Step-by-Step Guide: How to Pay Taxes in Germany

Paying taxes in a foreign country may seem intimidating, especially when you are starting out on your expat experience. However, once you understand how the system works, it’s rather easy to adapt and to perform the necessary steps with ease.

To help you improve your experience abroad and to aid you on your journey to your new life, we put together this step-by-step guide that explains how to pay taxes in Germany.

Step 1: Determine If You’re a Tax Resident

How do taxes work in Germany? If you’ve lived there for over 183 days in a calendar year, the government considers you a tax resident, meaning that you must pay income tax (Einkommensteuer) on your global income. This usually includes your wages, freelance income, rental wages, and investment income.Most blue-collar workers are taxed primarily on their wages, which is usually more of their employers’ concern (more on that below).

If you are subjected to paying taxes, this also means that you fall into a specific tax bracket. Regarding those, you can find more info here.

Step 2: Understand How Wage Tax (Lohnsteuer) Is Paid

If you are working for an employer as a blue-collar worker, the company withholds the wage tax or Lohnsteuer automatically from your salary, transferring it to the German tax office (the Finanzamt). In addition to your income tax, employers typically also deduct: 

• Social security contributions (pension, unemployment, health, and long-term care)
• Church tax (Kirchensteuer), if applicable
• Solidarity surcharge, for high earners only

All of these deductions are highlighted on your monthly payslip and you don’t have to do a thing, as your employer handles the transfer processes.

Step 3: Make Use of Tax Deductions and Allowances

If you pay taxes in Germany, you can take advantage of various allowances and deductions that reduce your taxable income. Here are a few that you may eligible to use: 

• Child allowances (up to age 18, or 27 if in education and not earning)
• Health, retirement, and long-term care insurance premiums
• Charitable and political donations

You should also know that some of these contributions are shared between the employee and employer, and the employee’s share may be tax-deductible. Always keep receipts and documentation if you’re claiming deductions.

Step 4: Know the Difference Between Lohnsteuer and Einkommensteuer

Knowing your taxes is essential. While the two phrases may be often used interchangeably, in a bureaucratic sense, there quite concrete differences between the two:

• Lohnsteuer: Withheld at the source (your salary), paid by your employer.
• Einkommensteuer: Paid by individuals on additional income like rental income, self-employment, or investments.

If you have other income sources than your salary, the tax system will require you to make quarterly advance payments (Vorauszahlungen) in March, June, September, and December, based on estimates by the Finanzamt.

Source: Pexels

Step 5: File a Tax Return (If You Need To)

Chances are, you won’t have to deal with this. You don;t have to file a tax return (Einkommensteuererklärung) in Germany, if your only income source is the form of monthly wages from your employer and they deduct your taxes correctly. However, you are subjected to these reductions if you:

• Are also self-employed
• Have additional income not taxed at source (freelance work, etc)
• Want to claim deductions or allowances
• Are eligible for a refund

There are also various deadlines for filing a tax return:

• July 31: Standard filing deadline
• December 31: With a tax advisor (Steuerberater)
• February 28 (following year): In exceptional cases

Step 6: Understand Other Taxes You May Pay

Besides income tax, there are several other types of levies in Germany that you will (or might have to) pay, including: 

• Value-Added Tax (Mehrwertsteuer/VAT): Standard rate is 19% for most products, services, and goods, with reduced rates of 7% or 0% for items like books, food, and medical services.
• Church Tax (Kirchensteuer): This takes up around 8–9% of your income tax if you’re registered with a religious institution, like the Catholic church.
• Special consumption taxes: Applied to “luxury” goods like tobacco, alcohol, coffee, tea, and fuel.
• Other types include:
  • Real estate tax
  • Inheritance and gift tax
  • Motor vehicle tax

Needless to say, these taxes can also affect your finances and cost of living, especially if you own your own vehicles or property.

Step 7: Know Your Tax Obligations If You’re Self-Employed

If you are a self-employed tax payer without an employer to handle tax deductions for you, these responsibilities automatically fall onto you. More specifically, in these cases, you will need to:

• Pay your own income tax, based on your annual profits. After the first year, you will be required to make quarterly advance payments.

• Pay VAT (Mehrwertsteuer), what you charge on the services and goods you sell. This means that you must issue VAT invoices and file monthly or quarterly VAT returns.
• Pay input tax or Vorsteuer. This is essentially the VAT you pay for business-related purchases and you can claim these back.
• Pay trade tax (Gewerbesteuer). These taxes are paid quarterly to the local municipality, depending on the size and type of your business.

On the note of self employment, you will need to differentiate between two categories:

1. Freiberufler (Freelancers) – doctors, lawyers, artists, etc.
2. Gewerbetreibender (Tradespeople/business owners) – shop owners, restaurateurs, etc.

Your local Finanzamt will determine your classification and tax obligations.

Source: Pexels

Step 8: Staying Organized and Compliant

For most blue-collar workers, this won’t be a problem, as their system is automated, and falls under the employer’s responsibility. 

However, if you opt to start your own business, you will need to understand the system more thoroughly. To avoid paying fines and have no troubles with tax filing, you should also keep detailed records of your income, invoices, VAT payments, and expenses. Track your deadlines on your returns and advance payments, and don’t hesitate to reach out to experts if you need help.

Looking for a Job in Germany?

As you can see, for the most part, most of your taxes are deducted directly from your paycheck and automatically sent to the tax office and other relevant government agencies. For most blue-collar experts, this means that they don’t have to bother with filing their own taxes. If you are an expat, this makes your transition and integration easier, and allows you to focus entirely on your work and getting accustomed to your new life.

On that note, if you are looking for jobs in Germany, don’t hesitate to take a look at the vacancies on Robin Jobs.