Monthly payroll cycles in Germany
In Germany, the payroll cycle is commonly applied monthly as reporting to social security and the wage tax office is based on monthly social contributions & taxes (§ 108 GewO).
Deadlines to prepare & file payroll in Germany
+Due dates for payment of wage taxes and social security
The deadline for running payroll and reporting monthly social security contributions to German social security is on the 5th last business day of a given month.
The deadline for payment of monthly social security contributions is on the 3rd last business day of a given month.
The deadline for reporting and paying monthly wage taxes falls on the 10th day of the following month.
USA: DoD/U.S. Army contractor field work in Germany
Most companies from the U.S. engaged in DoD/U.S. Army field work in Germany task us to execute two monthly payroll runs, firstly around the 20th with an estimation of the total hours (base salary) for the given month, and estimated HOLA/COLA amounts, secondly another run around the 5th of the following month for the prior month with the actual hours worked, and final HOLA/COLA amounts.
Throughout the European Union, employees who work in one of the EU member states such as Germany are subjected to social security in that state - regardless of the country in which the employer’s registered office is located. Article 21 (1) of the Implementing Regulation (EU) 987/09 requires foreign employers to register their employees in Germany for social security withholding and payment of social taxes as if the company were based in Germany. Exceptions apply in two cases:
- Employees have been posted to Germany and are only working for their foreign employer here on a temporary basis (secondment).
- The employees are subject to an exemption agreement concluded by the social insurance institutions in the member states. The competent institution in Germany is the Deutsche Verbindungsstelle Krankenversicherung - Ausland, (DVKA) [German Liaison Office for Health Insurance Abroad].
Even foreign employers without any fixed place of business in Germany are therefore required to register as foreign employers and obtain a German Federal Employer Identification Number (Betriebsnummer) with the Bundesagentur für Arbeit (Federal Employment Agency).
We are a professional tax law firm providing payroll services compliant with these implementing regulations and applicable laws.
Contact us today to learn how to register as a foreign employer!
Status of Forces Agreement (SOFA) Tax exemption
Unless the activity a contractor carries out as part of their task order falls under the Status of Forces Agreement as per the military's DOCPER liaison office, German wage tax must be withheld on any gross pay.
Germany has the right to taxation of gross pay based on the country-of-work principle of Art. 15 of the Germany-USA tax treaty.
BACO-90 & 183-Days-Rule
Further tax exemptions may include the BACO-90 regulation or 183-Days-Rule. The latter may only apply if the employee is assigned to a contractor without any fixed place of business in Germany, cf. Art. 15 (2) Germany-USA tax treaty.
Housing Allowance (OHA/HOLA) & Cost of Living Allowance (COLA)
German wage tax also applies to pay components commonly known as OHA or HOLA, and COLA.
Albeit HOLA & COLA being tax exempt by Publication 3 of the IRS if amounts paid don’t exceed those paid to Government employees, Germany doesn’t recognize the U.S. tax exemption as Article 3 of our consititution treats all taxpayers the same; there’s just no equivalent to the comprehensive U.S. tax exemption clause for HOLA/COLA pay items in Germany.
With the aforementioned in mind, a qualified partial tax exemption on HOLA is possible and commonly known by German tax law as an allowance for ‘double household keeping’ stateside and in Germany. It’s capped at 1,000 EUR monthly. If paid by the employer, any exceeding amounts are taxable. This requires the employee to evidence support of the primary household abroad, which is hardly manageable, and not even required by the Comptroller’s published defense regulation 3.3.1 “Proof of support of a lawful spouse or unmarried, minor, legitimate child of a Service member is generally not required”. This makes it hard to exempt HOLA up to the max. 1,000 EUR monthly threshold from German wage taxation, especially since the employer is liable for the correct wage tax withholding, and keeping supporting evidence readily available in a future field audit scenario.
When claiming a tax free allowance on HOLA in cases with a primary household abroad, the German tax authorities (LStR 9.11 (3)) require one trip home per year; in the case of distant home countries, one trip home during a two-year period suffices. Instead of a family trip home, personal contact can also be maintained by a joint family vacation (Tax Court Düsseldorf decision March 9, 1988 – docket number 15 K 49/84 E, EFG 1988, 412) or by a family visit to the place of employment (Germany).
However, financial support of the main household is required in any cases of longer periods of absence (Section 9 (1) sentence 3 no. 5 sentence 3 German Income Tax Act). The statutory regulation does not provide for any exception in this respect (cf. Tax Court Niedersachen decision September 21, 2022 – docket number 9 K 309/20, EFG 2023, 109).
The same principles also apply to single foreign employees, although the lack of family ties always requires a detailed examination of whether the household in the home country still represents the center of life. Overall, the number of trips home should not be underestimated as an indicator (German Financial Supreme Court BFH decision February 10, 2000 – docket number VI R 60/98, BFH/NV 2000, 949). However, a single taxpayer can also claim special circumstances that prevent him from making multiple trips home, e.g. mission requirements.
The necessary relationship to the common household is missing if the employee has decided not to return to his home country or if a return is excluded for political reasons during the stay at the place of employment in Germany, lack of possibility to return or lack of will to return stateside (German Financial Supreme Court BFH decision November 9, 1971 – docket number VI R 285/70, BStBl. II 1972, 148).
Ordinary Residents vs. Temporary Workers (Expatriates)
Ordinary Residents (ORs) must be registered with German social security while Expatriates can be exempted from German social security as temporary workers.
Example:
For the U.S., the exemption is applied for on form USA/D 101 with the Social Security Administration (SSA) in Baltimore, MD.
In cases involving exempted workers, you must run a payroll in Germany and in the home country of the worker to remit the correct (U.S.) social security taxes (at the time of this publication, this is approx. 6,2%* for SSN and 1,45%* for Medicare), deducting the foreign tax we communicate with the German payslip on the stateside payslip.
As laid forth above, a person who has no intentions of returning to the U.S. after deployment to Germany, or with a demonstrated history of extending their return continuously, may convert from Expatriate to OR. Therefore, we cannot make a final determination of OR vs. Expatriate. This information is provided by client at client’s risk of misstatement, but can be qualified/evidenced with the USA/D 101 form from the SSA in Baltimore, MD. For compliance reasons, the clearance certificate should be applied for ahead of the beginning of employment.
*This information relates to foreign regulations which are not updated or managed by a bilateral tax treaty. Therefore, no representation is made or liability presumed for the accurateness, or completeness of this information.