Mastering Payroll Tax Deductions: An Essential Guide for Employers

Payroll tax deduction

The amount of tax an individual owes to the state is calculated based on their annual income. This income tax is deducted from the salary by the employer and is usually paid quarterly. In most cases, the tax withheld from wages is equal to the amount owed by the employee for the year. However, there are situations where an individual owes more or less tax than has been withheld.

Payroll tax deduction is essential to doing business in this state. Therefore, employers need to be aware of these deductions and be careful when calculating the payroll tax deduction.

Here you can find out how wage tax tables, tax classes and the ELStAM procedure affect the wage tax deduction and how it is calculated.

Definition of wage tax deduction

The wage tax deduction is the deduction of wage tax from the employee's salary by the employer. The tax is then paid to the state on behalf of the employee.

Income tax is a progressive tax, meaning the more money you make, the higher the percentage of tax you have to pay. This system aims to ensure that everyone pays their fair share of the tax. The income tax deduction applies to all employees, trainees and civil servants based on Section 38 of the Income Tax Act (EStG).

When an employer deducts payroll tax from an employee's salary, it must remit that money to the state on the employee's behalf. This is known as PAYE (Pay As You Earn).

The income tax deducted from an employee's salary depends on their tax number. This is a series of letters and numbers used to calculate how much income tax needs to be deducted.

It is the employer's responsibility to ensure that the correct amount of income tax is deducted from the employee's salary. If too much tax is deducted, the employee may be entitled to a refund. If too little tax is deducted, the employee may have to pay back the money owed.

How is the income tax deduction calculated?

Payroll tax deduction

The income tax deducted from an employee's salary is calculated based on his tax number. This is a series of letters and numbers used to calculate how much payroll tax has to be deducted.

The tax code is used to calculate the income tax that you must deduct from an employee's salary. The tax code is a series of letters and numbers and is used to determine how much payroll tax needs to be deducted.

The tax number is usually calculated by the tax office and is based on information about an individual's income and personal circumstances.

It is the employer's responsibility to ensure that the correct amount of income tax is deducted from the employee's salary. If too much tax is deducted, the employee may be entitled to a refund. If too little tax is deducted, the employee may have to pay back the money owed.

Characteristics of the income

The wage tax deduction is subject to several legal bases due to the Income Tax Act. In addition, the tax offices can refer to the wage tax guidelines if they are unclear about the wage tax deduction. This law is in turn supplemented by the Wage Tax Implementation Ordinance. In this way, a uniform approach by the tax offices when deducting wage tax and thus uniform practice is guaranteed.

The electronic wage tax deduction procedure ELStAm replaces the previously used paper wage tax cards. This is a great advantage for employers, as all wage tax deduction data can be transmitted electronically between employees, employers and the tax office.

Here are 7 characteristics of the wage tax deduction that you should know

  • The wage tax deduction is determined according to tax brackets.
  • The wage church tax is calculated on the basis of denomination information.
  • Any child allowances reduce the solidarity surcharge and the church tax.
  • The amount of the pension benefits depends on the employee's date of birth. These allowances are intended to ensure fairer taxation in retirement.
  • As soon as income-related expenses, certain expenses or extraordinary burdens exceed the thresholds for the wage tax allowance, the employee's monthly wage tax deduction is reduced.
  • In addition, the wage tax deduction for private health and long-term care insurance can be reduced by a higher flat rate.
  • Disabled people and people in need of care receive lump sums that reduce their monthly income tax deduction.

Income tax deduction procedure

The employer must remit all employee taxes at once (monthly, quarterly or annually). The employer can send a declaration to the tax office (regularly electronically) about the amounts withheld and paid for income tax, church tax and solidarity surcharge. The number of employees employed is not required.

In some cases, you can reimburse employees for the excess payroll tax collected by employers during the calendar year. In addition to adjusting the employee's wages, the employer can also require the employee to submit a tax return.

In addition, you can claim back uncollected wage taxes in the case of income tax assessments. See "Income Tax" and "Employee Assessment Obligation".

Employers are responsible for withholding and remitting income tax for employees. The tax offices can claim income tax that has not been withheld from the employer or directly from the employee if they determine during an audit that the employer has withheld too little income tax.

Domestic employers are obliged to collect and pay the German taxes. Employees who have their place of residence or habitual abode in Germany (general wage tax liability) must withhold wage tax. You must also withhold income tax if an employee works in Germany or takes on foreign work in Germany. If the employee receives wages from domestic public funds, nationality is irrelevant.

If you are not self-employed, you can withhold income tax. In addition to wages, you will also receive benefits in kind (e.g. free food and accommodation) and non-cash benefits (e.g. use of a company car). He cannot legally claim any income, regardless of its name or form. The employer can deduct wages from wages paid by third parties.

Income tax on salaries is what an employee would owe if they had only dependent income.

Tax brackets are assigned to employees based on their circumstances, making it easier for employers to calculate taxes. Depending on the tax class, the basic tax rate (tax classes I, II, IV) or the splitting procedure (tax classes III, V, VI) is applied. Allowances and lump sums are also included in the tax calculation.

Employees receive a lump sum of 1,000 euros and pension allowances. The flat rate for income-related expenses is 102 euros, the pension allowance is 102 euros (tax class IV), the special expenses are 36 euros (tax class IV), and the pension contributions (tax classes I to VI) are flat-rate. Single parents receive a relief amount of 4,008 euros.

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Wage tax classes:

They are to be divided into:

class I: Employees who are single, divorced or widowed, with the exception of employees in tax classes II and III

Tax class II: Employees who are single, divorced or widowed and are entitled to the tax relief for single parents classified in tax class II. Single employees are entitled to the relief amount for single parents if they have at least one child under Section 32 (6) EStG or receive child benefit for this child. The child is considered a member of the household if it is registered in the taxpayer's home.

Tax class III: Married employees, spouses in a life partnership or widowed employees after the death of the spouse

Tax class IV: Employees who are married to their life partner and receive wages from both spouses/life partners Tax

class V: If a spouse or life partner is in class III and the other classified in Class IV.

Tax class VI: An employee in tax class VI receives wages from more than one employer at the same time. The federal and state governments each receive 42.5 percent wage tax, and the municipalities 15 percent wage tax. The withholding and payment of income tax is monitored by the tax offices of the federal states.

Calculation of wage tax deductions

Calculation wage tax deductions

At ELStAM, a card with the employee's personal data, a personal identification number, a wage tax class and other allowances is electronically exchanged.

In addition, the employer can access payroll tax tables and payroll tax approximation tables. A wage tax table shows how much wage tax is withheld, how high the solidarity surcharge and church tax are. Choosing the right tax bracket affects the amount of tax credits an employee receives, because payroll taxes are determined by a combination of factors such as salary and tax bracket.

There are two types of payroll tax tables: general and special.

  • General income tax table

In addition to the statutory pension and (voluntary) health insurance, there is also long-term care insurance.

  • Special income tax table

Civil servants, judges and professional soldiers who are not insured under pension insurance

In 2004 the income tax tables were abolished and the income tax tables were based on federal, state or church taxes paid or not paid. This changed the method of calculating income tax, which is now based on a continuous formula rate and no longer on a stepped rate. Income tax calculators are increasingly replacing spreadsheets these days.

The Federal Ministry of Finance offers an online calculator to precisely calculate the income tax deduction. If someone has paid too much income tax in a calendar year, they can reclaim this amount. Suppose an employee does not want to file his tax return.

In this case, in addition to the tax return, he can state his wage tax deduction characteristics via a wage tax reduction application. This prevents the employer from withholding too much income tax.

Income tax registration

In order to deduct income tax from an employee's wages, the HR department must register with the tax office immediately after employment. This is only possible via the ELSTER tax portal. The following information is required:

  • Employee ID number
  • birth
  • Date of the start of the employment relationship
  • Date of the new employee’s ELStAM application
  • Information on other employment relationships

Based on the wage tax paid in the previous year, the wage tax registration period is as follows:

  • A one-off registration is required for wage tax up to 1,080 euros required
  • For income tax over 1,080 euros but below 5,000 euros, a one-time registration per quarter is required.
  • With income over 5,000 euros, you must register monthly.

You can submit a wage tax registration up to the tenth day after the end of the registration period via the payroll department or in coordination with the accompanying tax office.

Wage tax deduction certificate - what is it and who issues it?

Wages Concept. Word on Folder Register of Card Index. Selective Focus.-1The wage tax deduction certificate is also known as the wage tax certificate. It is a document showing how much payroll tax has been deducted from an employee's wages. Wage tax certificates are issued by employers and contain important information such as:

  • Employer's name, address and telephone
  • number Employee ID number
  • Total taxable income
  • Wage tax assessment base
  • Wage
  • prepayment
  • Solidarity surcharge on wage
  • tax
  • Other deductible allowances

The wage tax certificate is issued at the employee's request. It is important that the certificate only applies to employment - for other types of income, such as B. Interest from capital investments, it cannot be used.

When is the income tax certificate issued?

The income tax certificate for the previous calendar year is usually issued by the end of February. Employees who change jobs during the year receive a certificate from each employer.

What should I do with my wage tax statement?

The income tax certificate should be kept in a safe place. It may be required for tax purposes or when applying for a loan.

How can I get a replacement income tax certificate?

Employees who have lost their income tax certificate can apply for a replacement certificate from their employer or the tax office.

In Germany, wage tax is deducted from the employee's salary by the employer and paid to the tax office. The amount of tax deducted depends on the employee's income and any allowances or deductions.

There are different income tax brackets in Germany and the amount of tax you have to pay depends on which bracket your income falls into. The tax rates for 2020 are as follows:

  • Income up to 9,408 euros: 0%
  • Income from 9,408 to 14,853 euros: 14%
  • Income from 14,853 to 50,852 euros 32%
  • Income over 50,852 euros: 42%

There is also a solidarity surcharge on income tax, which is currently 5.5%. It applies to all income above EUR 9,408.

Employees can also claim certain allowances or deductions that reduce their taxable income and the amount of tax they pay. For example, if an employee paid too much income tax in the previous year, they may be entitled to a refund.

Income tax is just one of the taxes that residents of Germany have to pay. Other taxes are property tax, sales tax and value added tax.

Employee Regulations
Eveline Jacobse

Written by:

Eveline Jacobse

Eveline is an experienced HR expert with a passion for content writing in the field. She has distinguished herself by sharing her in-depth knowledge and insights into HR topics and trends through articles that are both practical and informative. Her experience and expertise in human resources add value, and she continues to dedicate herself to informing and inspiring peers with her well-thought-out and well-founded content.


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