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I just got off the phone with an English recruiting agency, discussing a job in Germany. They said that payment will be done through a "payroll company", which will pay my taxes. Apparently, this is so the employing company can make sure that I pay my taxes. He said if I don't pay taxes, the tax office can go after the employers instead of me, and they prefer to do that since it's easier.

I have never heard of this practice. I'm assuming the company and the procedure is legit, but I'm just very confused, and have the following questions:

  1. Why would the employer care if I pay taxes? I have never heard that the German tax office can pursue a company employing a freelancer that doesn't pay taxes. They did nothing wrong.
  2. How do they "pay the taxes for me"? Am I going into some sort of non-freelance employment with that company?
  3. Is this a red flag or common practice? I've never worked with a recruiter from outside of Germany, so I don't know about the additional administrative effort needed.
  • Doesn't make sense, payroll by its definition is regarding employees, not freelancers. How would they even know how much taxes you need to pay? All they get is an invoice. – user3244085 Jun 19 '17 at 22:58
  • Check who will pay for the payroll company? Somehow I think it will be you ;) – Peter MV Jun 20 '17 at 14:58
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They did nothing wrong

Here in the States, employees are required to pay taxes, AND there is a mandated employer tax contribution which is "extra" (not included in the base salary). Some employers try to pay employees off-the-record because the cost of labor is cheaper if they simply avoid paying all taxes. The government has severe penalties against this practice - and the government will go after not only the employer, but the employee as well.

In your case there's probably similar legislation in England. So rather than the potential of being on the hook if you don't pay your taxes, the recruiting agency is eliminating the issue by forcing the taxes to be paid before you can put anything in your pocket.

First, the payroll company will register you. Then for each pay period, it will collect money from your employer, apportion and transmit the taxes to the appropriate authority (either England or Germany) and leave the rest for you.

  • Okay. That seems weird to me. I mean, with employers for permanent positions, that makes sense. But for freelancers, I am almost certain German companies just pay the salary and the tax stuff is the freelancer's problem. – Alexander Engelhardt Jun 19 '17 at 20:58
  • It's more or less the same in the US. Companies can pay consultants directly as "1099" contractors, who in turn are supposed to pay their own taxes. If the contractor doesn't pay, the gov't can go after the client. To avoid this, big companies don't allow the 1099 approach and require the contractor to use a fictitious business entity (corporation or similar) to protect the company from the taxation. – Xavier J Jun 19 '17 at 21:02
  • It's not illegal (though scrutinized) for a company to pay 1099 contractors, but there is an inherent risk! – Xavier J Jun 19 '17 at 21:03
  • The UK term is IR35 – JohnHC Jun 20 '17 at 13:31
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Looks like they will be employing you as an employee (the agency).

Why would the employer care if I pay taxes? I have never heard that the German tax office can pursue a company employing a freelancer that doesn't pay taxes. They did nothing wrong.

Because, as an employer, they are responsible. We have employer collection of taxes as standard.

How do they "pay the taxes for me"? Am I going into some sort of non-freelance employment with that company?

They will take tax at source (UK taxes called PAYE)

Is this a red flag or common practice? I've never worked with a recruiter from outside of Germany, so I don't know about the additional administrative effort needed.

Common practice. I have my own Ltd company (gmbh?) and send invoices to avoid exactly this.

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