Contents
- What is Einkommensteuer?
- The types of income tax
- Who has to pay income tax?
- Do businesses have to pay income tax?
- Who has to file a tax return?
- The basic income tax table
- How can I reduce my income tax?
- How to calculate your income tax
- Where, when and how to file a tax return
- Annexes to the income tax return
- The income tax notice
- The advance income tax payment
- Would you like to know more?
What exactly is Einkommensteuer (income tax)?
Einkommensteuer (income tax) is a tax on the Einkommen (income) of natural persons. Its legal basis is the EStG (income tax act). Lohnsteuer (wage tax), which employees also comes out of employee remuneration, is also included in income tax.
Income tax is a direct tax because the same person is both liable to pay and bears the tax. It is also a Gemeinschaftssteuer (joint tax) because it is due to the federal, state and local governments.
What types of income are subject to income tax?
German tax law recognises seven types of income that are subject to income tax:
- Land- und Forstwirtschaft (agriculture & forestry)
- Gewerbebetrieb (trade/business)
- Selbständige Arbeit (self-employed work)
- Nicht selbständige Arbeit (not self-employed work, i.e., employment)
- Kapitalvermögen (capital assets, if taxed at the standard rate)
- Vermietung und Verpachtung (renting & leasing)
- Sonstige: Renten, private Veräußerungsgeschäfte, Vermittlungen (other: pensions, private sales, brokerage)
Income exempt from income tax
Some income is exempt from income tax:
- Arbeitnehmer-Sparzulagen (savings allowances for employees)
- Investitionszulagen (investment allowances)
- Wohnungsbau-Prämien (housing allowances)
- Lottogewinne (lottery winnings)
- Schenkungen (gifts)
- Erbschaften (inheritances)
- Income from Liebhabereien (hobbies) (income that on balance makes a permanent loss)
- Wages from a Minijob (average monthly wage below the marginal earnings threshold, currently €450)
- Income from work in an Einrichtung/ Verein (institution/association) below €2,400/year
Income is subject to progressive taxation as per § 32 EStG.
This income is added to the basic tax-free amount. If you exceed the limit, you could be taxed on the excess income.
Income subject to progression includes:
- Arbeitslosengeld I (unemployment benefit I)
- Insolvenzgeld (insolvency benefit)
- Krankengeld (sickness benefit)
- Kurzarbeitergeld (short-time work allowance)
How does income tax collection work in Germany?
Lohnsteuer (income tax) on employment, Kapitalertragsteuer (capital gains tax) and Zinsabschlag (interest deduction – income tax on capital assets) are paid directly to the tax office by a third party (employer/financial service provider). If a financial service provider has an exemption order for capital gains tax, no capital gains tax has to be paid. This method of collection is also known as Quellensteuer (withholding tax but literally “source tax”) because the tax is deducted directly from the (income) source.
Only later, when the income tax return is filed, does the tax office check whether the tax paid corresponds to the actual tax liability and whether it must be refunded in full or in part.
Who has to pay income tax?
In principle, only natural persons pay income tax. But this does not mean that income tax plays no role for companies.
Who is liable to pay income tax in Germany?
Persons who have their Wohnsitz (domicile) or Aufenthalt (permanent residence) in Germany are subject to unlimited income tax liability on their income. Income earned abroad is also subject to German income tax.
Who is subject to income tax while living abroad?
Individuals who are neither domiciled nor permanently residing in Germany and who receive domestic income may be subject to limited taxation. This is particularly the case if you rent domestic property, work as an employee in Germany or run a business in Germany. Possible double taxation is avoided using double taxation agreements with various countries or by crediting taxes paid abroad against German income tax.
Do businesses have to pay income tax?
Personengesellschaften (partnership businesses) are not subject to income tax, but their Gesellschafter (partners) are. The partnership files a joint tax return. The income (profit or loss) of the partners is divided according to their shares or according to the partnership agreement. The tax office then sends the partners an “Einheitliche Feststellung der Besteuerungsgrundlagen” (uniform determination of the basis of taxation), which shows the respective share of each partner. Taxation is then based on the individual financial circumstances of each partner.
The same applies to corporations such as the GmbH and UG. As a legal entity, it is not subject to Einkommensteuer (income tax). Instead, it pays Körperschaftsteuer (corporation tax). Shareholders in corporations, on the other hand, have to pay income tax on their income from the company as natural persons – not only on salaries but also on dividends (Ausschüttungen) and the like.
Is it possible to offset Gewerbesteuer (trade tax) against Einkommensteuer (income tax)?
Businesses usually have to pay Gewerbesteuer (trade tax). Especially for Einzelunternehmer (sole traders), this tax burden can be crushing when added to Einkommensteuer (income tax).
As per § 35 EStG, you can have the trade tax credited against your income tax at a rate of 3.8 times the trade tax assessment amount. Always use the calculated amount, NOT the trade tax actually paid.
Who has to file an Einkommensteuer-Erklärung (tax return)?
Anyone who earns more than the basic tax-free amount is generally required to file a tax return. Self-employed persons or business owners must always file a tax return, even if they have no income or made a loss (negative income).
In addition, other income is subject to the obligation to file a tax return (§ 46 EStG). These include the following situations:
- Receipt of Lohnersatzleistungen (wage-replacement benefits) above €410 per month, e.g. Arbeitslosengeld I (unemployment benefit I), Krankengeld (sickness benefit), Kurzarbeitergeld (short-time working allowance) or Elterngeld (parental benefit).
- Kurzarbeitergeld (short-time allowance) 2020: Short-time allowance and employer subsidies in connection with the Corona measures are tax-free (§ 3 no. 2a EStG) (but become taxable if they are added to remuneration).
- Earning additional income exceeding €410 per month (e.g. rental income, income from self-employment).
- Receiving wages from several employers without deducting income tax (several mini-jobs)
- Claiming Freibeträgen (tax allowances)
- Losses carried forward from previous years
Who is exempt from filing an Einkommensteuererklärung (tax return)?
- Single people in Steuerklasse I (tax class I) with no additional income to their salary
- Married persons in Steuerklasse IV (tax classes IV) and without additional income to their salary.
For these groups of people, the employer has already paid the income tax.
Filing a voluntary tax return
It can sometimes be financially advantageous to file a tax return, even if you are not required to do so. This is especially the case if you can claim high special expenses, income-related expenses or extraordinary burdens that the tax office would otherwise not take into account. You can read more about this in the section ‘How can I reduce my income tax’ below.
Business taxation in Germany:
The basic income tax table
The basic income tax table provides information on the income-related tax burden – as a percentage and in euros. In addition to income tax, the Solidaritätszuschlag (solidarity surcharge) and Kirchensteuer (church tax at a rate of 9%) are listed.
The values are given in €100 increments, starting with an income of €9,405 up to €270,044. Income up to €9,408 per year is tax-free (as of 2020).
In 2020, the initial tax rate is 14% and the top tax rate is 42% from a taxable income of €57,052. On top of that, there is a solidarity surcharge of 5.5% of taxable income and a church tax of eight or 9%, depending on the federal state (only applies to members of a church).
Extract from the basic income tax table 2021
| Einkommen
Income |
€9,744.00 | €10,000.00 | €40,000.00 | €129,400.00 |
| Steuer
Tax |
€0.00 | €36.00 | €8,333.00 | €45,211.00 |
| Durchschnittssatz
Average rate |
0% | 1% | 21% | 35% |
| Grenzsteuersatz
Marginal tax rate |
0% | 14% | 35% | 42% |
| SolZ
Solidarity surcharge |
€0.00 | €0.00 | €0 | €2,486.61 |
| KiSt 9%
Church tax |
€0.00 | €3.24 | €749.97 | €4,068.99 |
| Gesamt Steuer
Total tax |
€0.00 | €39.24 | €9,082.97 | €51,766.901 |
| Durchschnittssatz
Average rate |
0% | 1% | 23% | 40% |
| Grenzsteuersatz
Marginal tax rate |
0% | 15% | 37% | 48% |
The values of this basic table result from the income tax scale as per § 32 EStG.
The income tax rate 2021 as per § 32 EStG
The standard income tax rate (Einkommensteuertarif) is based on taxable income. It is divided into five tariff zones (Tarif zonen):
| Tariff zone 1 | Nullzone (zero zone) | Up to €9,744 (Grundfreibetrag = basic allowance) | 0 |
| Tariff zone 2 | Progression zone 1 | €9,745 to €14,753 | (995.21 * y + 1,400) * y |
| Tariff zone 3 | Progression zone 2 | €14,754 up to €57,918 | (208.85 * z + 2,397) * z + 950.96 |
| Tariff zone 4 | Proportional zone 1 | €57,919 up to €274,612 | 0.42 * x – 9,136.63 |
| Tariff zone 5 | Proportional zone 2 | over €274,613 | 0.45 · x – 17,374.99 |
y = taxable income
In progression zone 1, the rate increases most sharply, and in progression zone 2 to a lesser extent. It then remains constant at the top rate of 42%.
How can I reduce my income tax?
There are several ways to reduce your Einkommensteuer (income tax):
Grundfreibetrag: The basic allowance
The Grundfreibetrag (basic personal tax allowance) is available to all taxpayers and is not offset against income tax. In 2021, it will be €9,744 for a single person.
Ehegattensplitting: Reduce your income tax by splitting your spouse’s income
Sometimes married couples have very different incomes. In such circumstances, Ehegattensplitting (spousal splitting) is particularly advantageous. The income of both partners is added together and divided by two. This can result in a much lower tax rate. Married couples who are assessed jointly have an exemption of €19,488 on their joint income.
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Tax-free allowance for pensions and pension benefits
An individual tax-free allowance is set for each state pension. Pensioners are also entitled to a Werbungskostenpauschale (income-related expenses allowance) of €102.
Kinderfreibeträge: Reducing income tax with child allowances
In 2021, the Kinderfreibetrag (child allowance) per parent and child is €5,460. In addition, there is a Betreuungsfreibetrag (care allowance) and an Erziehungsfreibetrag (education allowance) of €2,928. In most cases, these amounts are assessed together, resulting in an amount of €8,388. This allowance is only taken into account if the tax savings exceed the child benefit paid, which is currently €219 per month (for the first and second child, then gradually more). The tax office itself determines this in the context of a favourable tax assessment. There is also an Ausbildungsfreibeitrag (vocational training allowance) of €924.
Single parents can also claim an Entlastungsbetrag (relief amount) of €4,008 for the first child, plus €240 for each additional child living in their household.
Werbungskosten: Deduction of work-related expenses
An allowance of €1,000 is also known as the Werbungskostenpauschale or Arbeitnehmerpauschbetrag (work-related expenses allowance). The tax authorities automatically deduct it from your earned income. If your work-related expenses exceed €1,000, you must document them and you can claim a higher amount.
Work-related expenses include everything you spend on working. Examples include work equipment, train tickets, the cost of a second vocational training course or a second degree, professional clothing, the cost of applying for a job, moving house for a job-related reason or having two households and, of course, travelling to your place of work.
For travel to work, you can deduct 30 cents per kilometre (one way!) as a work-related expense from your tax. This is your Entfernungspauschale (commuting allowance). It is normally limited to €4,500 per year, but if you drive to work, the tax authorities will accept a higher amount if you can prove it.
Sonderausgaben: Deducting special expenses
Tax deductible Sonderausgaben (special expense) are things like:
- The cost of a tax accountant/adviser or tax software.
- 100% of private health insurance contributions if you’re receiving benefits or an employee.
- Up to if €2,800 of private health insurance if you’re self-employed.
- Liability, accident and other insurances.
- Donations, school fees and some other related items.
Außergewöhnliche Belastungen: Exceptional costs
Außergewöhnliche Belastungen (exceptional costs) include things such as medical expenses or maintenance payments.
Rücklagenbildung (Thesaurierung): Tax reduction through building reserves (retention)
A reduced income tax rate of 28.25% (plus solidarity surcharge and church tax, if applicable) applies to retained (not withdrawn) profits. This is also known as the reduced Thesaurierungsteuersatz (retention tax rate). If the money is withdrawn in a later tax year, it will be taxed at 25% plus additional taxes. This is usually worthwhile if the distribution is made after several years. It is best to have this checked by your Steuerberater (tax adviser).
What other taxes you can deduct if you’re self-employed is explained in this article.
How to calculate your income tax
You can work out your taxable income using the following calculation:
- Add together all your types of income
- minus Altersentlastungsbetrag (old-age relief amount) & Entlastungsbetrag für Alleinerziehende (relief amount for single parents) (§ 24 EStG)
- minus Freibetrag für Land- und Forstwirte (tax-free allowance for farmers and foresters) (§ 13 EStG)
- minus Hinzurechnungsbetrag (add-on amount from the wages of the second or more employment relationship) (§ 52 EStG)
- = Total amount of income
- plus Erstattungsüberhang Kirchensteuer (church tax refund surplus)
- minus Verlustabzug (loss deduction) (§ 10 EStG)
- minus Sonderausgaben (special expenses) (§ 10 EStG)
- minus außergewöhnliche Belastungen (exceptional costs) (§ 33 EStG)
- minus Steuerbegünstigungen für Wohneigentum (tax allowances for residential property) (§§ 10, 52 EStG)
- plus zuzurechnendes Einkommen attributable income (§ 15 AStG)
- = Einkommen (income)
- minus Kinderfreibeträge (child allowances) (§§ 31, 32 EStG)
- minus Härteausgleich (hardship compensation) (§ 46 EStG, § 70 EStDV)
- = zu versteuerndes Einkommen or zvE for short (taxable income)
The BMF (Federal Ministry of Finance) offers an income tax calculator on its website. This helps you to calculate your income tax liability. You enter your taxable income (zvE) and get the tax amount.
Einkommensteuererklärung: Where, when and how to file a tax return
Where do I have to file my income tax return?
The Finanzamt (tax office) in whose district the taxpayer is resident is always responsible for assessing and collecting income tax.
When do I have to file my income tax return?
The Einkommensteuererklärung (income tax return) must always be submitted for a calendar year (Veranlagungszeitraum = assessment period). Starting with the 2019 tax year, taxpayers will have an extra two months to file their tax returns. If you use the services of a Steuerberater (tax adviser) or a Lohnsteuerhilfeverein (income tax assistance association) the deadline is extended further.
This deadline can also be extended on request. And if you use a tax adviser or an income tax association, you have until 31 December of the following year. The tax return is submitted via the electronic portal Elster (= electronic tax return). The tax office processes tax returns in chronological order. Depending on the workload, it may take longer or shorter to receive your tax assessment. This is usually a few weeks after you have submitted your tax return. The tax assessment can then also be accessed via your Elster account.
Who doesn’t have to file a tax return?
Not everyone has to file a tax return. If you have no income, you don’t have to declare that you have no income.
Anlagen: Annexes to the income tax return
Depending on what you’re claiming, annexes and supporting documents must accompany your income tax return. Which ones you need will depend on your personal circumstances. The main form is called the Mantelbogen – it contains information about your person, special expenses and exceptional costs. You will need to ‘attach’ supporting documents to this form. The most common examples are:
- Anlage K (annex K): If you’re a taxpayer with children.
- Anlage G (annex G): If you’ve earned income from commercial activities (including negative income).
- Anlage S (annex S): If you generated income from self-employment.
- Supporting documents, such as donation receipts or bank statements: as applicable.
- Jahresabschluss (annual accounts) or EÜR (profit & loss account): If you’re a Selbständige (self-employed person) and/or Gewerbetreibende (commercial trader).
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Einkommensteuerbescheid: The income tax notice
In the Einkommensteuerbescheid (income tax notice), the tax office tells you whether you owe income tax or whether you can get a tax refund. Together with this tax assessment notice, the tax office will send you an Einkommensteuer-Vorauszahlungen (advance income tax payment) notice showing your quarterly advance payments of income tax for the next (or current) year.
Tip: Tax assessments are not always correct. Check them carefully or have them checked by a tax advisor. You can appeal against a tax assessment within one month of receiving it.
Einkommensteuer-Vorauszahlung: The advance income tax payment
Normally, income tax is not due until after the end of the year, but to save taxpayers from having to pay a large amount of tax in arrears and to ensure that tax is paid promptly, the tax office can set up advance tax payments. These are calculated based on the previous year’s income and are due quarterly: ten days after the end of each quarter, the tax office will deduct one-quarter of the previous year’s income tax from your account.
Can I reduce advance tax payments?
For some entrepreneurs, income fluctuates greatly. Depending on when a large project is invoiced, one year’s income might be half of the previous year’s income. If your current accounts and incoming orders show a sharp drop in income, you can apply to the tax authorities to reduce your advance tax payments.
Would you like to know more?
We’re building a library of accounting-related articles in English to help you understand what’s involved in managing a business’s finances in Germany. The Master List can be found here, here’s a sampling that may be useful:
