How to Pay Contractors in Germany: Complete 2025 Guide

Why This Guide Is Different

Paying German contractors has unique challenges: Scheinselbständigkeit (false self-employment) risks, strict VAT requirements, 10-year record retention, and complex social security rules. Germany has some of the strictest contractor classification laws in Europe.

Most guides focus on US or UK tax rules. This guide is specifically for businesses working with German independent contractors (Freiberufler) and self-employed professionals (Gewerbetreibende).

Payment Methods Compared

Recommended: SEPA for Eurozone, Wise for International

If you're in the Eurozone paying German contractors: Use SEPA bank transfer. It's free, takes 1-2 business days, and contractors receive EUR directly in their German bank account. All Eurozone banks support SEPA.

If you're outside the Eurozone paying German contractors: 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.

How to set up Wise payments to German contractors:

1. Create a Wise business account (free)
2. Get contractor's German bank details (IBAN and BIC/SWIFT)
3. Send EUR to their German bank account
4. Wise converts at mid-market rate if you're paying from USD, GBP, etc.
5. Contractor receives EUR in 1-2 business days

Understanding Scheinselbständigkeit (False Self-Employment)

Scheinselbständigkeit is the biggest risk when paying German contractors. It occurs when someone is classified as a contractor but works like an employee. German authorities (Deutsche Rentenversicherung) aggressively audit for this, and penalties are severe.

What is Scheinselbständigkeit?

False self-employment occurs when someone is legally classified as self-employed (Freiberufler or Gewerbetreibender) but actually works under conditions typical of employment.

Why it matters:

• Back taxes: You owe income tax that should have been withheld
• Social security: You owe employer and employee social security contributions (up to 40% of payments)
• Penalties: Additional fines and interest
• Retroactive: Can go back up to 4 years

How to avoid Scheinselbständigkeit:

• Multiple clients: Contractor works for multiple clients (not just you)
• Control: Contractor controls how, when, and where work is done
• Own tools: Contractor uses their own equipment and workspace
• Project-based: Work is project-based, not ongoing employment-like tasks
• No integration: Contractor is not integrated into your organizational structure
• Financial risk: Contractor bears financial risk (can make profit or loss)

Red flags for Scheinselbständigkeit:

• 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 structure
• Work is ongoing and indefinite (not project-based)
• You provide training or professional development

Pro tip: Request a status assessment (Statusfeststellungsverfahren) from Deutsche Rentenversicherung before engaging long-term contractors. This provides legal certainty about classification.

VAT (Umsatzsteuer) Requirements

German contractors must register for VAT (Umsatzsteuer/USt) if their annual turnover exceeds €22,000 (as of 2020). Once registered, they charge 19% VAT (standard rate) or 7% (reduced rate for certain services) on invoices.

How VAT works:

• Contractor charges 19% VAT on invoices (if registered)
• You pay the VAT amount to them
• They remit VAT to Finanzamt (tax office) monthly or quarterly
• If you're VAT-registered, you can reclaim it as input tax (Vorsteuer)
• If you're not registered, it's an additional 19% cost

Example invoice with VAT:

You pay €1,190 to the contractor. If you're VAT-registered, you reclaim €190 as input tax on your VAT return (Umsatzsteuervoranmeldung).

Kleinunternehmerregelung (Small Business Rule):

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

Tax and Compliance Requirements

What You Need from German Contractors

Before paying any German contractor, collect:

• Steuernummer (Tax Number): All contractors must have one
• USt-IdNr. (VAT ID): If VAT-registered (starts with "DE")
• Invoices: Proper invoices (Rechnung) for all work completed
• Bank details: IBAN and BIC/SWIFT for SEPA transfers
• Proof of self-employment: Gewerbeschein (trade license) or Freiberufler status

What You Need to Keep

German tax law requires you to keep records for 10 years. You should maintain:

• All contractor invoices (Rechnungen)
• Proof of payment (bank statements, Wise receipts, PayPal confirmations)
• Contracts or statements of work (Werkvertrag or Dienstvertrag)
• VAT documentation (if reclaiming input tax)
• Evidence of contractor's self-employed status
• Communication showing contractor independence

Pro tip: Kontrable automatically stores all invoices, contracts, tax IDs, and payment confirmations in one place, making German tax audits stress-free.

Invoice Requirements (Rechnung)

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

• Contractor's full name and address
• Your company name and address
• Contractor's Steuernummer or USt-IdNr.
• Invoice number (consecutive numbering required)
• Invoice date
• Delivery/service date or period
• Description of services
• Net amount, VAT rate, VAT amount, and gross total
• Payment terms

For Kleinunternehmer (small business exemption):

Invoice must state: "Kleinunternehmer gemäß §19 UStG. Umsatzsteuer wird nicht ausgewiesen." (Small business according to §19 UStG. VAT is not shown.)

Common Mistakes (And How to Avoid Them)

Mistake 1: Creating Scheinselbständigkeit Risk

Problem: 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.

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

Mistake 2: Not Reclaiming VAT Input Tax

Problem: You're VAT-registered but don't reclaim input tax (Vorsteuer) on contractor invoices. You're paying 19% more than necessary.

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

Mistake 3: Using PayPal for Currency Conversion

Problem: You're a US business paying German contractors via PayPal. PayPal's exchange rate is 3-4% worse than mid-market. For a $5,000 USD payment, you lose $150-200 USD to bad exchange rates.

Solution: Use Wise for international payments. You get mid-market rates and save 3-4% on every payment. For $50,000 USD/year in contractor payments, that's $1,500-2,000 USD saved.

Mistake 4: Not Keeping Records for 10 Years

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

Solution: Keep all contractor-related records for 10 years (German requirement). Use digital storage with automatic retention. Kontrable provides 10-year record retention built-in.

Tools for German Contractor Management

For payments:

• SEPA bank transfer via your Eurozone bank (free for Eurozone-to-Germany)
• Wise (best for non-Eurozone to Germany, €3-8 per transfer)
• PayPal (convenient but higher fees)

For compliance and management:

• DATEV or Lexoffice (German accounting software, €10-30/month, not contractor-specific)
• Spreadsheets (free but error-prone and time-consuming)
• Deel or Remote.com (€60-120 per contractor per month, built for EOR not contractors)

For contractor operations:

Kontrable is built specifically for managing independent contractors, including German contractors:

• Tax ID and VAT ID verification and storage
• Invoice management with German requirements (Rechnung)
• Payment tracking (works with SEPA, Wise, PayPal, any payment method)
• Contract storage and e-signatures
• 10-year record retention (German law compliant)
• Scheinselbständigkeit risk assessment

Pricing: $99 USD/month (€95/month) for up to 25 contractors. No per-contractor fees. Early access users get 50% off for 6 months.

Frequently Asked Questions

Get Started

Managing German contractors?

1. Request Steuernummer and USt-IdNr. (if VAT-registered)
2. Set up SEPA (Eurozone) or Wise (international)
3. Require proper invoices (Rechnung) with VAT breakdown if applicable
4. Keep records for 10 years
5. Assess Scheinselbständigkeit risk (ensure contractor independence)

Want to automate this?

Kontrable launches Q1 2026 with contractor management tools built for German compliance. Tax ID verification, invoice workflows, payment tracking, 10-year record retention, and Scheinselbständigkeit risk assessment. $99 USD/month for up to 25 contractors.