Many employees assume that their tax bracket determines whether they will receive a tax refund at the end of the year or have to make an additional payment. In fact, however, the tax bracket is only one factor in the monthly payroll tax withholding and not the final calculation of income tax.
The primary tax for employees is income tax. It covers not only wages but, in principle, all taxable income a person earns. In addition to salary, this may include income from renting and leasing, investment income, pension income, or certain capital gains. It is only during the annual income tax assessment that the actual amount of income tax for the respective calendar year is determined.
In contrast, payroll tax is not a separate tax in the strict sense, but rather an advance payment on income tax. The employer withholds it monthly from the employee’s wages and remits it to the tax office. This is intended to prevent employees from having to pay the entire tax in a single lump sum at the end of the year. At the same time, it simplifies the process because the employer calculates and handles the ongoing tax withholding.
Tax classes serve solely to calculate the monthly payroll tax deduction as accurately as possible. In particular, they determine which tax allowances are taken into account in the ongoing payroll tax deduction. Whether someone is single, a single parent, or married therefore affects their tax class. However, the tax class does not definitively determine how much income tax will actually be owed at the end of the year.
There are various tax classes in Germany. Tax Class I typically applies to single employees, while Tax Class II applies to single-parent employees. Married couples can choose the combination III/V or IV/IV, depending on their income distribution; additionally, the “factor method” is an option for Tax Class IV. Tax Class VI is regularly used for additional employment relationships where no tax-free allowances are taken into account.
Especially among married couples, it is often assumed that a certain tax class combination leads to tax savings. This is not entirely accurate. The choice of tax class primarily affects how much payroll tax is withheld throughout the year. The final income tax amount is determined only after the annual calculation. A favorable tax class can therefore result in a higher monthly net pay, but may also lead to an additional payment later on.
Whether a refund or additional payment is due is determined in the income tax assessment notice. This notice is issued after the tax return is filed, provided that a return is required or is submitted voluntarily. The tax return then also takes into account circumstances that were not yet or not fully accounted for in the monthly payroll tax withholding.
A tax refund often results when deductible expenses are taken into account. For employees, these include, in particular, income-related expenses such as commuting costs to the workplace, work equipment, business-related expenses, or—under certain conditions—expenses for a home office. In addition, there are special expenses, such as certain insurance premiums, as well as extraordinary burdens or tax credits for household-related services and tradespeople’s services.
Conversely, an additional tax payment may be due if the ongoing payroll tax withholding has not sufficiently covered the actual annual tax liability. This can be the case, for example, with additional income, one-time payments, bonuses, gratuities, or certain combinations of tax brackets. Even when multiple types of income are combined, the monthly payroll tax withholding is often insufficient to fully cover the final income tax liability.
It is therefore important to distinguish between the two terms: Generally, one does not contest a “payroll tax assessment” because payroll tax is withheld on an ongoing basis by the employer. If a refund or additional payment is due at the end of the year, this generally pertains to the income tax assessment. Only this assessment definitively determines the amount of income tax owed for the year in question.
If you disagree with a tax assessment, you should carefully review the income tax assessment notice. In doing so, you should verify whether all income has been accurately reported, all allowable deductions have been taken into account, and the advance payments as well as the withheld payroll tax have been correctly credited. If, on the other hand, the issue concerns your current monthly tax liability, your choice of tax bracket or a change in your tax bracket may also play a role. However, these two issues should be clearly distinguished from one another.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.