Amount of the managing director’s salary: what should it ideally be?

How high should the managing director’s salary ideally be?  What is the maximum with as little tax as possible? Here are a few practical examples:

This week a client came to me for advice because he wants to convert his sole proprietorship into a limited liability company and wanted to know what his managing director’s salary should ideally be.

This is not an easy question, because on the one hand you want to have the maximum, on the other hand you want to pay as little tax as possible.

In addition, it must be taken into account that managing director salaries must not be excessive and that employment contracts must be structured in a way that is customary for third parties (see my article).

In principle, the following applies to a GmbH:

Example 1: Managing director’s salary with full payout

If a profit of 100 euros is earned, the GmbH must pay an average of 30 euros in taxes on it. The remaining 70 euros would then be distributed and another 25 percent capital gains tax would be due. 

That would be about 20 euros in taxes (if he is single). So in the end, 50 euros would remain net on a private level from a profit of 100 euros in the capital company. In total, he would have paid 50 euros in taxes.

Example 2: Low managing director’s salary 

Assuming the limited liability company makes 100 and the managing director receives a salary of 50, he would pay about 11 euros in income tax, which corresponds to a tax rate of about 22.7 % (as of 2023). In the case of the GmbH, the salary can be deducted, which means that instead of a profit of 100, it only has to pay tax on a profit of 50 euros. This means that it has to pay 15 euros in taxes and the remaining 35 euros are available for a profit distribution or investments.

At the private level, only 39 euros remain in this example, but he has paid a total of only 26 euros instead of 50 euros in the previous example.

Now 39 euros may be too little to cover private consumption or private investment.

Therefore, here is another example:

3rd example: High Managing Director’s Salary with Profit at Zero

If the shareholder-manager pays himself a salary of 100 Euros, he must pay 33 Euros, i.e. 33% private taxes, and thus receives a net of 67 Euros. In total he has only paid 33 Euros. In this example, however, the GmbH has no capital left for business investments.

Therefore, in individual cases it may be more favourable to structure the salary as in example 2, since the profits can then be used for investments and thus also a possible growth of the GmbH and if distributions are to be made, this can then also be postponed until retirement age in order to then take advantage of a low personal tax rate.

It tends to be cheaper to pay out a salary than to make a distribution. However, one must be aware that from a taxable income of 62,000 euros, a so-called marginal tax rate of 42 % applies. This means that every additional euro is taxed at 42%. However, the average tax rate is much lower.

If you have any questions about your specific case and would like full-service support with financial accounting and payroll accounting, balance sheets and tax returns, as well as advice on tax or business structuring, please write to us: or call us: 089 652 001.

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