The Federation and the Länder each receive 42.5 % of wages tax revenue, whilst the municipalities are entitled to a share of 15 %.

Liability for wages tax attaches to the employee, but the employer is responsible for the correct deduction and remittance to the tax office. If the tax office determines on examination that insufficient tax has been withheld, it may enforce payment of the amount still due from the employer or directly from the employee.

Every resident employer is obliged by law to withhold wages tax and to remit it to the tax office. Not only must the tax be withheld from the wages of employees who are subject to unlimited income tax liability in Germany; it must also be withheld from the wages of employees who, having no residence or habitual abode in Germany, are only subject to limited income tax liability, yet receive certain income in Germany from work they perform. For example, where they perform dependent personal services in Germany or such services are used in Germany; or where the income from dependent personal services is paid from German public funds, including those of the Federal Railways Fund (Bundeseisenbahnvermögen) and the Deutsche Bundesbank, taking into account a current or past relationship of employment; in the latter case the recipient need not have an entitlement to payment from the German public fund.

Wages and salaries of employees: 

The income tax payable on employees’ wages and salaries (which are classed as income from dependent personal services) is collected by way of deduction at source (wages tax).

The wage or salary comprises all the receipts accruing to an employee from a current or former contract of employment. This in­cludes not only cash payments, but payments in kind as well (e.g. room and board), and other benefits (for instance, the private use of a company car). It is immaterial whether such receipts are recurrent or nonrecurrent, or whether the employee has a legal right to them; the name given to them or the form in which they are granted are also of no consequence.

The withholding of the tax generally marks the end of the taxation procedure, unless the employee applies to be assessed for tax or is legally obliged to submit a tax return to the tax office.

Marginal employment:

There are special regulations for employees earning up to € 5,400.00 per year/€ 450 per month, respectively. Furthermore, there are special rules for incomes within the range from € 5,400.01 to € 10,200.00 per year (the so-called 'earning within the sliding pay scale').

For the purposes of deducting wages tax, employees are categorised into tax classes (see the section entitled Rate(s) Structure for more details). These classes serve to ensure that, as a rule, allowances and flat-rate deductions that must be granted by law are taken into account. These are the wage or salary earner’s standard allowance, which currently stands at €1,000 a year, (for tax classes I to V), the flat-rate allowance for special expenses, which is €36 a year (for tax classes I to V), the flat-rate allowance for provident expenses (available to tax classes I to VI), and the allowance for single parents of €1,308 a year (for tax class II).

In the parallel case of tax assessment for limited tax liability, a number of the corresponding personal or family-based benefits, for example, certain special expenses or extraordinary financial burdens, cannot be taken into account to reduce tax, or can only be taken into account to a limited extent. Furthermore, neither the basic personal allowance nor the splitting method for married couples can be applied in this case.

Surcharge 2: Church tax (where appropriate)

In order to make it easier for employers to calculate the tax, employees are classified in different tax classes. Furthermore, the allowances and flat-rate deductions that must be granted by law are normally taken into account. These are the wage or salary earner’s standard allowance, which currently stands at €1,000 a year, (for tax classes I to V), the flat-rate allowance for special expenses, which is €36 a year (for tax classes I to V), the flat-rate allowance for provident expenses (available to tax classes I to VI), and the allowance for single parents of €1,308 a year (for tax class II).

The tax classes are arranged as follows:

• Class I: single employees, as well as married, widowed or divorced employees and employees who are in a civil partnership (1) or who were previously in a now-dissolved civil partnership (1) who do not meet the requirements for assignment to Class III or Class IV.
• Class II: employees as described in Class I, but who are entitled to the relief amount for single parents. This relief amount may be claimed by employees who are single, if at least one member of their household is a child for whom the employee in question is entitled to a tax-free allowance or child benefit. It is assumed that a child belongs to the household if that child is registered at the residence of the single taxpayer. Taxpayers are classed as single if they do not live in a joint household with another adult and

                   a) do not meet the requirements for applying the splitting method or 
                   b) are widowed.

• Class III: married employees/employees in a civil partnership (1) who are not permanently separated and are subject to      unlimited income tax liability and a) whose spouse/civil partner (1) does not receive income from dependent personal services, or b) whose spouse/civil partner (1) has been assigned to Class V following application by both spouses/civil partners (1) . Widowed employees if they and their deceased spouse were subject to unlimited income tax liability at the time of the spouse’s death and were not permanently separated at that time (however, this only applies to the calendar year following that of the spouse’s death).
• Class IV: employees who are married or in a civil partnership (1), if both they and their spouse/civil partner (1) are     subject to unlimited tax liability and are not permanently separated, provided that the employee’s spouse/civil partner (1) also receives income from dependent personal services.
• Class V: Employees as described in Class IV, if the employee’s spouse/civil partner (1) is assigned to Class III following      application by both spouses/civil partners (1).
• Class VI: applies to employees who receive income for dependent personal services from more than one employer concurrently; this class is used to withhold wages tax on the income from the second employment relationship and any further employment relationships.

From the calendar year 2010 onwards, spouses/civil partners (1) receiving income from dependent personal services have an extra option as regards each of their tax classes. In addition to the previously existing combinations (of Class IV for both partners, or Class III for one and Class V for the other) spouses/civil partners (1) may choose the tax class combination IV and IV in conjunction with a specially calculated multiplying factor. This factor-based option is a means of ensuring that the relevant tax relief provisions (in particular the basic personal allowance) are taken into account when withholding wages tax from each spouse’s/civil partner's (1) income. The factor also takes into the account the tax-reducing effect of the income-splitting method when wages tax is withheld.

(1) within the meaning of the Civil Partnership Act (Lebenspartnerschaftsgesetz - LPartG) of 16 February 2001 (Federal Law Gazette I, page 266)