Income tax – why it is also important for you as an entrepreneur

You will be confronted with wage tax if you employ employees in your company. It is one of the most important sources of income for the German tax authorities.

Unlike, for example, the income tax is the income tax a withholding tax. This means that the tax is paid directly at the source. The source in this case is your employee’s gross wages. According to German tax law, as an entrepreneur and employer, you are responsible for ensuring that a correct wage tax deduction procedure is carried out.

You have two options for this: either you commission a tax office or a payroll office to carry out the monthly payroll accounting, or you choose an in-house solution for this task.

The wage tax: Basics and legal provisions

Wage tax is a special form of income tax. The state collects it from all employed persons who are in an employment relationship that is subject to income tax. The wage tax deduction procedure was developed so that the tax authorities receive the wage tax.

With this wage tax deduction procedure, wage tax, church tax and social security contributions are deducted from the gross wage. You pay the remaining net salary to the employee.

If you decide to do the payroll accounting yourself, you may have to take income tax allowances into account. In addition, you can give your employees certain non-cash benefits that are exempt from income tax or do not have to be taxed in full.

The legal framework for wage tax and the wage tax deduction procedure can be found in the following legal bases:

• tax code
• Income Tax Act
• Income Tax Implementing Ordinance
• Payroll Tax Policies

The income tax for a mini job

If you, as an entrepreneur, employ an employee on a mini-job basis, you should note the following points in the wage tax deduction procedure:

• The wage tax is treated as a flat tax (2%), which you as an entrepreneur pay for your employees. This covers wage tax and church tax for this employee.
• If no pension insurance contributions have to be paid – because your employee has reached retirement age – flat-rate taxation at 2% is out of the question. If your employee’s wages are not more than €520, you can tax them at a flat rate of 20%.
• Alternatively, you pass the flat-rate tax on to your employee. This means that he pays the income tax himself.

The tax classes in the income tax

In order to ensure that the personal circumstances of an employee are sufficiently taken into account in the wage tax procedure, wage tax law distinguishes between the following six wage tax classes:

• I: For unmarried workers
• II: For single-parent employees
• III: For the higher earning spouse
• IV: For married couples who are both not self-employed
• V: For the low-income spouse
• VI: For employees who have a second employment relationship subject to income tax (not a mini-job).

The income tax allowances

To certain personal circumstances – such. B. the care of a child as a single parent employee – to be taken into account by the legislature income tax allowances to. Which includes:

relief allowance: Only separated parents can claim the relief amount for single parents if they look after at least one child. You will be grouped in income tax class II.

child allowance: Parents with children can claim the child allowance. An allowance of 0.5 is entered for each child.

You must take the income tax allowances into account if they are noted on the employee’s electronic income tax card. Otherwise, your employee can claim the income tax allowances as part of his private income tax return.

Wage tax: Which employer benefits are exempt from wage tax?

You can grant certain employer benefits to your employees without them being subject to income tax. These income tax-free employer benefits include, for example:

• Fuel vouchers (up to €50 per month)
• Sunday, holiday and night surcharges: It should be noted that the surcharges do not exceed a certain percentage of the basic wage. For Sundays and public holidays, the surcharge must not exceed 50% of the basic wage. The legislator has set a maximum percentage of 25% for night work.
• Gifts that are given on specific occasions (e.g. birthdays, weddings or service anniversaries): Gifts can be given free of income tax if they do not amount to more than €60 per year.

Income tax deduction procedure: Payroll accounting using an in-house solution

A correct wage tax deduction procedure requires that you determine the wage tax correctly. This applies to the employees in your company and in the home office.

The basis for determining wage tax is the employee’s electronic wage tax card (ELStAM). This shows all the wage tax information that you need to calculate the wage tax. These include e.g. e.g.:

• The ETIN (Electronic Transfer Identification Number)
• Date of birth and religious affiliation
• The number of child allowances and other income tax allowances, such as B. the relief amount for single parents
• The tax class

You enter the data from the electronic income tax card into the personnel master data of the software that you use to create the payroll accounting in your company. After you have taken the social security information into account, you first create a test statement. You can use this to check whether all the information has been entered correctly. If necessary, you make changes and then carry out the final billing. The wage tax registration and the contribution statements for the health insurance companies are sent to the responsible institutions. Ideally, the software also transfers the net salaries to the employees.

Calculating income tax: avoid these common mistakes

If you have not calculated the income tax correctly, you as an entrepreneur with employees must pay for the damage. Some of the most common mistakes to avoid include:

• After marrying an employee, you did not change the income tax bracket to III, IV, or V.
• An unmarried employee enters into a second employment relationship in your company that is subject to income tax. You calculate it using income tax class I.
• The tax credit for single parents is entered on an employee’s electronic wage tax card. This information is missing when creating the pay slip.

If you do not submit the income tax to the tax office on time, you must be liable. A fault on your part is not assumed for this. It is sufficient if an objective breach of duty can be proven.

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About the author: Michael Gottlieb is a state-certified business economist and lives with his family in the Bavarian Forest. During his career in accounting, he created profitability analyzes for the management and specialized in the field of business start-ups. Today, he also likes to put his wide-ranging knowledge of the most diverse financial aspects of the company on paper in order to inform young entrepreneurs about the latest interesting developments.