Income tax is a direct tax. It is levied in Germany on the income of natural persons. The income tax as a community tax is the most important source of income for the state.
In contrast to natural persons, companies must pay the so-called corporate income tax.
In general, both income from self-employment and income from employment must be taxed in Germany. The basis for calculating the amount is laid down in the Income Tax Act (EStG).
If foreign employers employ an employee in Germany and the employer has neither a domicile or habitual residence nor its management, registered office, permanent establishment or a permanent representative in Germany, no wage tax is to be withheld on the wages paid. In this case, employees who are taxable in Germany must notify the tax office and pay tax on the wages paid by the foreign employer by submitting an income tax return.
Why does an income tax rebate have to be paid?
In contrast to employees who already pay income tax on a monthly basis via their wage tax characteristics, the self-employed and freelancers must make an advance payment. The tax assessment notice, in this case, the advance payment notice, provides information on the amount of income tax. However, advance payments must already be made before this lands in the mailbox. The amount of tax to be paid is always based on income earned in the last assessment period.
If the tax office sets too high a tax burden because, for example, the income situation has changed, a reduction of the income tax can be obtained from the tax office on application.
How is the amount of the advance income tax payment determined?
The amount of income tax is not determined until the End of an assessment period with the tax assessment notice (advance payment notice). However, advance payments must already be made before the tax assessment is made. The amount of the advance payment is generally based on the income earned at the last assessment.
If in the taxpayer's opinion, the advance payments for the current calendar year are set too high because important basic conditions have changed, the taxpayer can apply for a reduction of the advance payments. A reduction is also possible in the current tax year.
When is the income tax prepayment due?
Advance payments on the expected income tax liability are due quarterly, namely on
- March 10th
- June 10th
- September 10th
- and 10th December to make advance payments (Section 37 of the German Income Tax Act).
When are advance payments fixed?
Advance payments are only to be fixed if they amount to at least EUR 400 per calendar year and at least EUR 100 for an advance payment date. A subsequent increase in advance payments will only be made if it amounts to at least EUR 5,000 in the advance payment period.
What does the employee pay?
Once we applied for income tax pre-payments the tax authority will send out an assessment notice based on the yearly gross salary. The employee will have to pay the income tax pre-payments on his own and in time.
What does the employer pay?
The employer on the other hand does not pay the taxes and therefore pays the salary out gross just with deduction of the social security contribution.
What are the risks?
- The employee could get a worse credit rating
- the AG has no control over whether the AN really pays the tax and in the end, the liability is probably with the AG
- Process must be repeated for each new employee with his own tax office of residence
- If the Contractor leaves, correspondence with the FA must again be conducted. Have notices amended
What information do we need from the employee?
We need the following personal employee data to apply for income tax pre-payments (if we do not have it already from the starter checklist):
- Name and address
- Tax ID Number
- Tax Number
- individual tax authority name
- estimated yearly gross salary
- estimated working period
We recommend the incorporation of a German legal entity!