Understanding the Total Cost of Employment in Germany
As a decision-maker considering using Employer of Record (EOR) services in Germany, it’s crucial to understand how the total cost of employment is calculated for employees in this country. This knowledge will help you make informed decisions about hiring and budgeting for your workforce in Germany. Let’s break down the components that contribute to the total employment cost and explore how they impact your business.
Base Salary: The Foundation of Employment Costs
The starting point for calculating the total cost of employment is the employee’s gross salary. This is the amount agreed upon between the employer and employee before any deductions or additional costs are considered.
Social Security Contributions
One of the most substantial components of employment costs in Germany is the social security contributions. These mandatory payments are calculated as a percentage of the employee’s gross salary
| Contribution Type | Employer Share (2025) | Employee Share (2025) |
|---|---|---|
| Pension Insurance | 9.3% | 9.3% |
| Health Insurance | 7.3% + 1.45%* | 7.3% + 1.45%* |
| Longterm-Care Insurance | 1.8% | 0.8-2.4% |
| Unemployment Insurance | 1.3% | 1.3% |
| Accident Insurance | 1.2–3% (industry-specific) | 0% |
*Health insurance includes a provider-specific supplementary rate.
Pension Insurance
The pension insurance pays employees a pension after they have retired. The amount of the pension is determined primarily by your income and the number of years an employee has worked in Germany. The contribution rate is 18.6%of the gross salary, equally split between employer and employee and capped at an annual income of €96,600 (“Beitragsbemessungsgrenze”).
Health Insurance
The statuatory health insurance pays for doctor’s visits and many medicines and therapeutic measures. The contribution rate is 14.6% of the gross salary plus a provider-specific supplementary rate (2.9% in average for 2025). The contribution is equally split between employer and employee and is capped at an annual income of €66,150.
Longterm-Care Insurance
The longterm-care insurance offers basic security if permanent care is needed due to illness. This mostly affects people of old age. The contribution rate for the employer is 1.8% of the gross salary. The contribution rate for the employee depends on the number of children and reaches from 2.4% (no children) to 0.8% (5 or more children). The contribution is capped at an annual income of €66,150.
Unemployment Insurance
The unemployment insurance pays unemployed people an income for a certain period of time if certain requirements are met. As a rule, you must have been insured for at least one year in the last two years and be looking for work again. The contribution rate is 2.6% of the gross salary, equally split between employer and employee and capped at an annual income of €66,150.
Accident Insurance
The accident insurance covers the costs of medical treatment and reintegration into working life after an accident at work or in the event of occupational illnesses. The contribution rate depends on the industry and the associated risk. The employer fully covers the contribution.
Levies U1, U2, U3
Employers in Germany are also responsible for several other mandatory contributions:
- U1 (continued remuneration): Covers salary continuation during employee illness
- U2 (maternity protection): Funds maternity leave benefits
- U3 (insolvency contribution): Protects employees in case of employer insolvency
These additional costs typically range from 1% to 2% of the gross salary, depending on the specific circumstances of the employer and industry.
Income Tax Considerations
While income tax is primarily the responsibility of the employee, employers play a crucial role in withholding and remitting these taxes.
Germany employs a linear progressive tax system, where tax rates escalate with income to align with taxpayers’ ability to pay. The foundational principle ensures that individuals earning below the subsistence minimum are exempt, while higher earners contribute proportionally more. For 2025, the basic tax-free allowance (Grundfreibetrag) is €12,084 for single filers and €24,192 for jointly assessed married couples. Income exceeding these thresholds is taxed progressively, with rates ranging from 14% to 45%.
A critical feature is the solidarity surcharge (Solidaritätszuschlag), levied at 5.5% of income tax for individuals earning above €19,450 (single) or €39,900 (married). Additionally, members of state-recognized religious communities pay church tax (Kirchensteuer) at 8–9% of their income tax, depending on the federal state.
Deductions and Allowances
Taxpayers can lower their tax burden through:
- Employee lump-sum allowance: €1,230 for work-related expenses.
- Health insurance premiums: Full deduction for statutory and 80% for private insurance.
- Child allowances: €9,600 per child in 2025.
- Pension contributions: Deductible up to €26,528 annually.
For families, the splitting mechanism (Splittingverfahren) allows married couples to halve their combined income, often resulting in lower effective rates. A couple earning €100,000 jointly would be taxed as two individuals earning €50,000 each, leveraging the progressive structure optimally.
Tax Classes (Steuerklassen)
Tax classes determine monthly withholdings, though annual liabilities remain consistent:
- Class I: Single, divorced, or separated individuals.
- Class III/V: Married couples with one primary earner (III) and a non-working or lower-earning spouse (V).
- Class IV/IV: Dual-earner couples with similar incomes.
For instance, a Class III taxpayer benefits from lower withholdings, but the spouse in Class V faces higher deductions. Annual tax returns reconcile discrepancies between withholdings and actual liabilities.
Example Calculation
| Monthly | Annually | |
| Total cost of Employment | € 6.272,00 | € 75.264,00 |
| Pension insurance (employer part) | € 465,00 | € 5.580,00 |
| Unemployment insurance (employer part) | € 65,00 | € 780,00 |
| Long-term care insurance (employer part) | € 90,00 | € 1.080,00 |
| Health insurance (employer part) | € 427,50 | € 5.130,00 |
| Accident Insurance | € 40,00 | € 480,00 |
| Levies (U1, U2, U3) | € 184,50 | € 2.214,00 |
| Gross Salary | € 5.000,00 | € 60.000,00 |
| Pension insurance (employee part) | € 465,00 | € 5.580,00 |
| Unemployment insurance (employee part) | € 65,00 | € 780,00 |
| Long-term care insurance (employee part) | € 120,00 | € 1.440,00 |
| Health insurance (employee part) | € 427,50 | € 5.130,00 |
| Tax | € 860,49 | € 10.325,88 |
| Net Salary | € 3.062,01 | € 36.744,12 |
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Stephan is the Managing Partner of FMC Group.
Before joining FMC Group, Stephan worked more than 8 years for Accenture’s management consulting practice. His main projects were in the manufacturing and automotive industry, where he focused on transformation and digitalization programs. Stephan has a strong knowledge when it comes to „remote resources“. In many projects, he was involved in the definition and implementation of nearshore resources, offshore delivery teams or the set-up of shared service centers.
He started his career in the semiconductor industry, where he worked as project manager in Asia and as key account manager for governmental clients.
Stephan holds a Master of Business Administration (MBA) from the University of St. Gallen and a Diploma (Dipl.-Ing.) in Automation Technology from the University of Stuttgart.
Disclaimer: Although we carefully researched and compiled the above information, we do not give any guarantee with respect to the actuality, correctness, and completeness.