Lohnsteuer (German wage tax) is a prepayment of the employee's annual income tax (Einkommensteuer), not a flat percentage of gross pay. Each month the employer withholds an estimate of the annual income tax and remits the amount to the tax office (Finanzamt) by the 10th of the following month. The employee later reconciles the estimate against the true figure on the annual income-tax return. The monthly withholding is derived from an annual, progressive tariff, apportioned to the pay period. The sections below set out how the estimate is calculated.
The six tax classes and how they are assigned
Every employee is placed in one of six tax classes (Steuerklassen). The employer does not choose the class or collect a form for it. The class, the employee's allowances, and church-tax status are retrieved electronically from the tax authority's ELStAM database (the federal electronic wage-tax record) using the employee's tax ID and date of birth.
The six classes:
- I: single, divorced, or widowed. The default.
- II: single parents, who receive an additional relief amount.
- III and V: the split for married couples with uneven incomes. The higher earner takes class III and a larger allowance; the lower earner takes class V and a smaller one.
- IV: married couples with similar incomes, each taxed as though single.
- VI: a second or further job. Class VI grants no basic allowance, so withholding is highest here.
The key point is that the tax class changes the monthly withholding, not the couple's actual annual tax. A III/V split lowers the higher earner's monthly deduction and raises the lower earner's, but the true joint liability is settled on the annual return. The class only decides who pre-pays what during the year. The government drafted a plan to retire the III/V split from 2030 and move those couples to class IV with a factor (the Faktorverfahren, which apportions withholding in proportion to each spouse's income). That transfer was struck from the legislation and is not in force; the III/V combination remains available, and no start date is fixed.
The income tax tariff: tax-free allowance and four rate zones
The annual income tax is calculated from a single continuous formula (EStG Art. 32a), not a table of flat brackets. For 2026 the formula has four zones, for a single taxpayer:
- Up to €12,348: the basic tax-free allowance (Grundfreibetrag). No income tax at all.
- €12,349 to €69,878: a linear-progressive zone. The marginal rate starts at 14% just above the allowance and rises continuously to 42%.
- €69,879 to €277,825: a flat 42% on each additional euro.
- From €277,826: 45%, the band informally called the Reichensteuer.
These are marginal rates: each rate applies only to the euros inside its own zone, never to the whole income. For a married couple filing jointly, the thresholds double (the 42% rate begins at €139,758), because their combined taxable income is halved, taxed, and doubled.
The solidarity surcharge and church tax
Two further amounts are calculated as a percentage of the income tax, not of gross pay.
The solidarity surcharge (Solidaritätszuschlag) is 5.5% of the income tax, but only above a threshold (Freigrenze). For 2026 an employee owes no surcharge until annual income tax reaches €20,350 (single) or €40,700 (married). Above that threshold, a phase-in applies before the full 5.5% takes effect. In practice roughly 90% of taxpayers pay no surcharge, and only higher earners still owe it.
Church tax (Kirchensteuer) applies to registered members of a tax-collecting church. The rate is 8% of the income tax in Bavaria and Baden-Württemberg and 9% in the other federal states. The employee's church-membership status is recorded in ELStAM, so payroll withholds church tax automatically for a registered member and not for anyone else. An employee stops owing church tax only by formally leaving the church (Kirchenaustritt).
A worked example: a single employee in class I
Take an employee in class I on €48,000 gross a year, with no children and no church membership.
Step one, allowances. Before the tariff applies, two amounts are deducted from gross: a pension-type deduction for social-security contributions (the Vorsorgepauschale) and a standard employee lump sum. Say these reduce the figure to roughly €40,000 of taxable income. (Rounded, for illustration.)
Step two, the tariff. The first €12,348 is untaxed. Only the remaining €27,650 or so enters the formula, taxed at rates rising from 14%. The annual income tax is roughly €7,000. (Illustrative and clearly rounded; the exact figure is produced by the EStG Art. 32a formula.)
Step three, the effective rate. €7,000 of tax on €48,000 of gross is an effective rate of about 15%. The statutory top rate is 42%, but the amount withheld is near 15% of gross, because the Grundfreibetrag and the low-rate zone leave the first large portion of income untaxed or lightly taxed. The effective rate on total gross is therefore well below the marginal rate that applies to the top euros of income.
Step four, the period. Divide the annual tax by twelve for the monthly Lohnsteuer, roughly €580. Social-security contributions and, for members, church tax are separate deductions on the same payslip.
Three complications: reconciliation, the Vorsorgepauschale reform, and the linked add-ons
Three features of the calculation need attention beyond the monthly formula.
First, the monthly withholding is only an estimate of the year's tax, never the final figure. The tax class sets the monthly deduction, but each person's true annual liability is worked out separately on the income-tax return (Einkommensteuererklärung) filed after the year ends. The two rarely match to the cent, and the difference comes back to the employee as a refund or is collected as a back-payment. The gap is largest when income is uneven across the year or between spouses: a second job, a marriage or divorce mid-year, or a III/V split each makes the flat monthly estimate diverge from the progressive annual calculation.
Second, the Vorsorgepauschale was reformed for 2026. The Vorsorgepauschale is the deduction for pension, health, and long-term-care contributions that lowers taxable pay before the tariff applies. Until 2025 payroll could fall back on a flat minimum version, the Mindestvorsorgepauschale, when it did not have an employee's actual contribution data. From 2026 that minimum version is gone: the employee's real social-security contributions are transmitted through ELStAM and used directly, so the deduction now reflects what each employee actually pays. Employees with private health insurance or higher incomes, whose real contributions differ most from the old flat figure, can see their Lohnsteuer change as a result.
Third, the solidarity surcharge and church tax are both calculated as a percentage of the income tax itself, not of gross pay. That means an error in the income-tax figure produces a proportional error in both. If an allowance is applied wrongly and the Lohnsteuer comes out too high or too low, the church tax (8 or 9% of the income tax) and the solidarity surcharge (5.5% above the threshold) are wrong by the same proportion. The three figures cannot be checked independently, because two of them are calculated from the first.
Most of these numbers change on a published schedule. The Grundfreibetrag and the tariff thresholds are updated most years, the surcharge Freigrenze is revised alongside them, and the Vorsorgepauschale was rewritten for 2026. The method stays the same from year to year; only the figures it runs on move.
To put the whole calculation in one place: German wage tax is a progressive annual tax, split across the twelve months and adjusted for the employee's tax class and allowances, with the solidarity surcharge and church tax added on as a percentage of the tax due. Getting it right is mostly a matter of using the current year's figures rather than last year's. Flux keeps the tariff formula and every allowance up to date for each pay cycle, so a partner running German payroll does not have to track the annual changes or calculate the wage tax by hand.
Mehmood Deshmukh
CTO & Co-Founder
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