Concept and Definition of Earned Income
Earned income in Germany and the European Union refers to all income obtained through personal labor or business activities. The term is particularly significant in tax law, social law, and other areas of law. Earned income is distinct from other types of income such as capital gains, pensions, or maintenance payments.
In a broader sense, earned income includes all sources of income arising from independent entrepreneurial activity, employment, or comparable activities. Earned income forms the basis of various statutory regulations, including for the calculation of tax liabilities, social security contributions, social benefits, or maintenance claims.
Earned Income in Tax Law
Definition and Scope
In German tax law, earned income is not established as an independent term in the statute but arises from the types of income listed in the Income Tax Act (EStG). According to general opinion, earned income particularly includes the following types of income (§ 2 (1) EStG):
- Income from employment (§ 19 EStG)
- Income from self-employment (§ 18 EStG)
- Income from business operations (§ 15 EStG)
- Income from agriculture and forestry (§ 13 EStG)
Income not attributable to earned income includes, for example, income from capital assets, income from renting and leasing, as well as other income (§§ 20-23 EStG).
Relevance for Tax Liability
Earned income is relevant for both unlimited and limited tax liability (§ 1 EStG). It is subject to income tax, whereby—depending on the individual case—various allowances, lump sums, and deductions apply (e.g., income-related expenses, business expenses).
Connection with Tax Progression and Taxation
As earned income is generally subject to the progressive income tax rate, it is decisive for the amount of tax burden on natural persons. In the case of wage tax, earned income is withheld and remitted directly when received.
Earned Income in Social Law
Relevance for Social Insurance
In social law, earned income serves as the assessment basis for contributions to statutory health insurance, pension insurance, unemployment insurance, and long-term care insurance (§§ 223 ff. SGB V, §§ 157 ff. SGB VI, §§ 341 ff. SGB III, § 55 SGB XI). This encompasses income from both dependent employment and self-employment.
Impact on Social Benefits
Earned income also plays a central role in the granting and calculation of social benefits, such as unemployment benefits I and II, housing benefits, child benefits, or parental benefits. The decisive factor is the gross or net income earned, sometimes taking into account allowances or crediting rules (e.g., § 11 SGB II).
Countable Earned Income
Not every income is considered countable earned income. For example, certain expense allowances, tax-free supplements, or income from mini-jobs are only taken into account to a limited extent—or not at all—when calculating social benefits.
Earned Income in Other Areas of Law
Maintenance Law
In family law, particularly in regard to child and spousal maintenance, earned income serves as the basis for determining maintenance claims (§§ 1361, 1570 ff., 1601 ff. BGB). This includes all income from employment, secondary jobs, as well as certain monetary benefits. The definition under maintenance law is generally broad and also takes into account voluntary benefits and benefits in kind.
In the context of parental maintenance and for educational grants under the Federal Training Assistance Act (BAföG), the earned income of the parents and applicants plays a central role.
Insolvency Law
In insolvency proceedings, earned income is also relevant, particularly in establishing the attachable part of income according to the attachment table (§ 850c ZPO). Here, all employment and business income is accounted for and checked for attachable portions.
Tenancy Law
In tenancy law, earned income is relevant for creditworthiness verification in the context of renting an apartment, although there is no clear legal definition here. Landlords often request proof of current earned income as evidence of financial capability.
Composition and Distinction of Earned Income
Composition
Earned income consists of various sources of income, including wages, salaries, fees, profit-sharing, commissions, and income from self-employment or entrepreneurial activities, minus allowable expenses (e.g., income-related expenses, business expenses).
Distinction from Other Types of Income
The legal distinction between earned income and other types of income, particularly capital gains, pensions, or state transfer payments, is crucial for the application of various legal provisions. The principal distinguishing factors are personal labor and independent entrepreneurial activity.
International Aspects and EU Law
At the European level, earned income is also highly relevant, such as under the EU social coordination regulations or for tax matters involving cross-border activity. However, individual member states have different definitions and legal consequences regarding earned income.
Significance in Case Law
The interpretation and application of the term ‘earned income’ is the subject of numerous court disputes, especially in tax, social, and maintenance law. The courts emphasize the inclusion of all components of labor income, as well as the need for a case-by-case assessment.
Conclusion
Earned income is a central, multifaceted legal concept that permeates numerous areas of German and European law. It includes all income based on personal labor or entrepreneurial activity and forms the basis for tax, social insurance, and maintenance regulations. The exact determination and legal classification of earned income depend on the respective area of law and the specific case.
Frequently Asked Questions
What tax obligations arise from earned income?
Persons who generate earned income—whether from self-employment, employment, or business activity—are subject to income tax liability in accordance with § 2 (1) EStG. The income must be disclosed annually to the tax office through a tax return. Employers are required to withhold wage tax from pay and remit it to the tax office. Self-employed persons and business owners are required to make quarterly advance payments, the amounts of which are based on expected income. In addition to income tax, a solidarity surcharge and church tax may also be due in some cases. Submitting a late or incorrect tax return can lead to late payment penalties or additional tax assessments. There is also an obligation to keep proper accounting records or at least prepare a surplus income statement, depending on the type of business and turnover (§§ 4, 141 AO, § 238 HGB).
What social security contributions are incurred with earned income?
Employees in an employment relationship are generally required to pay contributions to statutory social security; this includes pension, health, long-term care, and unemployment insurance (§ 1 SGB VI, § 1 SGB V, § 20 SGB XI, § 25 SGB III). Contributions are calculated from gross wages and split equally between employer and employee. Self-employed persons and business owners, under certain conditions, are required or allowed to take out voluntary or compulsory insurance in various social security branches—such as statutory health insurance or pension insurance, particularly for certain occupational groups like artists, craftsmen, or caregivers (§§ 2, 3 SGB VI, § 5 SGB V). The contribution amount is generally based on the income from the previous year, according to statutory requirements.
What reporting and disclosure obligations exist when receiving earned income?
Earned income must be reported to various authorities. Employees must provide all relevant information to the employer to ensure correct tax and social security processing (§ 1 MiLoG, § 39 EStG). Self-employed persons and business owners must immediately notify the competent tax office of their activity via a tax registration questionnaire (§ 138 AO). Depending on the type of business, registration with the local municipality may also be required (§ 14 GewO). Additionally, certain professions or business types may have further specific reporting obligations, for example, to the Chamber of Industry and Commerce or Chamber of Crafts. Failure to comply with notification obligations may result in fines or other sanctions.
How is earned income counted for social benefits?
Anyone who receives transfer benefits in addition to earned income, such as unemployment benefit II (citizen’s benefit), social assistance or housing benefit, must generally disclose their income fully and truthfully (§ 11 SGB II, § 82 SGB XII, § 14 WoGG). Earned income is taken into account in the calculation of entitlement to benefits, minus certain allowances or deductions. Failure to report earned income may result in repayment claims, fines, or even criminal consequences (§ 263 StGB – fraud). Earned income must also be reported during receipt of parental benefit or BAföG and will affect the amount of benefit according to the relevant law.
What obligations to cooperate exist in determining earned income vis-à-vis authorities?
Taxpayers and benefit recipients are required under § 90 AO (Fiscal Code) and comparable provisions in social law to actively cooperate in the determination and verification of their earned income. This includes submitting tax assessments, pay slips, surplus income statements, other accounting records and documentary evidence. If the obligated party does not comply, the authority may estimate the income or refuse benefits in whole or in part (§ 162 AO, § 66 SGB I). In the case of intentional deception, criminal measures may follow.
What special rules apply to minors or persons under guardianship with regard to earned income?
Minors are generally allowed to engage in gainful employment only after reaching the age of 15, and youth labor protection regulations must also be observed (§ 2, § 5 JArbSchG). Income from permitted activities generally belongs to the minor, but management and disposal usually fall to the legal guardians (§ 1642 BGB). If a person is under guardianship, court approval may be necessary for accepting or using earned income (§ 1908i BGB). Tax and social security regulations must also be observed for these groups, though special allowances or protective rules may apply.
