At some point in life, it probably happens to every employee: The employer gives notice of termination for operational reasons. There can be many reasons for this, for example, because departments or branches are being closed or there has been a serious drop in turnover. However, such terminations are only effective within a very narrow framework.
So that the future ex-employee does not sue in court for his given right to protection against dismissal, many employers pay a severance payment. Contrary to popular belief, the payment of a severance package – a one-time special payment as compensation for the loss of a job – is not regulated by law and is not mandatory. It is a voluntary benefit, the amount of which the employee and employer negotiate individually. Since, in the eyes of the legislator, this is a form of remuneration for work, those affected should pay tax on the severance payment – and pay tax on it in full.
Since, from the legislator’s point of view, the severance payment constitutes remuneration for work, those affected should pay tax on the severance payment – and pay tax on it in full.
The severance payment in the tax
Many people are not aware that consumers have to pay tax on severance pay. The shock is all the greater when a fraction of the negotiated lump-sum payment reaches the employee – because the tax office has withheld a large portion of it. However, according to § 34 para.1 sentence 1, 2 Income Tax Act (EStG) legal Ways to reduce the tax burden. After all, this is not a regular payment for work performed, but compensation for lost or foregone income.
Since when are there no more allowances on severance payments?
The surprise of many employees when they look at their bank statements is no coincidence, since severance payments were in fact tax-free until 2006. With the Act on the introduction of an immediate tax program by the 27.12.In 2005, a Tax benefits for severance pay are no longer provided for by the legislature. Since many employees would be hit by progression due to a high severance payment and would incur a disproportionate amount of tax on the one-time payment as an extraordinary payment and is therefore subject to the so-called five-tax rule.
Is there a legal entitlement to a severance payment?
There is no legal entitlement to the payment of a severance package or other special payments such as a Christmas bonus – not even to the amount of the one-off payment. Instead, it is a goodwill on the part of the employer, although many are happy to make such a payment. Lawsuits before the labor court usually cost more, are lengthy and time-consuming. The The amount of severance pay is freely negotiable.
In which cases is there a legal entitlement to severance pay?
In a few cases, the payment of a severance package is binding for the employer, for example because
- a payment was agreed in current collective agreements
- the payment has been included in social plans agreed with the works council
- or corresponding individual agreements exist in the employment contract
In particular, the last point often occurs with employees in management positions.
How must the consumer pay tax on his severance pay?
severance payments are fully taxable and are subject to income tax or. to the wage tax, which is a Special form of income tax is. If certain conditions are met, a tax reduction can be obtained. The so-called fifths rule (also known as tariff reduction) is not granted in every case.
Are smaller severance payments generally tax-free?
Since the new legislation in 2006, there are no longer any exceptions. Thus, the employee must also pay tax on a small severance payment, with one exception: if the employee does not earn more than 9.EUR 000, the Income below the basic tax-free amount and do not have to be taxed. All annual incomes are to be added up – this includes wages, income from a freelance or self-employed activity, possible capital gains and rental income as well as the severance pay.
Severance pay and social security contributions
In principle, a severance payment unlimited exemption from social security contributions. This means that no contributions to health, nursing care, pension and unemployment insurance have to be paid on the amount. This rule only applies if the severance pay as a compensation payment for the loss of future earning opportunities paid due to the loss of the job.
In the following exceptional cases, the severance pay is subject to social security contributions, so the corresponding contributions must be paid on it:
- if the end of employment has been determined by a labor court
- if the payment is not a severance payment but arrears of pay
- in the case of a previously taken leave of absence (z. B. When a dismissal without notice is converted into a dismissal with notice)
- In the case of a severance payment in a continuing employment relationship
- If the employee takes out voluntary health insurance himself after leaving the company
If a severance payment is made in the context of a so-called mini-job, this remains non-contributory.
The one-fifth rule as a tax advantage
The fifths rule in detail
Insofar as the severance pay paid is taxable in accordance with § 24 no. 1 EStG compensation for lost wages and thereby unusual accumulation of income in the year of assessment occurs, the one-fifth rule can be applied. This enables a tax saving, so that more of the severance pay remains.
What does Funftel-Regelung mean?
Under the one-fifth rule, the tax office spreads the severance pay over five years. This has the consequence that Tax burden is significantly lower as if the one-time payment is taxed as normal income within the same assessment year.
The tax office proceeds as follows when applying the one-fifth rule:
- First, the so-called tax amount 1 is determined: The taxable income excluding extraordinary income
- Determination of tax amount 2: increase of tax amount 2 by one fifth of extraordinary income
- Determination of tax amount 3: Five times the difference between tax amount 1 and 2 as reduced income tax for the severance payment
- Determination of the tax payable for the year of assessment: sum of tax amounts 1 and 3
Paying tax on severance pay: requirements for the one-fifth rule
In order for the one-fifth rule to apply, the following conditions must be met:[/p]
- This is compensation within the meaning of § 24 no. 1 EstG
- Existence of an accumulation of income in the year of assessment
If these conditions cannot be met, the tax office will tax the severance pay in the same assessment year and like normal wages.
Severance pay as compensation
A severance payment is only considered compensation if it is paid instead of the benefit owed (in this case, wages) and is based on a legal ground other than the employment contract. This function is performed, for example, by a Termination agreement. Furthermore, the severance payment may not be used as compensation for claims already acquired. In this case, it is legally considered as the usual salary with the corresponding deductions for taxes and social security contributions.
Relevant criteria for the aggregation of income
A severance payment increases the taxable income in one fell swoop to such an extent that the employee concerned in the year of assessment is subject to the one-fifth rule for his other circumstances subject to unusually high tax rates. this aggregation of income is unfair, as it is an exceptional case. For this reason, § 34 para.1 sentence 1, 2 EStG a better tax position in the form of tax relief for employees before, which meet the above-mentioned requirements.
This rule only applies if the severance pay paid is higher than the wages lost due to the termination of the employment contract. If the income decreases despite compensation, the requirement is deemed not to have been met.
How should the employee proceed in the tax return in order to make use of the one-fifth rule??
First of all, the future ex-employer makes the payment of the taxes payable. This also checks whether the employee necessary conditions for the application of the one-fifth rule fulfills. This means that the employee receives the net amount, of which, as a rule, nothing more has to be deducted. Subsequent claims by the health insurance funds or the tax office are possible.
As part of the annual tax return, the employee must declare the severance pay. This is done in Attachment N under the item Compensation / salary for several years. At the same time, all documents concerning the settlement should be submitted together with the tax return. This enables the tax office to check retrospectively whether the employer has applied the one-fifth rule.
The tax advantage in the example
The calculation of the one-fifth rule appears complicated to laypersons. For this reason, the following sample calculation illustrates the principle and makes it clear how high the tax savings will be:
Max Mustermann, 35 years old, single and childless, loses his job for operational reasons. Up to now, he has paid 30.000 euros gross and receives a severance payment of 10.000 EUR. After possible expenses such as special expenses, income-related expenses and the commuter allowance have been deducted from his total income, the remaining taxable income is 30.000 euros. This is assessed according to the one-fifth rule.
First of all, as tax amount 1 the Income tax for the income without the severance pay as extraordinary income determined.
|30.000 Euro||around 5.500 euros|
Now the Calculation of tax amount 2, by increasing the income by one fifth of the severance pay. From this, in turn, the income tax is calculated.
|30.000 euros||plus 2.000 Euro||results in 32.000 euros||results in about 6100 Euro|
The third step is the Calculation of the difference as well as the reduced tax for the severance payment.
|6.100 euros||minus 5.500 Euro||results in about 660 Euro||results in 3.300 euros|
Finally, the income tax for the year of the severance payment is calculated from the first and third amounts.
|8.800 euros||9.000 Euro|
Ultimately, the fifths rule in this example brings Around 200 euros savings.
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Now a dismissal for operational reasons does not always run smoothly. If an employee has to pay tax on his severance pay, there are important special rules to be observed.
Paying tax on severance pay: The installment
This includes Severance pay must be paid within one calendar year – a distribution over several years is possible, but in this case the fifths rule does not apply. Nevertheless, the employer can Make payment in installments, provided that this takes place entirely within the assessment period.
The use of a company car or a company apartment
In addition to severance pay, the employer can provide additional benefits on a small scale, for example for a transitional period For reasons of social welfare. This can involve the continued use of a company car for a limited period of time, the payment of insurance premiums, or payments for retirement benefits.
How severance pay can also be taxed favorably?
Is the termination effective at the end of the year, the amount paid out can be divided over two years. Thus, the amount of tax due can be kept low and shared. This procedure is recommended if the Severance pay particularly high and the taxes are unusually high due to the progression. Payment of severance pay in installments can help save taxes. In these cases, the so-called 10 percent limit of the tax authorities applies.