What is social insurance in Germany? A Process from Gross To Net.

The social insurance system in Germany is designed to ensure that all employees in the country will receive benefits if they become sick, unemployed, or retired.

Social insurance is mandatory in Germany, meaning that both employers and employees are required to pay into the system. This ensures that all employees will be able to receive benefits if they become sick or unemployed.

Germany statutory employers’ responsibilities 2023

Income tax is an employee-only contribution. In any German legal entity, it is the employer’s responsibility to withhold the tax from the employee’s gross income and to pay it directly to the tax office for all the company’s employees (1 - 3).
Germany has a structured social security system (4 – 8). It is made up of the following components:

• Health insurance
• Nursing care insurance
• Pension insurance
• Unemployment insurance

Social security contributions are paid equally parts by the employer (ER) and employee (EE). The total social security contributions are the sum of ER and EE amounts and are calculated as a percentage of the gross income. The contributions are transferred by the employer to each employee’s health insurance which collects the contributions to all the social security components.

Notes ( )

1. Under certain conditions employees may choose private health insurance. This requires an income exceeding 66.600 € annually/5.550,00 € monthly. In this case, the total contributions for health insurance and nursing care insurance are set by private health insurance. The employee will receive an employer contribution, capped at 403.99 € / 76.06 € per month max. (health/nursing care insurance).
2. There is a reduced contribution for employed pensioners of 14,0% rather than 14,6%, ER: 7,0 % EE 7,0%.
3. This is an additional contribution to the health insurance company set by the health insurance company itself.
4. This limit is used to assess if the contribution/participation in public health and pension insurance is obligatory for EE
5. Note: additional rate for childless EEs older than 23 years: 0,35%. Rates differ in Saxony: ER 1,025%; EE 2,025%;
6. Please refer to the detailed explanation of U1 and U2 below.

Continued payment of income insurance (sick leave and maternity leave | U1 and U2)

The German Law on the Reimbursement of Employer Expenditures (Aufwandsausgleichsgesetz, AAG) reduces the employer’s loss due to statutory continued payment of employee compensation to incapacitated employees (sick leave pay | U1), and to expenditures required by the Maternity Protection Act (maternity leave pay | U2).
The reimbursement procedure U1 applies to employers who employ no more than 30 people as a rule. Part-time employees will be taken into account according to their regular weekly working hours on a factor of 25% per every 10 hours per week. All employers, regardless of the number of employees, participate in the U2 reimbursement procedure.

U1 – reimbursement of sickness expenses (sick leave pay)

Health insurance reimburses employers for the bulk of their expenditures for the statutory continuation of payment of employee compensation to the employee (sick leave pay). The reimbursement rates are set by the health insurance individually and vary between 40% and 80% of the gross payment.
The funds for the U1 reimbursement procedure are provided in full by a special benefit cost contribution from the participating employers. The amount of the special benefit cost contribution is set by the health insurance individually and varies between 1,4% and 5,1%.
The benefit-cost amounts assessed are entered together with the total social insurance contributions in the contribution account statement (contribution group U1) by Paychex and paid. The reimbursement request must be submitted by electronic data transmission. It is based on the doctor’s certificate provided to the employee’s health insurance and retrieved by electronic data transmission. Paychex applies for reimbursement upon request.

U2 – reimbursement of maternity expenses (maternity leave pay)

The health insurance reimburses employers regardless of the number of employees for:

• the maternity benefit subsidy paid during statutory protection periods before and after childbirth (six weeks before and eight weeks after). The subsidy amounts to the employee’s net payment during the protection period.
• the employment compensation paid to compensate for a reduction in earnings occurring due to the prohibition of employment. This subsidy amounts to the gross payment plus the employer’s social security contributions.

Financing is provided by a special benefit cost contribution assessment of participating employers. The basis for the U2 assessment is the employment compensation of all employees (male and female) in the company.
The assessed amounts for compensation of maternity expenses are also to be documented and paid along with the rest of the social insurance deductions on the contribution account statement (contribution group U2).
The reimbursement requests must be submitted by special form. It is based on a doctor’s certificate provided for by the employee. Paychex applies for reimbursement upon request (copy of doctor’s certificate to be submitted).

Minimum wage raised

Statutory minimum wages have been raised to EUR 12.00 gross per hour on October 1st, 2022, and will remain on that level throughout 2023. Statutory minimum wages apply nationwide and are industry-independent to all employees who are employed in Germany, regardless of whether the employer is German or not.
Some industrial sectors have higher minimum wages. In this case, this higher minimum wage applies.

The employer is obliged to pay the social insurance contributions on behalf of employees. This includes all health insurance contributions, pension insurance contributions, and accident insurance contributions.

The employee must pay his or her own health insurance premiums (private or public). The employer does not pay these costs for you as an employee but only pays social security charges for unemployment benefits, pensions, and health care costs.
The employer deducts the amount due from each paycheck and pays this amount to the pension fund and accident fund.

The main contributors to these funds are employers and employees, with the exception of employees who earn under roughly $2,600 per month. These workers only contribute 1 percent of their income to the funds.

Employers are required to pay both an employer contribution and a payroll tax that goes into a fund called "Ausgleichskasse." Employees also make contributions out of their paychecks into this fund as well as another one called "Betriebsrentenversicherung" (BRV).

When an employee begins working for an employer, the former must register for social insurance with the local tax office within one month of taking on employment duties. Registration is free and can be done in person or online.

The following information is required:

• passport or identity card;
• proof of residence (rental contract); and
• bank account number

After registering for social insurance, the employee should work out his or her gross salary by adding together all revenue from multiple sources - including bonuses, overtime pay, and so on - then subtracting any applicable deductions such as tax savings or contributions towards pension plans.

The employee should work out his or her gross salary by adding together all revenue from multiple sources - including bonuses, overtime pay, and so on - then subtracting any applicable deductions such as tax savings or contributions towards pension plans.

After registering for social insurance, the employee should work out his or her gross salary by adding together all revenue from multiple sources - including bonuses, overtime pay, and so on - then subtracting any applicable deductions such as tax savings or contributions towards pension plans.

Next, calculate net income by subtracting from gross salary any self-employment tax that is payable by individuals operating their own business entity rather than through a traditional employer-employee relationship (e.g., sole proprietorships). The self-employment tax rate is calculated by multiplying your gross income by a percentage that depends on how much you earn:

If you earn less than EUR 54,800 per year, the rate is 18% of your total earnings up to EUR 54,800 and 26% above that amount.
If you earn more than EUR 54,800 per year but less than EUR 67,200 per year (or if your spouse earns more), the rate is 25%.

In Germany, most people will be eligible for some form of social insurance when they retire but the exact type depends on how much they have been earning over their working life. The amount of social insurance you get depends on whether or not you are employed and if so, what kind of work you do (blue collar vs white collar).

If you're self-employed or unemployed at the time of retirement, then it's best to check with one of the local authorities who can provide further information on what benefits may be available in these circumstances.

Conclusion

Social insurance is a vital part of the German economy. It helps workers ensure that they receive benefits if they become sick or unemployed, while also providing pensions for retirees. It is important that you understand how this system works so that you can ensure you are receiving all the benefits available to you under it!