Taxes in Germany – What You Need to Know

We want to make your life easier. Here you will find important information and explanations about the German tax system

2020-04-29
Maxine

The German tax system is known for its complexity and obscurity. There are about 40 different taxes and many different ways to define and classify them, and if you earn income in Germany, you won’t be able to escape them. This is why we gathered the most important terms you need to know about taxes in Germany.

The German tax system

If a natural person is subject to tax in Germany, most sources of income are generally taxable. In Germany, taxes are paid throughout the year and adjustments are made at the end of the year for possible under or overpayments. Are you currently planning to relocate to Germany? Read on here. Want to know more about how the German Social Security System works? You’ll find more information in our blog post about the German Social Security System.

Terms you should know

Are you keen to learn more about taxes in Germany? Then let’s start. For each term you’ll find the German translation. This will hopefully give you a better orientation when dealing with authorities. This article covers the following topics:

  • Tax Office – Finanzamt
  • Wage Tax – Lohnsteuer
  • Income Tax – Einkommensteuer
  • Wage Tax vs. Income Tax – Lohnsteuer vs. Einkommensteuer
  • Income Tax Certificate / Certificate of Wage Tax Deduction – Lohnsteuerbescheinigung
  • German Tax Calculator – Lohn- und Einkommensteuerrechner
  • German Tax Classes – Steuerklassen
  • Income Tax Declaration – Einkommensteuererklärung
  • How To File The Income Tax Declaration – Einkommensteuererklärung ausfüllen
  • Income Tax Assistance Association – Lohnsteuerhilfeverein
  • Tax Consultant – Steuerberater
  • Electronic Tax Declaration – ELSTER (ELektronische STeuerERklärung)

Tax Office, Wage Tax and Income Tax – Who, where and what’s the difference?

Tax Office – Finanzamt

You pay your taxes to the tax office. The tax office is a local authority: it has over 650 branches in Germany and administers taxes on behalf of the municipality, the federal state and the federal government. Finding the right tax office is simple: it is selected according to your current residence. You can easily find your local tax office using the tax office search function.

Wage Tax – Lohnsteuer

The wage tax is collected at source from compensation and paid directly to the tax office – this means that your employer withholds it directly from your salary. If you receive an income from other sources, this is covered by the income tax. An online tax calculator (see below) can help you get a first impression of how much tax you will have to pay.

Income Tax – Einkommensteuer

The income tax covers income from other sources, such as self-employment, rent collections and investments, and must be paid by the individual. If you have any of these sources of income, you are obliged to file an annual tax declaration.

Wage Tax vs. Income Tax – Lohnsteuer vs. Einkommensteuer

It is very simple: the difference between wage tax and income tax is the method of collection. The wage tax is automatically collected by the tax office with your income tax certificate that you receive at the end of each month from your employer. Income tax must be paid by the individual themselves.

Note: Are you looking to start a new job? Then you should be aware of the deduction. In Germany, the gross salary per year is usually negotiated. Taxes are deducted from it every month. And there is a huge difference between your gross salary and your net salary depending on your tax class.

Income Tax Certificate / Certificate of Wage Tax Deduction – Lohnsteuerbescheinigung

The employer provides each employee with the certificate of wage tax deduction. This includes a monthly pay slip as well as the annual certificate of wage tax deduction which you will need to file your income tax declaration.

German Tax Calculator and German Tax Classification

German Tax Calculator

An online tax calculator can help you get an idea of how much income tax you will have to pay. We would recommend this one by the Federal Ministry of Finance: https://www.bmf-steuerrechner.de/

German Tax Classes – Steuerklassen

There are six tax classes in Germany. They directly affect the amount of taxes that you have to pay.

  • Class I: Single/widowed/civil partnership/divorced. Married persons not in tax classes II, III or IV
  • Class II: Single but entitled to single parent allowance
  • Class III: Married but spouse does not earn wages/is classified under tax category V/recently deceased
  • Class IV: Married (not separated); both earning and residing in Germany
  • Class V: Married but one spouse is classified under tax class III
  • Class VI: Individuals on multiple wages from more than one employer

According to your circumstances it might make sense to change your tax class. To be sure to have the right classification you can consult the tax office or a tax advisor.

The Annual Income Tax Declaration: What you need to know and where to find help

Income Tax Declaration – Einkommensteuererklärung

If you are self-employed in Germany, you have to file an annual tax declaration. If you are an employee, you are not obliged to file the tax declaration, but it is recommended. The tax authorities then check whether you have paid too much income tax. This can really pay off for you: on average, nine out of ten people receive a refund, usually an amount of around 900 euros.

How to file the Income Tax Declaration – Einkommensteuererklärung machen

There are several ways to file your income tax declaration: either with help or on your own. If you prefer to deal with your tax declaration yourself, it is common to file it via ELSTER (see below). This is an electronic form with which you can send your tax declaration to the tax office online. If you have any questions, your local tax office will be happy to help you at any time.

There are also a number of online apps like Taxfix or Wundertax that help you complete your tax declaration step by step in an easy and understandable way – without getting too expensive. They even allow you to fill in your tax declaration in English. And if you have any more questions or this is just too much effort for you, you can consider visiting an income tax assistance association. It will help you file your tax declaration.

Income Tax Assistance Association – Lohnsteuerhilfeverein

An income tax assistance association provides advice and helps you file your tax declaration form. They will charge a fee for this, but at a fair price, considering that you get support from official tax experts. You can find an overview of income tax associations in Germany on this website: https://www.bvl-verband.de/verband/mitgliedsvereine

Tax Consultant – Steuerberater

A tax consultant will help you fill out your income tax return. They are usually self-employed and real experts in their field. They will most likely be more expensive than income tax assistance associations or any software. But if you're looking for someone to guide you through the process and perhaps advise you on more complex tax issues, this could be your way.

Electronic tax declaration – ELSTER (ELektronische STeuerERklärung)

ELSTER is the German online tax office system. This means that the central website elster.de serves an online tax office. Its purpose is to enable anyone to take care of their tax declaration online. Entrepreneurs and self-employed persons must submit their tax returns and declarations electronically via ELSTER. Employees, pensioners and retirees can do this voluntarily. Using this saves you from printing out and posting your tax form to your local tax office. If you use it on an annual basis, you can have the form pre-filled which makes it easier for you.

We hope that this overview will help you find your way through the German tax system. But there is so much more to learn. Maybe you want to know more about the topic of insurance in Germany? Go to our website and learn about how Getsafe revolutionises the insurance industry. Fully digital, via app, with daily cancelation. So that you are as flexible as possible, living in the knowledge that we’ve got you covered.