German Tax Classes: How Your (Steuerklasse) Changes Your Monthly Pay

Every employee in Germany is assigned a Steuerklasse, a tax class, which determines how much Lohnsteuer the employer withholds each month. There are six of them, and the assignment follows marital status, whether a spouse works, whether you have children and whether you hold more than one job.

The important thing to understand first is what a tax class is not. It is not a different rate of tax. Germany's income tax schedule is the same for everybody. The class simply changes the assumptions payroll makes about your allowances, and therefore how much is withheld in advance.

The six classes

The III and V combination

This is the arrangement that produces the dramatic payslip differences. The higher earning spouse takes class III, which applies both spouses' allowances to a single income and therefore withholds very little. The lower earning spouse takes class V, which applies no basic allowance at all and withholds heavily.

On a household where one spouse earns 70,000 euros and the other 25,000, the class III payslip can be 400 to 600 euros a month lighter on tax than the same salary in class I, while the class V payslip loses several hundred more than class IV would take. Total household withholding across the year is roughly right; its distribution between two people is not.

That distribution matters more than it sounds. Wage replacement benefits including Elterngeld, Arbeitslosengeld, Krankengeld and Mutterschaftsgeld are calculated on net pay. A spouse sitting in class V before taking parental leave will receive a materially smaller Elterngeld payment than the same person in class IV, on identical gross pay. Couples planning a birth commonly switch classes well in advance for exactly this reason, and the switch has to be made early enough to affect the reference period.

Class IV with a factor

Since the introduction of the Faktorverfahren, married couples can choose class IV for both spouses and apply a factor calculated by the Finanzamt. The factor distributes the expected annual liability between the two payslips in proportion to income, which produces two roughly accurate withholdings instead of one too low and one too high.

It is the technically correct option and it is used far less than it should be, mostly because it requires an application and the III and V default requires nothing.

Why the class matters less than the payslip suggests

Married couples in Germany are jointly assessed. The annual tax return recalculates the household liability under Ehegattensplitting, which halves the joint income, applies the tax schedule and doubles the result. Whatever was withheld during the year is then set against that figure, and the difference is refunded or demanded.

So a couple in III and V who over-withheld receives a refund. A couple in III and V who under-withheld receives a bill, and this is common enough that the combination triggers a mandatory return. The class changes the cash flow, not the destination.

For a single employee in class I the question does not arise at all, which is why the take-home figures in what a 70,000 euro German salary leaves are calculated on class I throughout.

Class VI and second jobs

Any second employment is taxed in class VI, which grants no allowances whatsoever and withholds at a rate that looks confiscatory on a small side income. The logic is that your allowances are already being used at the main job.

The annual return corrects it. If the second job was genuinely small, most of what was withheld in class VI comes back. Minijobs up to the monthly threshold are handled separately with a flat employer levy and are not affected.

Changing class

Class changes are made through the Finanzamt, either online through ELSTER or on a paper form, and take effect from the following month. The restriction that couples could only change once a year has been relaxed, and multiple changes are now possible where circumstances justify them.

Worth changing when:

• One spouse stops working or starts working, altering the balance of income substantially.
• A spouse is planning parental leave, sick leave or is at risk of unemployment, since benefits follow net pay.
• A marriage or divorce takes effect, which is not applied automatically in every case.
• The III and V split is producing a large annual bill that would be easier to manage spread across twelve months.

What else moves the monthly figure

Tax class is one of four inputs on a German payslip that employees can influence. The others are church membership, which adds 8% or 9% of the income tax bill and is covered in the guide to Kirchensteuer; the number of children registered, which reduces the solidarity surcharge and church tax base; and any Freibetrag entered on the electronic wage tax card for commuting costs, childcare or professional expenses.

That last one is underused. A long commute recorded as a Freibetrag reduces monthly withholding immediately rather than waiting for a refund fourteen months later.