How to pay and manage German contractors: A practical guide

If you're paying independent contractors in Germany, you need to handle payment, understand Scheinselbständigkeit (false self-employment) risks, and manage VAT and tax compliance. The payment part is straightforward. The compliance part—avoiding misclassification penalties, managing strict VAT requirements, and keeping records for 10 years—is where most international businesses struggle.

This guide walks through what you actually need to do. Then we'll show you where Kontrable helps organize the work.

The main things you need to do

1. Use SEPA for Eurozone payments, Wise for international. If you're in the Eurozone, use SEPA bank transfer—it's free and takes 1-2 business days. If you're outside the Eurozone, use Wise for mid-market exchange rates ($3-8 per transfer, saving you 3-4% vs PayPal).

2. Avoid Scheinselbständigkeit risks. This is the biggest compliance issue with German contractors. Scheinselbständigkeit (false self-employment) occurs when someone is legally classified as self-employed but actually works like an employee. German authorities audit aggressively, and penalties are severe—you can owe back social security contributions (up to 40% of payments) for up to 4 years. Ensure contractors work for multiple clients, control how they work, use their own tools, and work on a project basis.

3. Request Steuernummer and VAT ID. Before paying a German contractor, request their Steuernummer (tax number) and USt-IdNr. (VAT ID) if they're registered. Verify the VAT ID on the EU VAT Information Exchange System (VIES).

4. Require proper invoices with VAT. German law has strict invoice requirements. Invoices must include the contractor's tax ID, a consecutive invoice number, service description, and if they're VAT-registered, 19% VAT. If they use the small business exemption (Kleinunternehmerregelung), the invoice must state this explicitly.

5. Keep records for 10 years. German tax law requires 10-year retention. This is longer than most countries. Keep all invoices, payment proof, contracts, and VAT documentation.

That's the foundation. Everything else builds on these five things.

Payment methods: What actually works

For Eurozone payments:

Use SEPA bank transfer through your Eurozone bank. It's free, reliable, and takes 1-2 business days. All Eurozone banks support SEPA. Just ask the contractor for their IBAN and BIC/SWIFT code, and send the transfer.

For non-Eurozone payments to Germany:

Use Wise. You'll get mid-market exchange rates (3-4% better than PayPal or traditional banks) and low fixed fees (€3-8 per transfer). Contractors receive EUR in 1-2 days.

Why Wise works: If you're paying from USD or another currency, Wise converts at the actual market rate. PayPal's exchange rates are 3-4% worse, costing you hundreds per year unnecessarily.

How to set up: Create a Wise business account (free). Enter the contractor's German IBAN and BIC. Send money from your currency. Wise converts at mid-market rate and deposits it in their account.

What about PayPal?

PayPal is convenient if the contractor already uses it, but it's expensive. It charges 2.49% + €0.35 per transaction. For regular payments, use SEPA or Wise.

Understanding Scheinselbständigkeit (False self-employment)

This is the single biggest compliance risk with German contractors. You need to understand it clearly.

Scheinselbständigkeit occurs when someone is legally classified as self-employed but actually works under employment-like conditions. German authorities (Deutsche Rentenversicherung) audit aggressively for this because it relates to mandatory social security contributions.

What happens if you get it wrong: You owe back employer and employee social security contributions (up to 40% of all payments made), plus income tax withholding, penalties, and interest. This can go back up to 4 years. The contractor owes contributions too. It's expensive and can destroy a business relationship.

How to avoid it: Ensure the contractor works for multiple clients (not just you—ideally >15% of their income comes from other sources). They must control how, when, and where work is done. They should use their own equipment and workspace. The work should be project-based with defined deliverables, not ongoing employment-like tasks. They shouldn't be integrated into your organizational structure, and you shouldn't provide training or professional development.

Red flags: Contractor works exclusively for you (>85% of income from one client). You provide workspace, equipment, or tools. You set working hours or require presence at specific times. Contractor is integrated into your team. Work is ongoing and indefinite. You provide training.

Protect yourself: For long-term contractor relationships, request a status assessment (Statusfeststellungsverfahren) from Deutsche Rentenversicherung. This provides legal certainty about whether the relationship is self-employment or employment. It costs a small fee but eliminates audit risk.

Understanding VAT (Umsatzsteuer)

German contractors must register for VAT if their annual turnover exceeds €22,000. Once registered, they charge 19% VAT (standard rate) on invoices.

Here's the key: VAT on contractor invoices works like this. The contractor charges you 19% VAT. You pay them the total (including VAT). They remit the VAT to the German tax office (Finanzamt). If you're VAT-registered, you reclaim the VAT as input tax (Vorsteuer) on your own VAT return. If you're not registered, it's an additional 19% cost.

Example invoice: Services €1,000, VAT (19%) €190, Total €1,190. You pay €1,190. If you're VAT-registered, you reclaim €190 as input tax.

Small business exemption (Kleinunternehmerregelung): Contractors with turnover under €22,000 can opt for the small business rule. They don't charge VAT, but they also can't reclaim input tax. Their invoice must state: "Kleinunternehmer gemäß §19 UStG. Umsatzsteuer wird nicht ausgewiesen." (Small business. VAT not shown.)

Your responsibility: Ensure contractors provide proper invoices with VAT information and their VAT ID (USt-IdNr.). Keep invoices for 10 years. If you're VAT-registered, verify the VAT ID on VIES (ec.europa.eu/taxation_customs/vies/) and reclaim the input tax.

Invoice requirements (Rechnung)

German law is strict about invoice requirements. A proper invoice (Rechnung) must include:

• Contractor's full name and address
• Your company name and address
• Contractor's Steuernummer (tax number) or USt-IdNr. (VAT ID)
• Consecutive invoice number (required by law)
• Invoice date
• Service date or period
• Description of services
• Net amount, VAT rate, VAT amount, and gross total
• Payment terms

If the contractor uses the small business exemption, the invoice must explicitly state: "Kleinunternehmer gemäß §19 UStG. Umsatzsteuer wird nicht ausgewiesen."

What you need from German contractors

Before paying any contractor, request: Steuernummer (tax number), USt-IdNr. (VAT ID if registered), proper invoices for all work, IBAN and BIC/SWIFT for transfers, and documentation showing their self-employed status (Gewerbeschein for tradespeople, or evidence of Freiberufler status).

Records you must keep

German tax law requires 10-year retention. Keep all contractor invoices, proof of payment (bank statements, transfer confirmations), contracts or statements of work, VAT documentation, and evidence of contractor self-employed status.

This is longer than most countries, so set up digital storage with automatic retention to avoid losing documents.

Common mistakes and how to avoid them

Mistake 1: Creating Scheinselbständigkeit risk. You hire a contractor who works exclusively for you, uses your equipment, and follows your schedule. Deutsche Rentenversicherung audits and determines Scheinselbständigkeit. You owe back social security contributions (up to 40% of all payments) for up to 4 years—potentially tens of thousands of euros.

Solution: Ensure contractors work for multiple clients, control their work methods, use their own tools, and work on a project basis. For long-term engagements, request a status assessment (Statusfeststellungsverfahren) from Deutsche Rentenversicherung for legal certainty.

Mistake 2: Not reclaiming VAT input tax. You're VAT-registered but don't reclaim input tax (Vorsteuer) on contractor invoices. You're overpaying taxes by 19%.

Solution: Ensure contractors provide proper invoices with VAT breakdown and their VAT ID. Keep invoices organized. Reclaim input tax on your VAT return (Umsatzsteuervoranmeldung).

Mistake 3: Using PayPal for currency conversion. You're a USD-based business paying German contractors via PayPal. PayPal's exchange rate is 3-4% worse than the real market rate. For a $5,000 USD payment, you lose $150-200 USD to unnecessary fees.

Solution: Use Wise for international payments. You get mid-market rates and save 3-4% on every transfer.

Mistake 4: Not keeping records for 10 years. You delete old invoices and payment records after 5 years. German tax office (Finanzamt) audits you and you can't provide required documentation. You lose VAT deductions and face penalties.

Solution: Keep all contractor-related records for 10 years. Use digital storage with automatic retention to ensure documents don't get lost.

Frequently asked questions

Q: Do I need to withhold tax from German contractor payments? A: No, if the contractor is properly classified as self-employed (Freiberufler or Gewerbetreibender). They handle their own income tax. Exception: If they're misclassified and actually employees, you're liable for back taxes and contributions.

Q: What's the difference between Freiberufler and Gewerbetreibender? A: Freiberufler (freelancers) provide intellectual or creative services—writers, designers, consultants, doctors, lawyers. They don't need a trade license (Gewerbeschein) and don't pay trade tax (Gewerbesteuer). Gewerbetreibende (tradespeople) run commercial businesses, need a trade license, and pay trade tax. Both can be contractors.

Q: Can I use SEPA if I'm outside the Eurozone but in the EU? A: Yes, SEPA works for all EU countries, plus Iceland, Norway, Liechtenstein, Switzerland, Monaco, and San Marino. However, if you're paying in a non-EUR currency, your bank will convert at their exchange rate (usually 2-3% markup). Use Wise for better rates.

Q: How do I verify a German contractor's VAT ID (USt-IdNr.)? A: Use the EU VAT Information Exchange System (VIES) at ec.europa.eu/taxation_customs/vies/. Enter the VAT ID (starts with "DE" followed by 9 digits). This confirms the ID is valid and active. Keep verification records.

Q: Do I need a written contract with German contractors? A: Not legally required, but highly recommended. A written contract (Werkvertrag for project-based work or Dienstvertrag for service-based work) clarifies scope, deliverables, and payment terms. It also helps demonstrate contractor independence for Scheinselbständigkeit assessments. It protects both sides.

Q: What happens if Deutsche Rentenversicherung determines Scheinselbständigkeit? A: You owe back social security contributions (employer and employee portions, up to 40% of payments), income tax withholding, penalties, and interest. This can go back up to 4 years. The contractor owes contributions too. Prevention is critical—ensure they work for multiple clients and control their work.

Q: Do I need to register as an employer in Germany? A: No. You're paying independent contractors, not hiring employees. You don't need to register as an employer or with German tax authorities unless you have employees. The contractor handles their own tax compliance.

Getting started

If you're paying German contractors, here's the process:

1. Request Steuernummer and USt-IdNr. (if VAT-registered)
2. Verify VAT ID on VIES if registered
3. Assess Scheinselbständigkeit risk—ensure contractor independence
4. Set up SEPA (Eurozone) or Wise (international)
5. Require proper invoices (Rechnung) with VAT breakdown if applicable
6. Create written contractor agreement (Werkvertrag or Dienstvertrag)
7. Keep records for 10 years
8. For long-term engagements, consider Statusfeststellungsverfahren (status assessment) with Deutsche Rentenversicherung

Kontrable helps with steps 1, 4, 5, 6, 7, and 8 by organizing contractor information, tracking payments, managing invoices, and storing contracts. You stay in control of your payment method and use SEPA or Wise directly.

If you're managing a few contractors, a spreadsheet works. If you're managing dozens or coordinating across a team, Kontrable saves time and keeps contractor data organized.

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