In my previous post, I shed some light on the annual income tax in Germany. In this post, I will try to answer the question of whether or not it is mandatory to file income taxes in Germany. I mentioned that not everyone is required to file their taxes. It is recommended to declare your taxes if you have a taxable income. Most people will not get into any trouble if they do not file annually. The only risk here is that you might pay more taxes than you have to.
On the other hand, there is a section of the population that is required to file taxes. If you have one employee, you will notice on your payslip that your tax is withheld and automatically paid to the Finanzamt by your employer. The Finanzamt knows exactly how much you are earning and can be sure you are paying the correct amount in tax.
It gets a bit complicated when you have multiple income streams. Another complexity is also when your income is not constant. For this reason, you may be required to file your tax returns every year.
Who is required to file income taxes?
Some people have two or more jobs. It does not automatically mean you have to file your taxes. In this case, one of the employers must include your income from the other job on your payslip. Why is this – Because then the Tax Office has one single point of truth and can know exactly how much you are earning.
If this is not the case, then you will need to file income taxes at the end of the year. When in doubt ask your employer.
Government Aid Receivers
If you are receiving government aid you are required to also declare your taxes every year. For example in the year 2020 during the coronavirus pandemic, government programs such as Kurzarbeitergeld have been used to provide stability in the economy. There is also Unemployment payments (Arbeitlosengeld I) and Parental Allowance(Elterngeld)
If you have received more than 410Euros of such payments in the year, you are required to declare your taxes.
Unemployment Payments Tier II(Arbeitslosengeld II) receivers are exempt from this requirement. In Germany, there are basically two tiers when it comes to Unemployment checks. Tier I is paid to any employee that loses their job. This is about 70% of your earnings in the last 12 months.
Arbeitslosengeld II – also known as Hartz V kicks in after you come out of ALG I and has spent all your savings. Then the Job Center will pay for your basics such as rent, amenities, and some pocket money. While of course helping/encouraging you to find a job.
Side Hustle – Nebenberuflich Selbständig
Also known as Nebenberuflich Selbständig. Some people have in addition to their regular employment something on the side. Maybe you run a blog, or you are a social media influencer. You probably do some freelance activities on the side or own a restaurant. Tax declaration is compulsory for you.
Income Tax Reduction – Lohnsteuerermäßigung
The Finanzamt is also sometimes very nice. You could apply for tax relief earlier in the year. Meaning you give the Finanzamt a plausible reason for a reduction of your taxes. Effectively you will get more net from your salary and make you more liquid during the year.
Loss Carryforward – Verlustvortrag
Taxes are paid on income, not revenue. If you make losses, the Finanzamt in certain situations has to carry forward the losses you have made until such time when you pay enough taxes and then pay your money back to you. For example as a student, you can carry forward all the losses you made during the time of your studies. At the end of your studies, let’s say u made a loss of 10,000 Euros, you can deduct this from your taxes in your first year(s) of employment.
A quick disclaimer here, this only applies to postgraduate students or if you have before your bachelor studies had an apprenticeship(Ausbildung).
Entrepreneurs are required to file taxes. Baring in mind that, depending on what kind of business you have, you will have to be paying some other types of taxes. Generally, for entrepreneurs, it is better to have a tax advisor to take care of everything.
What happens if you don’t pay taxes in German?
You go to Jail!
Ok, maybe I exaggerated. Probably not immediately but eventually – if you do not repent from your ways. Germany is quite unforgiving of tax crimes. I have not tried it but depending on the severity of how much you are cheating the country, your door will be knocked down in the middle of the night and you will be arrested. Or the Finanzamt will give you some notice to try to clear things up before things escalate.
At the end of the day, just pay your taxes, and let’s avoid having to find out.
As a rule of thumb, always consult a professional tax advisor when in doubt. These tips should only be a starting point in your search. You can find English speaking tax advisors in your city and get some qualified advice. Tax crimes can be very costly. The Finanzamt is mostly reasonable and will also assist you when you need help