The plan proposed today marks a further step in Germany's attempt to impose its strict domestic laws against incitement on the free-wheeling world of online chatter.
Justice Minister Heiko Maas, a member of the center-left Social Democratic Party, said social media companies had already taken voluntary steps to crack down on hate crimes that have resulted in improvements.
"This isn't sufficient yet," Maas said, citing research that he said showed Twitter deletes just 1 percent of illegal content flagged by users, while Facebook deletes 39 per cent.
All copies of the content would also have to be deleted and social media companies would need to publish a quarterly report detailing how they have dealt with such material.
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Sites would also have to nominate a person responsible for handling complaints, who could face fines of up to 5 million euros personally if the company fails to abide by mandatory standards.
Maas said the measures, which will become part of a bill to be put before Parliament, wouldn't restrict freedom of speech that already exists in Germany and there were no plans to create a "truth commission" against so-called fake news.
Facebook declined to comment directly on the new proposal, but insisted that tests the company had commissioned showed higher rates of removal than those cited by Maas.
Facebook also said it had taken measures to train staff in how to deal with the legal situation in Germany and expects to have 700 people in Berlin examining flagged content by the end of the year.
Twitter, too, declined to comment on the proposal. However, the company noted a number of measures taken in recent months that it said are designed to prevent abuse and allow users to filter unwanted content.