Wrong tax class?

German wage tax is calculated based on tax classes. A wrong tax class could lead to a substantial cash effect.

Every employee in Germany (except for employees with monthly wages below 450 euros, called Mini-Jobber) has a tax class:

Class one – single tax payer

Class two – singly taxpayer with children, living alone without another taxpayer

Class three – married taxpayer, partner with the higher income

Class five – married taxpayer, partner with the lower income

Class four – married taxpayer, both partner earning roughly the same

Class six – taxpayer, who have not provided their employer with proper information to carry out the tax calculation, or taxpayer with a second employment

In case your wage tax calculation is based on tax class one, but in fact you are married, you need to change the tax class. The correct tax class would be either four/four (when bot partner are employed and will earn roughly the same amount of salary) or three/five (when one partner will earn substantially more ore one partner is not employed).

The correct address to ask for such a change is your local fiscal authorities. The employer cannot help you and, by law, is not able to do so.

Please find the official form for the application here.

In case you do not know your local fiscal authorities, you can use the official search engine that you will find here.

Wage tax deductions are now valid for two years

A new letter from the ministry of finance does extend the validation of wage tax deduction for two years instead of one.

Employees can apply for a deduction of certain costs already in the monthly wage tax calculation. Examples for such deductions are costs for long travels between home and work, costs for an additional flat for business purposes (double household deduction) but also high medical bills or other extraordinary expenses, like alimony payments.

In the past, such an application needed to be filed every year. With the start in January 2016, application filed for 2016 will be valid for two years. The employee need to file a new application for 2017 only when there is a change in the basis for the deduction. In addition, the employee needs to notify fiscal authorities when he realized the deductions would not be necessary at all.

The applications for the tax year 2016 can be filed on 1st October 2015 as the earliest possible time.

Employee, but no wage tax deduction?

 Basically, every employer is obliged to carry out the income tax deduction for employees. However, there are exceptions.

 The term of the employer is not defined, but may derive from the definition of the term employee defined in para 1 LStDV (wage tax implementation regulation). Thereafter, an employer determines in its role the place, time and content of the activity of the employer.

 A usual employer’s obligation is to withhold and pay the monthly wage tax. However, this applies only to domestic employers. A foreign employer may also be liable to pay the wage tax deduction if he (at least) maintains a wage tax permanent establishment in Germany.

A wage tax permanent establishment is the place where the individual elements of remuneration or pay details for machine payroll input values ​​are determined for payroll purposes.

 In general, this is the representative of the employer who will determine, calculate and record the wages, for example, defines the payment of overtime or night supplements. Typical of this is a local office in which the team leader or supervisor determines the operational plans, checks and countersigns the time sheets of the employees.

 An employee but who works from home (home office) for a foreign (=non-German) employer usually has no superior in Germany. It operates autonomously, confirms important decisions with the superiors abroad and decides about overtime and vacation without major influence of the foreign employer. Such employment situation will usually not lead to a permanent establishment (wage tax or corporation tax). Also, in this case a foreign employer is not required to monthly wage tax withholding (PAYE). Rather, the employee pays income tax by way of quarterly advance payments.

 Nevertheless, a payroll is necessary because the employee who concentrates his center of life in the home office in Germany continue to be subject to the German social security law. The calculation of the contributions to the German social security system is rather complicated and the monthly reporting needs a qualified and certified system.

 Such specific situation calls for a competent payroll provider, which has the understanding and knowledge of the speciality and can communicate and explain the facts and circumstances not only to the authorities but also to the employees.