German Payslip: Employed vs self-employed
When working in Germany, you will pay social security and taxes directly from your German payslip. How much net income is left from your gross salary? Find it out here.
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In this article, we PerFinExplained the standard German payslip already. So now it is time to compare the payslip of an employed person with a self-employed person. Do you wonder what the difference between those two types of payslips is? Who will earn more: An employed person or a self-employed?
Below are two German payslips. The payslip on the left is an exemplary payslip of an employee that we created online as a comparison. The payslip on the right is the real payslip of our self-employed Managing Director Axel Brückner.
Even though the structure is completely the same, there are major differences in terms of health insurance, social security, and taxes. Get your payslip before continuing to read this article if you want to follow along to understand your personal payslip better.
Top Part of a payslip in germany
The top part of every German payslip is filled with personal information about you. There are some very important with implications on your net income (like your tax class and health insurance) and some information with less importance (like your birthday or your tax ID).
Your income tax class will make a big difference in the amount of taxes you pay monthly from your payslip. That’s why you want to choose your income tax class wisely if you can. Unmarried and divorced people are automatically tax class 1 and single parents are automatically tax class 2.
Married couples can choose freely if they want to be in tax class 3, 4, or 5. Tax class 4 is taxed in the same way that tax class 1 is. Therefore, choose that tax class if both have a similar income. You will pay the least amount of taxes in tax class 3, but the other person has to choose tax class 5 which has a high tax rate. So the combination of tax class 3 and tax class 5 is worth it for married couples that have different salaries.
Other information on the top of your payslip in Germany includes if you are a member of the church. Meaning if you have to pay church tax. If so, you have to pay 8% or 9% on top of your income tax as church taxes (depending on the German state). You can also exit the church to save money.
The employee payslip is insured in the public health insurance system because employees have to be if they do not earn above the threshold (64.350€ gross salary in 2022) to choose health insurance freely. Self-employed people can choose if they want to be a member of the private health insurance system – independent of their income.
Payslip While Being Self-Employed: How Does That Work?
Self-employed people in Germany can still be employed and get a monthly payslip. These people (e.g. Managing Directors that own a company) are employed from a legal perspective but self-employed from a social security perspective. That is why they can choose if they want to pay for social security or not.
When owning a company in Germany, you probably want to employ yourself as the Managing Director and pay yourself a regular salary. You also want to pay yourself a reasonably high salary. If you are paying yourself a 1€ salary a year all you are doing is giving away a lot of free money if you pay yourself 1€.
When employing yourself in your own company, you can firstly, most likely choose freely over the time you work, secondly the place you are working from, and thirdly the type of work you are doing. If you can decide over these 3 criteria yourself, you are by definition of the German public pension self-employed.
While employees are forced by the German government to pay into the German social security system, self-employed (see the definition above) can choose if they want to pay into the social security system or not. There is no way for employees in Germany to exit the social security system.
Payslip Deduction 1: Taxes
The top part of the German payslip is done. Now it is time to add up your different salary parts to 4.000€ gross salary in our example payslips. The company you work for can add benefits to your salary. For example a company car, a gym membership, or a company pension. Speak to your employer to see what is possible with them.
After summing up all parts of your salary, the first big deduction will reduce your gross salary to come closer to your net income: Taxes. Everybody in Germany earning above the tax-free threshold (10.347€ in 2022) has to pay income tax. On top of that, you might have to pay church tax as well as solidarity tax.
Even though both our payslips pay income tax only (no church tax or solidarity tax), the self-employed person has to pay exactly 200€ more in income tax than the employee. That is because the self-employed business owner is not paying into social security. Consequently, he has to pay more in income tax.
That is also the reason why a 4.000€ monthly gross salary is the perfect salary for a Managing Director that is not married in tax class 1 (perfect salary from a tax perspective). A monthly gross salary of 4.000€ will result in a 25% average tax rate. A business owner can pay himself a dividend from his company that is also taxed with 25% capital gains tax – instead of paying up to 45% income tax in Germany.
4.000€ gross salary per month will result in the following taxes with different tax classes:
- Tax class 1: 644€ income tax
- Tax class 2: 534€ income tax
- Tax class 3: 335€ income tax
- Tax class 4: 644€ income tax
- Tax class 5: 1.051€ income tax
- Tax class 6: 1.088€ income tax
Please remember that only married couple can choose their tax class freely (see above). If one spouse chooses the best tax class 3, the other spouse has to choose tax class 5. So when calculating your personal tax rate, make sure that the high-earning spouse is in tax class 3 and the low-earning spouse is in tax class 5.
Payslip Deduction 2: Social Security
Compared to the potentially unlimited amount of taxes you have to pay from your German payslip, there is always a maximum payment for German social security payments. This threshold usually rises year over year as the government wants to make high-earners pay more percentage of their salary.
German social security thresholds in 2022:
- 4.837,50€/month gross salary for public health insurance and care insurance
- 7.050€/month gross salary for public pension and unemployment insurance
If you earn below both those social security thresholds (like our example employee payslip), your full salary is subject to social security payments. If you earn more than that, your salary above those thresholds will be free of social security payments. You only have to pay taxes on that income then.
With a 4.000€ monthly gross salary you will pay for German social security:
- 18,6% of your salary (372€ x2 = 744€) for German public pension (Deutsche Rentenversicherung)
- 15,8% of your salary (316€ x2 = 632€) for public health insurance with Techniker Krankenkasse
- 3,3% of your salary (75€ x2 = 150€) for care insurance (or 3,05% if you have children)
- 2,4% of your salary (48€ x2 = 96€) for unemployment insurance
All payslips in Germany show only half of the real social security payments because German social security contributions are always split 50/50 with your employer. While you are paying 811€ from your 4.000€ monthly gross salary for social security similarly is your employer paying 811€ (1.622€ in total).
Axel’s real self-employed payslip shows no social security contributions because self-employed and business owners can exit from the German social security system – and that’s what Axel did. Self-employed only have to pay health insurance (public or private) as well as care insurance.
Private health insurance is deducting the monthly premium from your bank account and not from your payslip. That’s why privately insured people get the 50% share of their employer on top of their net salary. Our self-employed payslip gets 134,13€ for private health insurance + 18,67€ for private care insurance (before receiving cashback).
This shows that it is possible to save a lot of money by switching from the public health insurance system to the private health insurance system. Axel is not even paying half of his 5-star private health insurance that he would have to pay for the 1-star public health insurance (152,80€ vs 391€).
Net Salary Of Employed Vs Self-Employed
After all deductions for taxes and social security from 4.000€ gross salary, the employee payslip shows a 2.544,75€ net salary while the self-employed payslip shows a 3.155,42€ net salary (excluding 50% employer share for private health and care insurance that’s why net payout increases to 3.308,22€).
There are many ways to increase your net income without increasing your gross salary (e.g. capital forming benefits = Vermögenswirksame Leistungen in German). Talk to your employer to see what kind of benefits they offer. Our 5 tips will give you some inspiration to increase your net income.