How Taxes Work in Germany (Simple Step by Step Guide) #

Understanding taxes in Germany can feel overwhelming at first especially if you’re new to the country. This simple step by step guide breaks down how the German tax system works, what types of taxes you’ll pay, and how they affect your income. Whether you’re an employee, student, or self-employed, this guide will help you see where your money goes and how to manage your taxes with confidence.

1. Understanding Taxes in Germany #

If you live and work in Germany, you must pay taxes. Your taxes pay for healthcare, pensions, unemployment benefits, and public services.

Main types of taxes and contributions: #

1. Income tax (Einkommensteuer / Lohnsteuer)
2. Health insurance (Krankenversicherung)
3. Long-term care insurance (Pflegeversicherung)
4. Pension insurance (Rentenversicherung)
5. Unemployment insurance (Arbeitslosenversicherung)
6. Church tax (Kirchensteuer) – only if you’re a church member
7. Solidarity surcharge (Solidaritätszuschlag)

If you’re an employee, your employer automatically takes these from your paycheck. If you’re self-employed, you must pay them yourself through your bank.

2. Income and Salary Tax #

A tax on all the money you earn (from your job or business). It’s a progressive tax, meaning:

• The more you earn, the higher your tax rate.

How much you pay: #

If you’re an employee, this is taken out as Lohnsteuer (salary tax) every month. If you pay too much, you can file a tax return and get a refund.

3. Health Insurance (Krankenversicherung) #

Everyone in Germany must have health insurance.

Types: #

• Public insurance (gesetzlich) – costs a % of your income.
• Private insurance (privat) – price depends on the insurer and your health.
• Expat insurance – for temporary stays.

If you’re an employee, your employer pays half. If you earn less than €535/month, you can use a parent’s or spouse’s insurance for free. Students get a discounted rate.

 4. Long-Term Care Insurance (Pflegeversicherung) #

This helps cover your care when you’re old or disabled.

• Costs 2.6% to 4.2% of your income.
• Employers pay 1.8%, and you pay the rest.

5. Public Pension Insurance (Rentenversicherung) #

This builds your retirement fund.

• Costs 18.6% of your income.
• Employers pay half (9.3%), you pay the other half.

If you’re self-employed, this is usually optional but you should plan your own retirement savings if you don’t join the public pension system.

6. Unemployment Insurance (Arbeitslosenversicherung) #

If you lose your job, this helps replace part of your income.

• Costs 1.3% of your income.
• For employees, your employer pays part.
• For freelancers, it’s optional.

7. Church Tax (Kirchensteuer) #

If you belong to a recognized church, you pay this tax.

• 8% of your income tax (in Baden-Württemberg or Bavaria).
• 9% in other states.

If you leave the church, you stop paying this tax.

8. Solidarity Surcharge (Solidaritätszuschlag) #

If your income tax is more than €19,950 per year, you pay an extra 5.5% of that tax as a solidarity surcharge.

9. Capital Gains Tax (Kapitalertragsteuer) #

If you earn money from investments (like stocks, ETFs, or dividends):

• You pay 25% tax on profits above €1,000 per year.
• Also includes church tax and solidarity surcharge.
• Crypto income is taxed differently (as private income, not investment).

10. Other Common Taxes #

You might also pay:

• TV license (Rundfunkbeitrag) – one fee per household
• Vehicle tax – for owning a car
• Dog tax – if you own a dog
• Property tax – if you own property
• VAT (Value Added Tax) – already included in most prices
• Trade tax (Gewerbesteuer) – for businesses

11. Taxes for the Self-Employed #

If you are self-employed, you must pay:

Required:

• Income tax
• Health insurance
• Long-term care insurance
• Solidarity surcharge
• (Church tax, if applicable)

Optional:

• Unemployment insurance
• Public pension insurance

Your business may also owe:

• Trade tax (Gewerbesteuer)
• VAT (Umsatzsteuer)
• IHK membership fee (for registered trades)

Since you don’t have an employer, you pay the full amount for insurance yourself.

12. German Tax Classes (Steuerklassen) #

Your tax class determines how much tax is taken from your monthly paycheck (Lohnsteuer), but not your total yearly tax. You can change it online with ELSTER.

• Tax class 1: If you are not married, and you are not in any other tax class.
• Tax class 2: If you are not married, and you raise children alone. You get more tax benefits.
• Tax class 3: If you are married, and you earn more than your spouse. If you are in tax class 3, your spouse is in tax class 5.
• Tax class 4: If you are married, and you and your spouse have similar incomes. If you are in tax class 4, your spouse is also in tax class 4.
• Tax class 5: If you are married, and you earn less than your spouse. If you are in tax class 5, your spouse is in tax class 3.
• Tax class 6: This is the tax class for a second job. If you don’t have a tax ID, your employer might put you in tax class 6. You have no tax benefits, and you pay more salary tax.

Conclusion #

Paying taxes in Germany may seem complicated at first, but once you know what each tax is for, it becomes much easier to manage. Most taxes go toward healthcare, pensions, and social security helping keep the country’s system strong and supportive.

If you’re employed, your taxes are handled automatically through your paycheck. If you’re self-employed, you’ll need to organize and pay them yourself — but you also have more control over your deductions and planning.

Tip: Always keep records of your expenses and consider filing a yearly tax return many people get money back.

Check out our full guide on How to save money in Germany