A Managing Director salary at a GmbH offers tax advantages both in the taxation of the company and in the income tax of the GmbH shareholder. For example, the general manager’s salary for corporate tax and business tax reduces the company’s profit, which thus has a tax-reducing effect. In this respect, the shareholder benefits from a higher profit. But also in the context of his income tax, he can save taxes compared to a profit distribution. A calculation example should make this clear to you.

In order to show you an example of how a Managing Director salary at a GmbH helps the Managing Director to achieve tax advantages, we would like to set out some key points. For reasons of simplicity, we limit ourselves to a one-person GmbH. The only shareholder is usually also the managing director of the GmbH. This is also the case in our example. In addition, a profit before tax of EUR 100,000 should serve as the basis for calculation. Thus, the GmbH shareholder is necessarily subject to the top tax rate of 42 %.

2nd tax advantage number 1: The Managing Director’s salary reduces the GmbH’s taxes

2.1 The GmbH taxation without payment of a managing director salary

First of all, we want to look at the advantage of managing director salary at the GmbH. In fact, there are two advantages. The advantage concerns both corporate tax and business tax.

So we first calculate the corporate tax and the solidarity surcharge of the GmbH with an annual net profit of EUR 100,000:

EUR 100,000 x 15% = EUR 15,000 corporate tax

EUR 15,000 x 5.5 % = EUR 825 solidarity surcharge

Similarly, we proceed with the trade tax, assuming a realistic levy of 450%, which is typical for many cities in Germany:

EUR 100,000 x 3.5% x 450 % = EUR 15.750 Business Tax

So remain as profit distribution:

EUR 100,000 – EUR 15,000 – EUR 825 – EUR 15,750 = EUR 68,425

This profit after tax is due to the GmbH shareholder. Of course, he now has the choice to salvage the profit in order to use it for investments, for example. But this would be detrimental to the meaning of our article. So we'd rather let him pay out the profit.

2.2. The GmbH taxation taking into account a managing director salary

Before we dedicate our attention to the distribution of profits to the GmbH shareholder, we would like to see what impact the managing director’s salary actually has on the taxation of the GmbH. In doing so, we assume that the Managing Partner wisely estimates the annual profit fairly accurately at EUR 100,000. Furthermore, he decides that instead of paying the profit, he prefers to agree on the payment of a managing director salary with his GmbH. Since all the requirements have now been determined, we now prepare the following simple calculations for determining corporate tax and business tax:

Annual profit of the GmbH EUR 100,000 – Managing Director salary EUR 100,000 = taxable annual profit EUR 0

Conclusion: If the Managing Director's salary is the same as the annual net profit of the GmbH (without payment of a Managing Director's salary), then the company pays no taxes. Therefore, we must now focus our attention on the tax treatment of the managing director's salary in the case of the shareholder's income tax.

So we have to consider two different scenarios: on the one hand, the taxation of the distribution of profits and on the other hand, that of the general manager’s salary.

3.1. Taxation of profit distribution

3.1.1. The choice between capital gains tax and income from parts

For this we have to note that the GmbH shareholder shown here even has two different taxation methods to choose from. As a rule, distributions of profits by corporations to their shareholders are treated as capital gains in tax terms. Consequently, the Treasury levies a capital gains tax on these dividends. Although the Income Tax Act grants a savings lump sum of EUR 801 for single people and EUR 1,602 for married people, it covers all advertising costs associated with these revenues. In addition, the importance of this allowance is negligible due to the small amount in relation to the taxable profit. Alternatively, however, the so-called partial income procedure for taxation is also possible, provided that certain conditions are taken into account. However, it is often the case that the choice of tax method does not lead to a significant tax difference. So now we just follow the path of capital gains tax.

3.1.2. Calculation of capital gains tax on profit distribution

So we make the following calculation of the capital gains tax and the proportional solidarity surcharge:

Dividend EUR 68,425 – flat-rate savings amount EUR 801 = taxable capital income EUR 67,624

taxable capital gains EUR 67,624 x 25 % = capital gains tax EUR 16.906

Capital gains tax EUR 16.906 x 5.5 % = Solidarity surcharge EUR 929.83

In total, the burden with tax levies amounts to EUR 17.835,83, so that the GmbH shareholder receives a net profit of EUR 50.589.17. Under the conditions laid down here, as already mentioned, the use of the partial income method would also have led to a comparable result.

3.2. Taxation of the salary of directors

A Managing Director salary is usually treated as a normal salary of an employee in the sense of income tax law. Thus, the managing director receives current income from non-self-employment (§ 19 EStG). In this context, issues such as the receipt of taxable benefits in kind and monetary benefits, such as a privately used company car, or advertising costs are also relevant. However, taking into account all such influences on the taxation of the managing director’s salary, which are common in everyday practice, would affect our comparative view of the relevant differences in the distribution of profits. So we're not going to do that. Instead, we assume that the GmbH shareholder has no further remuneration and deductions to take into account in addition to the managing director's salary.

Although the top tax rate of the GmbH shareholder with an annual managing director salary of EUR 100,000 is 42 %, the average tax rate is about 33 %. With this we calculate the income tax in the following way:

Managing Director salary EUR 100,000 x 33% = income tax EUR 33,000

Income tax EUR 33,000 x 5.5 % = Solidarity surcharge EUR 1,815

This results in a total tax burden of EUR 34,815 for the shareholder, which means that EUR 65.185 is available to him as net income.

4. Which is cheaper: CEO salary or profit distribution?

So if we compare these two simplified models to determine which is more advantageous for the GmbH shareholder, then the statement for the managing director salary is clearly positive. At this point, however, it should be noted that these idealized models are subject to some changes in reality. Nevertheless, based on this comparison, one can tend to plead in favor of the managing director salary.

5. What else needs to be considered in the management salary

An important point in the granting of a managing director’s salary is to ensure that the salary remains within the framework usual in the respective fallow. Because if the managing director’s salary is exceptionally lavish, the tax office assumes a hidden profit distribution – and treats the amount above the usual as an investment income. Therefore, it is advisable to determine the usual executive salary before determining the amount of the executive salary.

At least as important is the accuracy of the forecast in relation to the expected profits. The more accurately one estimates, the more precisely one can use the managing director salary as an instrument in the reduction of taxes. For example, if the annual business result is subject to greater fluctuations, you have to expect certain restrictions when determining the amount of the managing director's salary. However, the retroactive payment of a higher managing director salary is not an option, because this is also to be regarded as a hidden profit distribution.

So, as you can see, using the managing director’s salary as a means of reducing taxes is quite beneficial. But the advice of a tax consultant experienced in corporate tax law may also be helpful in many respects, or even indispensable.