Six wage-tax classes, and how they reach the employer

Merve Aydın takes a weekend job at a bakery on top of her full-time position. On her first 520 € pay from the side job she is surprised by a sizeable wage-tax deduction, although her main job pays barely above average. The bakery made no mistake: it applied tax class VI, because the law prescribes exactly that class for a second employment.

Why tax classes exist at all

Income tax is assessed for a whole calendar year, while wages are paid every month. Wage withholding bridges that gap. By year end it should come as close as possible to the tax due on the wages, without the employer having to know every personal circumstance of the person it employs.

That is precisely why § 38b EStG sorts employees into tax classes. The first sentence of the section says so directly: the classification serves to carry out wage-tax withholding. The tax class is therefore a tool of the withholding procedure, not a tariff of its own and not a statement about the final tax owed for the year.

Changing class therefore changes the monthly prepayment, not the annual tax. The annual tax follows from income and tariff; the class only decides how much of it is withheld along the way and how much is collected or refunded at assessment.

Besides the class, the law knows further characteristics the employer builds into its calculation. § 39(4) lists them: tax class and factor, the number of child allowances in classes I to IV, an allowance or add-back amount, certain private health and long-term care insurance premiums, and an exemption under a double taxation treaty.

Classifying it as a separate determination has a practical side. Where an application to form or change the characteristics is refused in whole or in part, sentence 8 requires a written notice with instructions on legal remedies. The employee can challenge a refusal much as he would challenge a tax assessment.

The six classes of § 38b

Subsection 1 lists the classes in order, and the order has a logic. Classes I and II cover employees treated as single for withholding. Classes III, IV and V belong to spouses. Class VI, finally, is not a personal situation at all but a calculation rule for certain employments.

Class I is the starting point. It covers single employees, but also married, widowed and divorced people who do not meet the conditions for III or IV. A couple living permanently apart therefore ends up in class I. Persons with limited tax liability are expressly placed in this class as well.

Class II is class I with an addition. It applies to the employees of number 1(a) when the single-parent relief is to be taken into account for them. The conditions of that relief are set by § 24b; the course on children and family in income tax covers them in detail, so they are not repeated here.

Class IV is the default class for spouses. It requires both to have unlimited tax liability and not to live permanently apart. The second half of number 4 makes clear that this applies even if one spouse draws no wages at all and no request for the III and V combination has been made.

Classes III and V form a pair, and neither exists alone. Number 3(a) and number 5 refer to each other: one spouse is placed in III because the other is placed in V at the joint request of both. Without a joint request, both stay in class IV.

Class III has two further cases that are easily missed. A widowed employee receives it for the calendar year following the year of death, provided both spouses had unlimited tax liability at the time of death and were not living permanently apart.

The third case concerns a dissolved marriage. Class III applies for the year of dissolution if both spouses had unlimited liability that year and lived together, and the other spouse has remarried, lives with the new spouse, and both have unlimited liability.

Subsection 2 adds the number of child allowances in classes I to IV. A minor counts with a factor of 0.5 where the employee is entitled to the child allowance under § 32(6) sentence 1, and with a factor of 1 in the special cases listed there, for example where the other parent died before the year began.

In classes III and IV, sentence 4 also counts the spouse's children. For children not taken into account automatically, such as adult children for whom an allowance is due, the number is applied on request using the official form. Under sentence 3 such a request can cover several years.

Subsection 3 finally opens a path downwards. At the employee's request a less favourable class or a lower number of child allowances can be applied. That can make sense when a foreseeable back payment at year end is to be absorbed during the current year instead.

What the class changes in the calculation

How the employer computes wage tax is set out in § 39b(2). It annualises current wages, deducts certain amounts and arrives at the taxable annual amount. The class acts at two points: which deductions apply, and which tariff is applied to the result.

On deductions, one boundary recurs in the text. The employee lump sum and the special-expenses lump sum are allowed in classes I to V, but not in class VI. The single-parent relief is applied only in class II, which is what sets that class apart from class I.

On the tariff, sentence 6 separates three groups. In classes I, II and IV annual wage tax is computed under the basic tariff of § 32a(1). In class III it is computed under the splitting method of § 32a(5), as if the wages were shared between two people.

For classes V and VI, sentence 7 prescribes its own calculation. Annual wage tax is twice the difference between the tax on one and a quarter times and the tax on three quarters of the taxable annual amount. A floor applies as well: annual wage tax is at least 14 percent of the taxable annual amount.

• classes I, II and IV: basic tariff under § 32a(1)
• class III: splitting method under § 32a(5)
• classes V and VI: twice the gap between the tax on 1.25 times and on 0.75 times
• classes V and VI: at least 14 percent of the taxable annual amount
• class VI: neither the employee lump sum nor the special-expenses lump sum

The floor has a consequence worth remembering. It applies to the whole taxable annual amount, not to a slice above some threshold. A tax-free starting band such as the basic tariff has therefore does not exist in this calculation: in classes V and VI wage tax generally falls due even on small amounts.

Sentence 7 also contains upper limits tied to euro amounts of the taxable annual amount. This course does not reproduce them, because the statutory text as read does not say which calendar year those amounts apply to. Employers calculate using the programme flowchart that the Federal Ministry of Finance draws up and publishes under § 39b(6).

Tax class VI: the second employment

Number 6 of § 38b describes no personal situation but a payroll situation. Class VI applies to employees drawing wages from several employers at the same time, for the wages of the second and every further employment. It also covers the cases of § 39c, dealt with in the last section of this module.

The logic is simple. The employee's allowances and lump sums are taken into account in the first employment. If every further job granted them again, part of the income would stay tax-free several times over. Class VI prevents this by granting neither the employee lump sum nor the special-expenses lump sum in the second job.

Which employment counts as the first is decided neither by the employer nor by the level of pay. Under § 39e(4) the employee tells each employer on starting whether it is the first or a further employment. Reporting the better-paid main job as a further employment means paying needlessly high wage tax there.

A special case involves a single employer. Where an employer pays different kinds of remuneration, for example pension payments alongside wages for active work, § 39e(5a) lets it withhold tax on the second payment under class VI without a further retrieval. The provision expressly refers to § 46(2) number 2.

That reference leads to the most important consequence. Anyone who drew wages from several employers at the same time must be assessed for income tax under § 46(2) number 2. Class VI wage tax is therefore not a final tax but a prepayment, set off against the annual tax in the return.

Number 2 has one exception. The obligation does not apply where wages from several employers were combined for withholding under § 38(3a) sentence 7. In that case withholding has already captured the whole income from employment, and no correction through assessment is needed.

For Merve from the opening, this means two things. The high wage tax at the bakery is provided for by law and is not an error. And she must file an income tax return for the year. Whether she then pays more or gets a refund depends on both wages and her other deductions.

ELStAM: what the employer retrieves

Characteristics no longer reach the employer on paper but electronically. § 39e governs this procedure of electronic wage-tax withholding characteristics, abbreviated ELStAM. The Federal Central Tax Office generally forms the tax class and the number of child allowances under § 38b(2) sentence 1 automatically for every employee.

Much of the data comes from the population register. Registration offices report membership of a tax-levying religious community, civil status and children to the Federal Central Tax Office. Other data, such as whether spouses live permanently apart or amounts under § 39a, are reported by the local tax office instead.

This split matters more in practice than it seems. A marriage recorded in the register enters the procedure without the employee doing anything. No registration office, however, knows about a permanent separation. It only enters the procedure if the employee tells the tax office, and § 39(5) obliges him to do exactly that.

On marriage, § 39e(3) sentence 3 has the Federal Central Tax Office automatically form class IV for each spouse, where the conditions of number 4 are met. The III and V combination therefore never arises by itself. It always requires a request by both spouses to the tax office.

On joining, the employee must give each employer three items: tax identification number and date of birth, whether this is the first or a further employment, and where relevant whether and to what extent an allowance under § 39a(1) sentence 1 number 7 is to be retrieved.

• at the start of employment: retrieve the ELStAM and enter them in the payroll account (§ 39e(4) sentence 2)
• on an ongoing basis: query and retrieve notices and changed characteristics monthly (§ 39e(5) sentence 3)
• on every payslip: state the characteristics applied (§ 39e(5) sentence 2)
• when employment ends: report the end date without delay (§ 39e(4) sentence 5)

The employer applies the retrieved characteristics until the Federal Central Tax Office provides changed ones or the employer reports the end of employment. Towards the employee they count as notified once the payslip showing them has been handed over or made available electronically.

That turns the payslip into the employee's own check. If he finds that the characteristics deviate from the correct ones in his favour, § 39e(6) sentence 5 obliges him to tell the tax office without delay. An overly favourable class is not a stroke of luck but a reason to report.

Use of the data is narrowly limited. Without the employee's consent, and unless the law permits otherwise, § 39(8) allows the employer to process the characteristics only for withholding wage tax and church tax. The class reveals something about civil status; it must not feed into personnel decisions.

Under § 39e(6) sentence 6 the employee may name employers at the tax office that are or are not allowed to retrieve, or have his characteristics blocked altogether. Sentence 8 names the downside: an employer that receives nothing because of the block can only calculate under tax class VI.

Without retrievable characteristics

§ 39c governs what happens when the employer cannot retrieve any characteristics. The law distinguishes by who is responsible for the gap. If the employee culpably fails to provide his identification number and date of birth, or the Federal Central Tax Office refuses to supply them, the employer calculates wage tax under class VI.

Things differ in case of technical faults or where the employee is not responsible for the missing identification number. The employer then applies the expected characteristics under § 38b, for at most three calendar months. It provisionally uses the class the employee is entitled to on his circumstances.

The three months are a real deadline. If the employee still has not provided identification number and date of birth when they expire, class VI applies retroactively. If the characteristics arrive in time, the employer reviews the past months and settles differences in the next payroll run.