U.S. Employer · Employee in Germany
U.S. employer with an employee in Germany: tax, payroll and social security
An employee moves to Germany but continues working for a U.S. employer, often fully remotely. What looks like a simple continuation of the existing employment relationship can create German income tax, payroll, social security and permanent-establishment issues. The key factors include where the work is actually performed, how long the arrangement lasts, the employer structure and whether the employee is on a genuine temporary assignment or working permanently from Germany.
Work performed in Germany
The employer's location does not by itself determine where salary is taxed
If an employee lives in Germany and physically performs the work from Germany, the employment income generally becomes relevant for German tax purposes. A German tax resident is generally subject to German income tax on worldwide income.
The Germany–U.S. income tax treaty must then be applied to determine how taxing rights are allocated between the two countries. For employment income, the place where the employment is physically exercised is particularly important.
Four levels to review
Remote work from Germany involves more than personal income tax
The employee's personal tax position is only one part of the case. It is also necessary to determine whether the U.S. employer acquires German payroll or social security obligations and whether the employee creates a taxable business presence in Germany.
- German income tax of the employee
- German wage tax and payroll obligations
- German or U.S. social security coverage
- permanent-establishment risk for the U.S. employer
- possible German corporate tax exposure
- continuing U.S. tax obligations of the employee
- coordination through treaty rules and Foreign Tax Credits
Common scenarios
Temporary assignment, permanent relocation and local employment are not the same
Temporary assignment
An existing U.S. employee is sent to Germany for a period that is intended from the beginning to be temporary, with an expected return to the United States. Special social security rules may apply.
Permanent relocation
The employee moves to Germany for personal reasons and continues working remotely for the same U.S. employer on a long-term basis. This generally differs from a classic assignment and increases German compliance requirements.
New hire in Germany
A U.S. company hires an employee who already lives and works in Germany. German social security generally follows the country-of-employment principle.
German wage tax
A U.S. employer does not automatically have the same wage-tax obligations as a German employer
German wage-tax withholding obligations depend on whether the foreign employer has a sufficient German tax nexus for payroll purposes, for example through a German residence, registered office, place of management, permanent establishment or permanent representative. Special rules may also apply in certain international employee-assignment structures.
If a U.S. employer has no relevant German employer nexus, there can be cases in which no German wage tax is withheld through a conventional German payroll. This does not eliminate the employee's German income tax liability.
Payroll analysis
Before setting up German payroll, first determine whether the U.S. company is a German wage-tax employer
German permanent establishment
If the U.S. company has a German permanent establishment, this can also create German wage-tax withholding obligations.
Permanent representative
A permanent representative in Germany can also change the employer's German tax position.
German group company
If a German host company economically bears or should bear the employee's compensation under arm's-length principles, special rules for international employee assignments can become relevant.
U.S. company only
Where no German company or other German employer nexus exists, income tax and social security still need to be reviewed separately because the two systems use different connecting factors.
Temporary assignment of up to five years
U.S. Social Security can continue for a qualifying temporary assignment
If a U.S. employer sends an existing employee to Germany temporarily and the assignment is expected to last no more than five years, the U.S. social security system can generally continue to apply under the bilateral agreement.
For the social security branches covered by the agreement, this can exempt the employee from German social security contributions. Continued U.S. coverage should be documented through the appropriate Certificate of Coverage.
Permanent work in Germany
Employees hired or permanently working in Germany generally fall under German social security
If an employee works in Germany for a U.S. employer and no assignment exception applies, German social security law generally applies. The foreign employer can then have German employer obligations even without a German subsidiary.
Health insurance
Depending on income and personal circumstances, statutory or private German health insurance must be considered.
Pension insurance
If German social security applies, German statutory pension contributions are generally due.
Unemployment insurance
German unemployment insurance can also form part of the ongoing social security payroll.
Long-term care insurance
German long-term care insurance is generally part of the German social insurance system.
Foreign employer
German social security can require employer registration even without a German subsidiary
A U.S. company can have employer obligations in the German social security system if its employee is subject to German social security law.
A lack of German wage-tax withholding therefore does not mean that no German payroll or social security administration is needed. Wage tax and social security must be analyzed independently.
Permanent Establishment
An employee in Germany can create permanent-establishment risk for the U.S. employer
If an employee works from Germany on a continuing basis, it must be determined whether the U.S. company thereby acquires a fixed place of business or dependent-agent permanent establishment in Germany.
A home office does not automatically constitute a permanent establishment. The risk increases, however, where the work from Germany is permanent, commercially relevant to the employer or required by the business, or where the employee plays an important role in contracting.
- permanence of the home-office arrangement
- company access or control over the location
- business need for the employee to be in Germany
- nature and importance of the employee's functions
- authority to conclude or negotiate contracts
- customer-facing and sales functions
- management and executive responsibilities
Home office
Not every home office is a permanent establishment – but not every home office is tax-neutral
Employee-driven home office
If the employee works from Germany for personal reasons and could equally perform the role from an employer-provided location elsewhere, this can weigh against treating the home as a fixed place of business of the company.
Business-required German location
If the German presence is used for customer coverage, market development or operational functions, permanent-establishment risk increases.
Contracting authority
If the employee regularly concludes contracts or plays the principal role in securing contracts for the company, dependent-agent permanent-establishment rules must also be reviewed.
Corporate taxation
A German permanent establishment can create German tax returns for the U.S. company
If the employee creates a German permanent establishment, an arm's-length portion of the enterprise profit must generally be attributed to the German operation. German corporate income tax and trade tax filings can then become relevant for the U.S. company.
The permanent-establishment analysis should therefore be performed before the employee has worked from Germany for several years.
Employer of Record
An Employer of Record can simplify local payroll – but does not automatically solve every tax issue
An Employer of Record can formally employ the individual in Germany and handle certain local payroll, social security and employment-law processes. Whether this structure is appropriate depends on the facts and legal implementation.
The use of an EOR should not automatically be treated as eliminating all permanent-establishment or corporate tax risk for the U.S. company. The employee's actual functions and the economic relationship with the U.S. business remain important.
U.S. citizen in Germany
For a U.S. citizen, the U.S. federal income tax return generally continues in parallel
If the employee is a U.S. citizen or otherwise remains taxable in the United States on worldwide income, employment income generally remains reportable on the U.S. return even when all services are physically performed in Germany.
Economic double taxation is then coordinated through the applicable treaty rules and U.S. relief mechanisms.
Form 1040
U.S. citizens generally continue reporting worldwide income after relocating to Germany.
Foreign Tax Credit
German income tax on German workdays can be relevant for U.S. Foreign Tax Credit purposes, subject to the applicable U.S. rules and limitations.
Form 2555
The Foreign Earned Income Exclusion should not automatically be assumed to be the best option. In a high-tax country such as Germany, the Foreign Tax Credit can often be more useful depending on the facts.
FBAR & Form 8938
German bank and brokerage accounts opened after the move can trigger additional U.S. information-reporting obligations.
Germany–U.S. tax treaty
The 183-day rule is not a general exemption for remote work
The treaty's well-known 183-day rule is often misunderstood. Several requirements must generally be satisfied at the same time. Among other conditions, the remuneration must generally not be paid by or economically borne by an employer in the work state and must not be attributable to a permanent establishment there.
For an employee living permanently in Germany and performing the employment there, a reference to fewer than 183 days in a particular period does not automatically exempt the employment income from German taxation.
Workdays in both countries
Regular work in both Germany and the United States can require a workday allocation
If the employee travels back to the United States for meetings or projects, salary may need to be allocated between the countries. Actual workdays and the applicable treaty rules generally form the basis of the allocation.
Calendars, travel records and workday documentation should therefore be maintained contemporaneously.
German workdays
Work physically performed in Germany is generally treated as employment exercised in Germany.
U.S. workdays
Days on which the employee physically performs services in the United States can create U.S.-source employment income and must be allocated separately.
Equity compensation
Stock options, RSUs and other equity awards require separate cross-border analysis
The analysis becomes more complex when the employee receives Restricted Stock Units, stock options or other equity compensation in addition to salary. If the employee moves during the vesting period, Germany and the United States may each claim a portion of the employment benefit.
Grant date, vesting period, exercise date, settlement date and actual workdays during the relevant period should therefore be documented in detail.
German employment law
Tax planning does not replace the need to review German employment law
If an employee habitually works in Germany, mandatory German employment-law provisions can become relevant in addition to tax and social security. These may include working time, vacation, termination protection and other employment conditions.
For a permanent German work arrangement, these issues should be considered together with the tax structure.
Cross-border process
How a U.S. employment relationship with work performed in Germany should be reviewed
Determine residence and work location
Establish when the employee began living in Germany and where the employment is physically performed.
Distinguish assignment from permanent employment
Document the existing employment relationship, expected duration, return intention and reason for the German work arrangement.
Analyze treaty taxation of salary
Review German residence, physical workdays and the applicable treaty rules.
Determine the U.S. employer's wage-tax obligations
Review whether the employer has a German permanent establishment, permanent representative or other German payroll nexus.
Determine social security coverage
Apply the work-state rule, assignment exception and documentation requirements under the Germany–U.S. Social Security Agreement.
Analyze permanent-establishment risk
Review the home office, customer contact, contracting authority, management functions and permanence of the German activity.
Implement the payroll solution
Depending on the result, German payroll, social security registration, German tax prepayments or another employment structure may be required.
Coordinate German and U.S. tax returns
For U.S. persons, employment income, German tax, Foreign Tax Credits and any additional U.S. reporting are reconciled across both systems.
Documents
Information typically needed for the initial analysis
Employment agreement
The existing U.S. employment contract and any amendments covering remote work or the German assignment.
Relocation details
Arrival date, German lease, start of residence and expected duration of the German stay.
Payroll records
U.S. pay statements, Form W-2, bonus arrangements and other compensation components.
Workdays
A record of workdays in Germany, the United States and other countries.
Employee functions
Job description, customer contact, decision-making authority and contracting authority.
Social security
Information on prior U.S. Social Security coverage and any existing Certificate of Coverage.
Common mistakes
What is often overlooked when a U.S. employer has an employee in Germany
“My employer is American, so I only pay U.S. tax”
Work performed from Germany generally requires German tax analysis regardless of where the employer is located.
Using the 183-day rule as a blanket exemption
The treaty exception applies only where all of its conditions are satisfied.
Treating wage tax and social security as the same issue
A U.S. employer can have German social security obligations even where its German wage-tax status is different.
Treating a personal move as an assignment
The temporary-assignment exception requires the actual facts to support an assignment structure.
Ignoring home-office permanent-establishment risk
A long-term employee presence in Germany can create corporate tax issues for the U.S. employer.
Preparing U.S. and German returns separately
For U.S. citizens, German income tax and U.S. Foreign Tax Credits should be coordinated using the same employment-income data.
Related guidance
Related topics
Frequently asked questions
U.S. employer with employee in Germany
Can I live in Germany and continue working for my U.S. employer?
Where is my salary taxed if I work remotely from Germany?
Does my U.S. employer have to set up German payroll?
Does a U.S. employer have to pay German social security contributions?
How long can a temporary assignment remain under U.S. Social Security?
Is a personal move to Germany treated as an assignment?
Can my home office create a German permanent establishment for my employer?
Does using an Employer of Record eliminate permanent-establishment risk?
Do I still file Form 1040 as a U.S. citizen?
Should the arrangement be reviewed before moving to Germany?
Germany–U.S. tax advice
Do you work from Germany for a U.S. employer?
We review German income tax, possible wage-tax and payroll obligations of the U.S. employer, the Germany–U.S. Social Security Agreement and permanent-establishment exposure. For U.S. persons, we also coordinate the German and U.S. tax returns, including Foreign Tax Credits.
Schedule an initial consultation
Germany–U.S. Social Security Agreement
As a starting point, social security follows the country where the work is physically performed
For employees working in Germany, the Germany–U.S. Social Security Agreement generally points to German social security law, regardless of where the employer is located.
An important exception can apply to a genuine temporary assignment from the United States to Germany.