Payroll refers to the entire process of wage and salary accounting – from recording working hours and calculating taxes and social security contributions to disbursing payments to employees. The term simultaneously describes the salary list, the total amount of personnel costs, and the responsible department. In Germany, payroll is particularly demanding due to complex tax and social security regulations.

Definition: What Is Payroll?

Payroll is the English term for wage and salary accounting. In an HR context, it encompasses all processes related to employee compensation – from data collection to the transfer of net salaries.

The Three Meanings of Payroll

The term payroll is used for three different things in practice:

1. The salary list: A compilation of all wages and salaries that a company pays to its employees. When someone is "on the payroll," that person is employed by the company.
2. The total amount: The sum of all personnel costs that a company must allocate for salaries, social contributions, and additional benefits.
3. The department: The team or department responsible for regular payroll processing and all associated administrative tasks.

Payroll vs. Wages vs. Salary

In Germany, a distinction is made between wages (Lohn) and salary (Gehalt). Wages are based on actual hours worked and can vary monthly. Salary, on the other hand, is a fixed monthly amount regardless of the specific number of hours worked. Payroll as an umbrella term covers both forms of compensation accounting.

Tasks in Payroll

The payroll process is divided into three phases that are completed each pay period.

Pre-Payroll: Data Preparation

Before the actual calculation, all relevant data must be collected and updated:

• Employee master data (tax class, health insurance, bank details)
• Working hours and overtime
• Vacation and sick days
• Variable compensation components (bonuses, commissions)
• Changes to employment contracts
• Benefits in kind and non-cash benefits

Payroll Processing: Calculation and Deductions

In the core process, the net amount to be paid is calculated from the gross salary. The following are deducted:

Taxes:

• Wage tax (depending on tax class)
• Solidarity surcharge (only for higher incomes)
• Church tax (if applicable)

Social security contributions:

• Health insurance
• Pension insurance
• Unemployment insurance
• Long-term care insurance

Social security contributions are generally shared equally between employers and employees.

Post-Payroll: Reporting and Payment

After the calculation, the following steps complete the process:

• Preparation of pay slips for all employees
• Transfer of net salaries
• Payment of wage tax to the tax office
• Reporting and payment of social security contributions
• Preparation of certificates and notifications
• Posting to financial accounting

Legal Framework in Germany

Payroll in Germany is subject to numerous legal regulations that must be precisely followed.

Overview of Relevant Laws

Section 108 of the Trade Regulation Act (§ 108 GewO): Employers are required to provide employees with a written pay slip. This must be available by the payment date at the latest and must transparently list all components of compensation as well as deductions.

Income Tax Act (EStG): Governs wage tax deduction. Germany uses a progressive tax system with six tax classes, which makes calculation complex.

Social Security Code IV (SGB IV): Defines the basis for calculating and paying social security contributions. Contribution assessment ceilings are adjusted annually.

Continued Remuneration Act (EntgFG): Regulates continued payment of wages in case of illness. Employers must continue to pay compensation for up to six weeks.

Characteristics of the German Payroll System

Germany is among the countries with the world's most complex payroll requirements. According to the Global Payroll Complexity Index 2023, Germany ranks second worldwide. There are several reasons for this:

• Progressive tax system: Six different tax classes with varying allowances
• Comprehensive social security: Four pillars with different contribution rates and ceilings
• Collective agreements: Industry-specific regulations on wages, working hours, and additional benefits
• Frequent legislative changes: Regular adjustments to taxes and social contributions
• Strict data protection: GDPR-compliant processing of personal data is mandatory

Payroll software in Germany must also be ITSG-certified to correctly handle statutory reporting procedures.

Payroll vs. HR – Division of Tasks and Interfaces

Although payroll and human resources work closely together, they have different focuses.

HR tasks:

• Recruiting and onboarding
• Personnel development and training
• Employee support and retention
• Employment law and contracts
• Employer branding

Payroll tasks:

• Wage and salary calculation
• Tax and social security reporting
• Preparation of pay slips
• Support during audits
• Handling special cases (parental leave, illness)

The interfaces are numerous: HR provides master data, contract changes, and absences. Payroll needs this information for accurate accounting and returns pay certificates. In small and medium-sized enterprises, both functions are often combined in one department.

Payroll Options for Companies

Depending on company size and resources, there are various ways to organize payroll.

In-House Payroll

With internal processing, the company's own HR or finance team handles the complete payroll. This requires:

• Qualified payroll specialists
• Suitable software with ITSG certification
• Continuous training on legislative changes
• Sufficient capacity for special cases and audits

Advantages: Full control, direct data access, quick adjustments

Disadvantages: High resource expenditure, risk during staff absences, costs for software and training

Payroll Outsourcing

With outsourcing, an external service provider handles payroll accounting. According to a Deloitte study, 81 percent of companies in Europe have outsourced some payroll tasks.

Advantages: Expert knowledge, legal certainty, relief of internal resources, scalability

Disadvantages: Dependence on the service provider, costs per payroll run, data sharing required

Payroll Software

Modern software solutions automate a large part of payroll processes. The most well-known providers in Germany are DATEV, SAP HCM, LOGA, and Personio.

Important criteria when selecting:

• ITSG certification for legally compliant reporting
• Integration with existing HR systems
• Automatic updates for legislative changes
• User-friendliness and support
• Scalability for growing companies

Frequently Asked Questions About Payroll

What is payroll?

Payroll is the umbrella term for all wage and salary accounting processes. This includes recording working hours, calculating gross and net wages, paying taxes and social contributions, and disbursing payments to employees. The term also refers to the salary list or the responsible department.

What does a payroll specialist do?

Payroll specialists are responsible for accurate and timely payroll processing. Their tasks include maintaining employee data, calculating wages and salaries, preparing reports for tax authorities and social security institutions, and supporting company audits.

What is the difference between payroll and HR?

HR (Human Resources) handles recruiting, personnel development, and employee support. Payroll focuses on wage accounting and all related administrative processes. Both areas work closely together and share much data but have different core tasks.

Which laws govern payroll in Germany?

The most important laws are Section 108 GewO (obligation to provide pay slips), the Income Tax Act (wage tax deduction), Social Security Code IV (social security contributions), and the Continued Remuneration Act (continued payment during illness).

Is payroll outsourcing worthwhile?

This depends on company size and internal resources. Outsourcing offers advantages such as legal certainty, expert knowledge, and time savings. Particularly for SMEs without their own payroll expertise, outsourcing can be beneficial. According to Deloitte, 81 percent of European companies outsource at least parts of their payroll.

What must a pay slip contain?

According to Section 108 GewO, a pay slip must contain the gross salary, all taxes (wage tax, church tax if applicable, solidarity surcharge), social security contributions, the net salary, and the pay period. Special payments and benefits in kind must also be listed.

Why is payroll so complex in Germany?

Germany has a progressive tax system with six tax classes, comprehensive social security regulations, industry-specific collective agreements, and strict data protection requirements. Added to this are frequent legislative changes and the requirement for ITSG certification for payroll software.

Conclusion

Payroll is far more than just salary transfers. As a core process of personnel administration, it encompasses the entire compensation accounting with all tax and social security aspects. In Germany, payroll is particularly demanding due to the complex legal situation and requires either qualified internal specialists, suitable software, or an external service provider.

For HR professionals, it is worthwhile to regularly review payroll processes and optimize them as needed – whether through better software integration, outsourcing, or targeted team training.

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Sources

• Section 108 Trade Regulation Act (GewO) – Obligation to provide pay slips. Federal Ministry of Justice, 2024. https://www.gesetze-im-internet.de/gewo/__108.html
• Income Tax Act (EStG). Federal Ministry of Justice, 2024. https://www.gesetze-im-internet.de/estg/
• Social Security Code IV (SGB IV) – Common provisions for social security. Federal Ministry of Labour and Social Affairs, 2024. https://www.gesetze-im-internet.de/sgb_4/
• Continued Remuneration Act (EntgFG). Federal Ministry of Justice, last amended 2022. https://www.gesetze-im-internet.de/entgfg/
• Global Payroll Complexity Index 2023. Alight Solutions, 2023.
• Deloitte Global Payroll Benchmarking Survey. Deloitte, 2023.