Salary and income are generally a taboo topic in many cultures, and Germany is no exception. It is uncommon to discuss your income at all, as deemed private. Personally, I totally get it and feel the same way. However, this veil of secrecy often obscures details that distort the big picture.
As an employee, the most important figure regarding your compensation is a gross salary. Gross salary is the base amount a company offers you; every other calculation is relative to this number. After all mandatory deductions are made, what you keep is your net income. It sounds simple enough, but there is more to it than that.
A significat portion of these mandatory payments consists of contributions to various social systems, such as pension, healthcare and unemployment insurance. It is important to remember that your employer also pays these contributions on your behalf - most are split 50/50 between both parties. These contributions increase the total cost of your employment. In essence, they are part of your salary that the company rarely mentions.
Knowing that is one thing, but I wanted to visualize it to better understand where the money goes. To that end, I’ve built a simple salary breakdown page:
Without going into details here are the main points that are easy to overlook:
- Your total compensation is higher than your gross salary.
- You pay significantly more in contributions than you see on your pay stub, including some you might not be aware of.
- The “Tax rate” includes neither employer contributions nor the “broadcast tax” (Rundfunkbeitrag).
- A simple reminder: “free” education and healthcare are only free as long as you aren’t working. The word don’t exist for taxpayers.
- Pension, health and unemployment contributions are further subsidized by the state, meaning you are paying for them even more that you think.
- There is an additional premium for health insurance which is also split. When a provider tells you that you’re paying a 0.9% premium, it means they receive another 0.9% from your employer, totaling 1.8%.
- Your effective tax may be beyond 50%.
Ultimately, it doesn’t matter much whether the money is taken from your right or left pocket; what matters is where that money goes and how much is left.