Beware of hidden costs: Hiring foreign temporary workers in Germany
Martin Thieslauk
by Martin Thieslauk
We’ve all been there: the order books are full, all your employees are working at full capacity, and then a request comes in for a lucrative project. Just at that moment, you are offered 10 workers from other EU countries who can work in Germany for a period of about nine months. You make a decision quickly; the workers are hired, and the project starts a week later.
The payroll office records the employee names and foreign addresses. Since they are all single and, according to their statements, pay social security contributions in their home countries, their wages are calculated and paid using tax class 1, without social security deductions. The employees cannot provide tax ID numbers at this time – these will be submitted later. After nine months, the project is completed, the employees are deregistered, and they return to their home countries.
The following year, a routine social security audit and an off-site payroll tax audit take place. The audits result in significant back payments for payroll tax and social security. What happened?
Social security
If foreign employees are directly employed by a German employer and perform their work in Germany, they are subject to social security contributions under German law. German social security obligations may be waived only in the case of a temporary posting where the foreign employment relationship continues, or when EU or treaty law applies (submission of an A1 certificate is required).
Income tax
Wages paid to a foreign employee who performs their work in Germany are subject to German income tax, provided the employer is based in Germany. The tax liability applies regardless of whether the employee is subject to unlimited or limited income tax liability in Germany; the decisive factors are that the work is performed in Germany and the wages are paid by a German employer.
Regarding the tax bracket: if no German tax identification number is available, the employer may apply for a wage tax withholding certificate from the competent tax office for the place of business. In this case, tax bracket I is assigned. If no certificate is presented, tax bracket VI must be applied.
Consequences
The wages paid to employees are considered net wages. These net wages are extrapolated to gross wages. For tax bracket 6, the tax rate ranges between 50% and 60%. Added to this are social security contributions, comprising both the employer’s and employee’s shares, totalling approximately 45%. This quickly doubles the cost per employee, as the following example illustrates. A supposed “bargain” can quickly turn into a cost trap. Therefore, it is important for employers to seek advice in a timely manner.
Martin Thieslauk has been working as a tax adviser for over 30 years. He specialises in international tax law and has extensive experience in VAT law and payroll matters, including those relating to expatriates.Contact Martin.
Benefitax GmbH Steuerberatungsgesellschaft Wirtschaftsprüfungsgesellschaft is a tax consultancy and public auditing company located in Frankfurt, which is widely recognised as the financial centre of Germany. Benefitax predominantly serves German entities of foreign multinational groups, mid-sized German companies with cross-border activities, and wealthy private individuals.
GGI member firmBenefitax GmbH Steuerberatungsgesellschaft WirtschaftsprüfungsgesellschaftFrankfurt am Main, GermanyT: +49 69 256 227 60
Advisory, Auditing & Accounting,Corporate Finance, Fiduciary &Estate Planning, Tax
