Payroll software is a solution that automates all tasks related to salary processing – from calculating gross and net pay to tax deductions and reporting to tax authorities and social security institutions. Under Section 108 of the German Trade Regulation Act (GewO), employers are legally required to provide employees with a pay statement in text form. Modern payroll software saves time, reduces errors, and ensures compliance with Germany's complex wage tax and social security regulations.

What Is Payroll Software?

Payroll software (also known as payroll programs, wage accounting software, or salary processing systems) is a specialized software solution for automating payroll and salary calculations. Based on master data, working hours, and legal requirements, the software calculates gross salary, all deductions, and the net salary of employees.

Unlike manual processing, the software also handles communication with authorities: wage tax returns are automatically submitted to the tax office, and social security contributions are reported to health insurance providers. For companies, this means less time spent, fewer sources of error, and greater legal certainty.

Wages vs. Salary

The terms are often used interchangeably but refer to different forms of compensation. Wages are calculated based on hours worked – the amount can vary from month to month. Salary, on the other hand, is a fixed monthly payment regardless of the actual number of hours worked. Good payroll software can handle both variants as well as mixed forms (e.g., base salary plus overtime compensation).

Legal Framework for Payroll in Germany

Section 108 GewO – Obligation to Provide Pay Statements

The legal basis for payroll statements in Germany is found in Section 108 of the Trade Regulation Act (Gewerbeordnung, GewO). According to this provision, every employer is obligated to provide employees with a statement in text form when paying wages. The statement must transparently show the pay period and the breakdown of compensation – including gross salary, all deductions, and the net amount.

An exception applies only if nothing has changed compared to the previous statement. In practice, most employers still create monthly statements, as employees expect this and it serves documentation purposes.

Important: Since 2001, pay statements can also be provided digitally. Under Section 126b of the German Civil Code (BGB), text form is satisfied if the document is readable, the employer is identifiable, and the employee can access it at any time. However, for purely digital provision (e.g., via an employee portal), the explicit consent of employees is required.

Retention Requirements

Pay statements must be retained for six years according to Section 41 of the German Income Tax Act (EStG). The period begins on January 1 of the year following the last wage payment. Payroll software should therefore enable audit-proof archiving.

Data Protection: GDPR Requirements

Since pay statements contain sensitive personal data – including specially protected categories such as religious affiliation (relevant for church tax) – strict data protection requirements apply. Under GDPR and the German Federal Data Protection Act (BDSG), companies must implement technical and organizational measures to protect this data. For cloud solutions, a data processing agreement with the provider is mandatory.

Key Features of Payroll Software

Wage and Salary Calculation

The core function of any payroll software is the automatic calculation of gross and net salary, taking into account all relevant factors: tax class, church tax liability, social security contributions, allowances, and variable components such as overtime, bonuses, premiums, or benefits in kind. Good programs also handle special cases such as mini-jobs, short-time work, partial retirement, or employment of working students.

Reporting (ELStAM, DEÜV, AAG)

A significant advantage of payroll software is automated communication with authorities:

• ELStAM (Electronic Wage Tax Deduction Features): Retrieval and processing of tax class and allowances directly from the tax office
• DEÜV (Data Collection and Transmission Regulation): Reports on social security contributions to health insurance providers and pension insurance
• AAG (Compensation Equalization Act): Reimbursement claims for continued payment of wages in case of illness or maternity protection

These reports must be submitted on time and in the correct format – errors can lead to back payments and late payment surcharges. Payroll software significantly minimizes this risk.

Interfaces

Modern payroll software offers interfaces to other systems:

• DATEV Interface: Enables direct transfer of payroll data to tax advisors or payroll offices. This function is essential for companies working with external service providers.
• Accounting Software: Automatic transfer of wage costs to financial accounting
• Time Tracking: Import of working hours, overtime, and absences directly into payroll
• HR Software: Integration with digital personnel files, absence management, and applicant management

Payroll Software Comparison

The market for payroll software is diverse. The following overview shows common solutions for different company sizes (as of January 2025):

Prices vary depending on the number of employees and range of features. Many providers offer free trial periods.

Software, Tax Advisor, or Outsourcing?

There are three basic options for payroll processing:

Option 1: In-house with Software - You handle payroll yourself using payroll software. This requires training and ongoing education about legislative changes but offers full control and is often the most cost-effective solution as employee numbers grow.

Option 2: Tax Advisor or Payroll Office - Payroll is outsourced to external experts. This guarantees legal certainty and saves time but involves ongoing costs (often €15-30 per payroll run). A DATEV interface in your HR software can significantly simplify data exchange.

Option 3: Full-Service Outsourcing - Specialized payroll service providers take over complete payroll processing. This option is particularly suitable for companies with complex payroll situations or international employees.

Decision Guide: For micro-businesses (1-5 employees), a tax advisor is often the most pragmatic solution. From around 10 employees, dedicated payroll software usually pays off – ideally with DATEV connectivity so the tax advisor can provide support when needed.

Selection Criteria for Payroll Software

When choosing payroll software, you should check the following points:

Range of Features

• Does the software cover all relevant pay types (salary, hourly wage, mini-job, short-time work)?
• Are all required reporting procedures integrated?
• Are there interfaces to your existing software landscape?

Legal Compliance

• Is the software regularly updated (contribution rates, legislative changes)?
• Is it GoBD-compliant for audit-proof archiving?
• Does it meet GDPR requirements?

User-Friendliness

• Is the interface intuitive to use?
• Are there wizards or step-by-step guides?
• How much effort is required for training?

Support and Costs

• What support is included in the price?
• What is the pricing model (per employee, flat rate, annual)?
• Are there hidden costs for updates or additional features?

Frequently Asked Questions About Payroll Software

Is a pay statement mandatory for employers?

Yes. According to Section 108 GewO, employers must provide employees with a statement in text form for every salary payment. This must clearly show the pay period and the breakdown of compensation. An exception applies only if nothing has changed compared to the previous month.

How much does payroll software cost?

Costs vary widely. Simple cloud solutions start at around €10 per month, while professional programs for mid-sized companies cost €30-100 monthly. For most providers, the price depends on the number of employees to be processed. Desktop solutions with annual licenses are available from around €100-600.

What features must payroll software have?

Essential features include: wage and salary calculation including special cases, automatic reports to tax authorities and social security institutions (ELStAM, DEÜV), GDPR-compliant data storage, and automatic updates for legislative changes. Depending on your needs, DATEV interface, time tracking integration, and employee portal are useful additions.

Can I handle payroll without software?

Theoretically yes, practically hardly. The complexity of German payroll – Germany ranks 2nd worldwide in the Global Payroll Complexity Index 2023 – makes specialized software virtually essential. Without automated calculations and reporting procedures, the risk of errors is too high.

Cloud or On-Premise – which is more secure?

Both variants can meet data protection requirements. Cloud solutions offer the advantage of automatic updates and professional server security from the provider. On-premise solutions give you full control over your data but require your own IT resources. For SMEs without their own IT department, cloud is usually the more pragmatic choice.

How often must a pay statement be created?

Usually monthly – corresponding to the typical pay period. For hourly wages with weekly payment, correspondingly more frequently. The statement must be available at the latest at the time of salary payment.

What happens if there are errors in the pay statement?

Incorrect pay statements can be corrected – legally, they are merely statements of knowledge, not acknowledgments of debt. Employees can file objections within three years (general statute of limitations), although shorter exclusion periods may apply under employment contracts or collective agreements. Errors to your disadvantage as an employer can result in back payments and late payment surcharges.

Conclusion

Payroll software is not a luxury but a necessity for companies with employees. The software saves time, minimizes errors, and ensures compliance with Germany's complex wage and social security regulations. When selecting software, you should pay attention to the range of features, legal compliance, user-friendliness, and appropriate interfaces – the DATEV connection in particular is valuable for working with tax advisors.

Looking to optimize not just your payroll but also your hiring process? With scientifically validated game-based assessments, the digital platform Aivy helps companies evaluate candidates objectively and fairly – free from unconscious bias. Learn more about Aivy

Sources

• Section 108 GewO – Payroll Statement. German Federal Ministry of Justice, 2025. https://www.gesetze-im-internet.de/gewo/__108.html
• Section 41 EStG – Record-Keeping Requirements for Wage Tax. German Federal Ministry of Justice, 2025. https://www.gesetze-im-internet.de/estg/__41.html
• Section 126b BGB – Text Form. German Federal Ministry of Justice, 2025. https://www.gesetze-im-internet.de/bgb/__126b.html
• Payroll / Employment Law. Haufe, 2025. https://www.haufe.de/id/beitrag/lohn-und-gehaltsabrechnung-arbeitsrecht-HI727125.html
• Global Payroll Complexity Index 2023. Alight Solutions, 2023.