Working as a Contractor in Germany for a US Company
We often get inquiries from contractors looking to work in Germany for a US company. With the growing acceptance of remote work for professionals, this is becoming a common way to access talent. One German contractor reached out to us and asked for guidance on how to set this up across borders. The company wanted to hire the German, but had no entity for employment and proposed hiring them as a contractor.
The contractor wanted to know if they could work with an umbrella company and the taxes on compensation including salary and stock options. We shared some of the following information to answer their questions.
Contracting in Germany for a US Company for German Resident
Contracting with a US company is fairly straightforward for a German resident. It is mostly a B2B relationship, where you only have to agree to contract terms and a payment method. If you want to have a third party involved you can use a German umbrella company to oversee the contract and facilitate payments.
Non-residents: residency permit options
If you are an ex-pat who wants to work in Germany, there are more steps you need to take. You don’t need a work permit for EU-nationals but will need a residency permit for long-term stays. You may also need to register as a self-employed, and the criteria are stricter than in some countries to prevent ‘stealth employment’.
Non-EU nationals will need a work permit, which can only be obtained through a German sponsor. In that case, you would need to work through a German umbrella company as your sponsor.
Does the US company need to register for VAT?
As a foreign entity with no presence in Germany, the US company does not have to register and pay VAT. However, as a self-employed contractor, you will need to register for VAT and pay an amount depending on income. If you can pre-calculate this amount, you could include your rates in the contract with your client.
What should I look out for when working for a US company?
In a new client relationship with a US company, you will want to confirm in writing the contract and payment terms before beginning work. The best way to operate at first is with smaller payment milestones until some goodwill is created. The US company won’t have any legal obligation to you, and there is always the risk of unexpected contract termination.
Misclassification risk – Employee vs. Contractor
The company has to avoid treating you like an employee, or you could be subject to misclassification as a contractor. Employee relationships are characterized by control over work schedule and methods, offering benefits or paying a fixed salary. In the event of misclassification, the US company would be subject to unpaid social contributions and penalties. Those would have to be paid to continue working with you as an employer, as well as setting up a German payroll.
In the initial inquiry, the German who reached out to us said they would be paid a fixed salary and granted stock options, both of which are red flags for misclassification. An umbrella company would help minimize that, or another employment solution.
Getting paid in USD or Euros
The contract with the US company should specify what currency you’re paid in, with the USD being most likely. If you are paid in USD, the contract should contain a currency exchange clause that allows for adjustment of your rates. This happens if the USD-Euro currency pair deviates from a fixed percentage.
Time zones: the US vs Germany
One of the challenges with working remotely from a different country or continent is time zone differences. The US has four primary time zones, so depending on where the US company is located the difference will be 6 to 9 hours from Germany. This means that if the company is in New York and it’s 8 am, it will be 2 pm German time.
That’s not a problem if you need to communicate in real-time before 12 noon in New York, but it will affect your work schedule otherwise. Many roles don’t require extensive video conferencing or collaboration at the moment, but there will be occasions that you will have to accommodate the US company’s time zone.
How much taxes do I have to pay on my salary?
The tax rates in Germany range from 14%-45% depending on income, after the personal allowance of EUR 12,500. If you are working as a self-employed there is also a municipal trade tax which is 3.5% of business income, after the first EUR 24,500
How do I contribute to social security?
If you handle your contributions yourself you will register as self-employed and make regular contributions. If you earn more than EUR 64,350 per year, you can opt-out and purchase private medical insurance instead.
How do I stay compliant as a contractor in Germany?
Many of the compliance issues mentioned can be avoided by working with an umbrella company. In essence, you become an employee of the umbrella company which resolves many of the self-employment, misclassification and contracting issues. The umbrella company can sponsor work permits, withhold taxes and pay social contributions on your behalf. This allows you to focus on your work knowing that you have expert assistance in Germany.
How can Contractor Taxation help you as a contractor in Germany?
When you consider the compliance challenges facing you as a contractor, it can be helpful to have a partner to assist in Germany. Contractor Taxation has qualified umbrella companies in Germany who are well versed in facilitating contracts between contractors and their clients abroad. We can explain to you how taxes and contributions will be handled by the umbrella company, and other roles they can play to ensure a successful work experience.
If you prefer an employee role, we also have a partner that offers an employer of record service (EOR). The EOR would become your German employer, while the US company still managed your daily work and projects. Please contact us with any questions about either umbrella companies or an EOR in Germany.