Your guide to Germany payroll

Running a smoothly operating and compliant payroll is essential to attracting and retaining talent in Germany. However, navigating payroll, taxes, and labor regulations can be complex, especially for international employers based in the U.S. 

That’s why most companies look for partners who offer compliance support in Germany, like a temporary work agency, also known as an Arbeitnehmerüberlassung (AuG) company. 

For instance, Payoneer Workforce Management, a licensed temporary work agency (AuG company), can help handle payments, taxes, and social security contributions while helping you stay compliant with German employment laws.

Let’s explore the payroll system in Germany and what employers need to know. 

Payroll in Germany: Wages and other payments

Employers setting up payroll in Germany need a working knowledge of wages, social insurance contributions, taxes, and additional benefits like sick pay, maternity allowance, severance, and bonuses. 

Understanding wages and other payments helps employers stay compliant and competitive.

Payroll cycle

In Germany, payroll typically follows a monthly cycle, with salaries paid at the end of each month. 

Minimum wage

As of January 2025, Germany’s minimum wage is EUR 12.82 per hour. 

While German law does not provide a single statutory definition of overtime, it is generally understood as any hours worked beyond the agreed contractual schedule. 

Employers must also comply with legal working time limits: a maximum of 10 hours per day and an average of 8 hours per day over a six-month reference period, with a weekly cap of 48 hours.

For employees with higher base salaries, overtime compensation may be considered included in their regular pay. However, when collective bargaining agreements or company policies apply, overtime must be compensated separately according to standard multipliers:

• Weekdays (Extra Hours): 1.25 times the normal wage
• Night Hours: 1.5 times the normal wage
• Weekends (Normal & Extra Hours): 1.5 times the normal wage
• Public Holidays: 2 times the normal wage

These rates ensure compliance with German labor regulations and collective agreements.

Sick pay

Employees in Germany are entitled to up to 6 weeks of paid sick leave per illness. This sick pay is equal to their regular wages and is paid by their employer. 

After six weeks, the employee’s health insurance takes over payments, covering 70% of the employee’s gross pay or up to 90% of the employee’s net monthly salary. 

Maternity pay

Germany has a Maternity Protection Period (Mutterschutzgesetz) of 14 weeks (6 weeks before the birth and 8 weeks after), during which mothers are entitled to their full pay. 

Maternity pay (Mutterschutz) is split between the employer and the employee’s health insurance provider. Statutory health insurers pay EUR 13.00 (tax-free) per day, with employers making up most, if not all, of the remaining salary. 

If their child is born premature or the employee has multiple births, the mother is entitled to 12 weeks of fully paid leave. 

Maternity pay is calculated based on the average pay of the previous 13 weeks, or the 3 months before the month of birth. 

Severance packages

Germany does not mandate severance pay for all dismissals. However, employees dismissed without severe cause are usually entitled to 50% of 1 month’s wages per year of service, as per their collective bargaining agreement or employment contract. 

The severance is capped at a 12-month wage, or up to a 15-month wage for employees over 50.

13th-month salary

While not legally required, the 13th-month salary, a year‑end bonus equivalent to one month’s pay, is customary in many German companies. This bonus is contract-dependent and often tied to job performance. 

Employer payroll taxes in Germany

Payroll taxes in Germany include income tax withholding, social security contributions, and, in some cases, church tax. 

Income tax

Employer payroll taxes in Germany ​include income tax (Lohnsteuer), which is deducted from an employee’s gross salary based on progressive brackets ranging from 0% to 4%. 

Germany’s progressive income tax rates are as follows:

Taxable income range	Tax rate
Up to EUR 9,984	0%
EUR 9,985 – EUR 58,596	14% to 42%
EUR 58,597 – EUR 277,825	42%
EUR 277,826 and over	45%

Social insurance contributions

In Germany, social security is known as social insurance (Sozialversicherungsbeiträge). There are four components of German social security:

• Pension: 18.6%, split equally between employer and employee (9.3% each)
• Health (GKV): 14.6%, split equally (7.3% each)
• Long-term care: 4.2% to 5.2% split unequally (1.8% employer, 2.4 to 3.4% employee)
• Unemployment: 2.6% split equally (1.3% each)
• Sickness levy (U1): 2.5%, employer only
• Maternity levy (U2): 0.65%, employer only
• Disability: 0.64%, employer only
• Insolvency: 0.09%, employer only
• Accident (employer only)

Solidarity tax

Introduced in 1991 to support German reunification, the solidarity surcharge is a flat 5.5% on income tax. 

Germany payroll compliance best practices

In Germany, payroll laws are complex and may evolve. To stay compliant, it’s best practice to:

• Monitor legislative updates for annual wage, tax, and insurance changes
• Audit payroll calculations periodically to ensure accuracy
• Train HR and payroll staff on regulation changes
• Record earnings, deductions, and tax filings systematically

Alternatively, employers can simplify operations and stay compliant by using an AuG company that offers global payroll like Payoneer Workforce Management. 

Payoneer Workforce Management assists with payroll, deductions, reporting, and statutory requirements, making international payroll a streamlined process.

Your options for payroll services in Germany

When setting up payroll in Germany, companies can:

• Set up a local entity: Enables full control, but comes with legal complexity and cost
• Hire contractors: Useful for short-term needs, but risks worker misclassification and has limited oversight
• Partner with a licensed temporary work agency (AuG company): Best for global scalability as it provides support with payroll, tax, benefits, and reporting, while remaining compliant. 

Payoneer Workforce Management can help simplify your payroll management. Global businesses, like US employers paying employees in Germany, can benefit from seamless payroll processing without the need to establish a legal entity. 

Book a demo today.

FAQs

1) How does payroll work in Germany?

Employers typically pay employees in Germany monthly. They withhold deductions for income tax, solidarity tax, church tax (if applicable), and social insurance.

2) Is 13th-month pay mandatory in Germany?

No, 13th-month pay is not mandatory in Germany, though it is common for this bonus to be paid around Christmas time.

3) How is salary paid in Germany?

Salary is usually paid monthly into a German bank account. For foreign companies, using a licensed temporary work agency (AuG company) helps employers manage payroll in Germany without establishing a local entity.