||can be classified...||Special features|
|I||Singles, single people (also after divorce or death of the partner), unmarried couples living together||Basic allowance, employee lump sum, special expenses lump sum|
|II||Single parent workers||Basic allowance, employee lump sum, special expenses lump sum, relief amount for single parents|
|III||Married employees whose partner has no or significantly lower income; married employees whose partner is classified in income tax class V||Basic allowance, employee lump sum, special expenses lump sum|
|IV||Married couples (or registered partnerships) with approximately the same income||Basic allowance, employee lump sum, special expenses lump sum|
|V||Married employees whose partner has a significantly higher income; married employees whose partner is classified in income tax class III||Employee lump sum, special expenses lump sum|
|VI||Employees with several jobs||-|
Special features of the wage tax classes
- Wage tax class I: The common wage tax class for single employees.
- Wage tax class II: Single parents are classified in this wage tax class after divorce/death of the partner, provided that no other potential legal guardian lives in the household. Persons classified in this category can also benefit from the relief amount; however, this must first be applied for at the appropriate tax office.
- Wage tax class III: Married persons whose income is different (about 60/40) are classified here, whereby tax class III is chosen for the partner who has a higher income.
- Wage tax class IV: Married couples who earn about the same amount and would have a tax disadvantage due to the III/V combination are classified in this tax class. Married couples who wish to change from the IV/IV combination to III/V can also apply for subclass IV with a factor in order to avoid back taxes resulting from the change.
- Wage tax class V: Married couples whose partner is assigned to tax class III, i.e. who earn the higher income, are classified here.
- Wage tax class VI: The common tax class for employees who have several jobs. Here the (second) job with the lower income is classified in order to keep the tax payments as low as possible since tax class VI is the tax class with the highest deductions and lowest allowances.
Tax allowances and lump sums for income tax
Employees in tax classes I to IV also benefit from the basic tax allowance of 9,408 euros for 2020; the special expenses allowance of 36 euros and the employee allowance of 1,000 euros can also be claimed by almost all tax classes (I to V).
How is the wage tax calculated?
To calculate the correct amount of wage tax, the Federal Ministry of Finance (https://www.bmf-steuerrechner.de/) (BMF) publishes updated wage tax tables every year. Based on the wage tax deduction characteristics, these tables calculate how much wage tax the founder has to withhold from his employees and pay it over to the tax office. Basically, the current wage tax table is integrated into the current programs for wage accounting. This automatically calculates the correct wage tax with the features you have stored. If you do not want to use a wage tax program, you can also find freely available wage tax calculators on the Internet.
When using wage tax programs or calculators, you should always bear in mind that you are responsible for possible errors in the calculation yourself and that, in case of doubt, you cannot shift the responsibility to a faulty or incomplete program. For this reason, it is recommended to use reliable providers for the calculation of the income tax.
Income tax for self-employed persons: What should be considered?
The calculation of income tax for employees may seem complex at a cursory glance at the income tax tables, but in principle, it follows relatively simple rules. But what about income tax for the founder himself?
It is important that you register your self-employment no later than one month after you start your business. The tax office will then send you a tax registration form by post; alternatively, you can register with the tax office yourself to avoid possible delays. You should take sufficient time to complete the form and, in case of doubt, consult a specialized consultant, as the information provided may have a significant impact on your tax burden.
It makes a difference, for example, whether the tax office classifies the business start-up as a freelance activity or as a commercial enterprise. In the latter case, you will be subject to trade tax from a profit of over 24,500 euros - the trade tax allowance applies to all income up to this amount. Sole proprietors and partners of partnerships (for an overview of the different legal forms) do not have to pay income tax if the company generates losses. You can read more about income tax for self-employed persons here.
Income tax as managing director of a corporation
Most founders begin their independence with a sole proprietorship or a partnership under civil law (GbR). However, if the company is growing rapidly, a limited liability company (GmbH) is often more appropriate later on. Then there is also the question of the wage tax for the founder, who is then not only a partner but also at the same time managing director - i.e. partner-managing director - of the corporation.
First of all, however, the tax status of the partner-managing director must be determined. Is he a controlling partner (more than 50 percent of the shares), can he enforce his will, and is he not authorized to give instructions? In this case, the managing partner is considered an entrepreneur, also in terms of tax. However, if these points do not apply, the managing partner is to be treated like an employed employee with regard to wage tax. This means that the salary and other remuneration must be offset against tax and paid as wage tax or other deductions. In case of doubt, the status determination procedure of the clearing office can help to assess the situation and act in a fiscally correct manner.
Caution is advised with the amount of the remuneration of the managing partner. It is to be chosen in such a way that it appears appropriate to the amount of work and performance when examined neutrally. The question is, therefore: Would the founder also pay this salary to an externally employed managing director? If the founder pays himself a significantly higher remuneration as managing director of the company, there is probably a hidden profit distribution. This is punished by the tax authorities; if it is discovered, the managing director must pay the allegedly "saved" taxes.
Profit distributions are tax-relevant for the company, because - as the name already suggests - they are deducted from the company's profit and should not be booked as regular, tax-reducing costs. This is also relevant for the shareholder-managing director, since profit distributions, i.e. capital income, are taxed differently than wages.
As managing director you are liable twice in these cases: On the one hand, you will get difficulties with the tax office as a private person if you suspect that you declare income incorrectly (e.g. capital income as wage components). On the other hand, you as a manager are liable for the correct declaration and payment of income tax - including your own. This is also checked by the tax office during the tax audit.
Payroll accounting and payroll accounting
The wage tax is one aspect of the tax obligations with the topic employees. We have compiled further details on wage accounting in separate chapters.