The question of gross versus net salary is a crucial factor when it comes to wages. You often find yourself in front of job advertisements and ask yourself what will ultimately be left of the stated salary.
What is the gross and net salary?
The term “gross salary” refers to the total amount that employees receive as compensation for their work. This amount is the result of the agreement between employee and employer – and therefore represents the full salary before any statutory deductions. This means that no social security contributions or taxes have been deducted at this point.
The gross salary is an important reference as this amount is usually mentioned in employment contracts, collective agreements or job advertisements. It allows employees to get a first impression of the level of their pay. However, it is essential to understand that the gross salary does not correspond to the amount that is actually paid out monthly. Before the payment is made, various contributions and taxes are deducted from the gross salary.
Net salary, also known as “paid salary”, is the amount available to employees after deducting all statutory contributions and taxes. The compulsory contributions in Germany refer, for example, to contributions to health, nursing care, pension and unemployment insurance. Taxes such as wage tax, the solidarity surcharge and, if applicable, church tax are also deducted.
The net salary is therefore the amount that is actually credited to employees’ accounts at the end of the month. This amount can be used to cover living expenses, pursue savings goals, or for leisure and entertainment expenses. It is therefore crucial to understand the difference between gross and net salary in order to get a realistic overview of your financial possibilities.
What is deducted from the gross salary?
First, the wage tax to be paid is calculated from the gross salary. The amount depends on the relevant tax class. There are six tax classes in Germany, and choosing the right class depends on your marital status. For example, single parents fall into tax bracket two. However, single and childless people or couples who live together without being married are assigned to tax class one. Married people have the option to choose from three different tax brackets. The selection of the appropriate tax class depends on the individual income and you can choose between tax classes three, four and five. The sixth and final tax class applies if a secondary activity is carried out.
In general, employees and pensioners pay income tax, while self-employed people pay income tax. The difference between wage tax and income tax lies only in the way they are collected; the tax rate is basically identical. Employers are obliged to withhold wage tax and forward it to the tax office by the 15th of the following month.
In addition to taxes, social security contributions are also deducted, which must be taken into account from the gross salary when calculating the net salary. Contributions to unemployment, nursing care and pension insurance are borne equally by the employer and employee. This is also the case if a person has statutory health insurance. For employees who have private health insurance, the maximum subsidy in 2023 is 403.99 euros per month.
Germany has a progressive income tax system, so the tax rate increases as income increases, according to steuerschroeder.de in an online article. There is a basic allowance up to which no income tax is paid. The tax rate for income and wage tax starts at 14 percent and can rise to 42 percent. The highest income group is even subject to a tax rate of 45 percent, known as the rich tax. The respective tax rates for income tax are listed in an income tax table, plus a solidarity surcharge of 5.5 percent and a church tax of 8 percent or 9 percent. The basic allowance, which remains tax-free and serves to avoid reducing the subsistence level through taxes, is currently 10,908 euros per year, as highlighted by Sozialpolitik-aktuell.de. The portion of income that exceeds 62,810 euros is then taxed at a tax rate of 42 percent. Finally, the so-called rich tax rate of 45 percent applies to income over 277,826 euros.
Example calculation
Let’s look at an example: Mr. Smith is single and has no children, so he falls into tax bracket one. For him the basic allowance is 10,908 euros. This portion of income remains tax-free because it represents the subsistence level. If we assume that Mr. Smith earns 4,000 euros gross per month, then, according to Datev, he pays 588.41 euros in income tax to the tax office. The pension insurance, which is calculated at a rate of 18.6 percent, would cost 744 euros, of which Mr. Smith pays 372 euros himself. 14.6 percent of gross wages are deducted for statutory health insurance. In Mr. Smith’s case, this corresponds to 584 euros, of which he pays 292 euros himself. Taking into account the additional health insurance contribution of 1.6 percent, Mr. Smith actually pays 324 euros. In addition, he has to pay the nursing care insurance, for which 3.05 percent of the gross wage is deducted. The share here is 61 euros. However, due to the additional contribution rate of 0.35 percent, he has to pay a total of 75 euros. Finally, Mr. Smith has to pay unemployment insurance, which in our example is 2.6 percent. A further 104 euros are deducted from the gross salary, with him paying half himself, i.e. 52 euros.
In total, the social security deductions amount to 823 euros. Together with the wage tax of 588.41 euros, this results in the sum that is deducted from Mr. Mustermann’s gross wages. Instead of 4,000 euros, only 2,588.59 euros end up in his account.
Editorial team finanzen.net