Severance pay and taxes in the event of termination

Renate Oettinger was a graduate in business administration Dr. rer. pol. and worked as a freelance writer, editor and copy chief in Munich. Their areas of expertise were business, law and IT. In addition to IDG’s CIO, Computerwoche, TecChannel and ChannelPartner editorial teams, her clients have included Siemens, Daimler and HypoVereinsbank, as well as the Campus, Springer and Wolters Kluwer publishing houses. On 29. January 2021 Renate Oettinger passed away.

Andrew Th. Fischer is a freelance journalist in the south of Munich. He has many years of experience as an editor in various IT trade media, including NetworkWorld Germany, com! professional and ChannelPartner. His professional focus is on IT security, networks and virtualization.

After the dismissal a gift from the boss? Unfortunately, it is usually not that easy.
Photo: photastic –

After the shock of a dismissal, most of those affected deal with the issue of severance pay sooner or later. Unfortunately, it is not the case that there would be a vested right to severance pay, as some people assume. If the termination was proper, a lawsuit for such a one-time monetary payment is even ruled out in many cases. The situation is different in the case of a so-called action for protection against dismissal.

Under certain conditions, many companies are prepared to pay a severance payment. Why some bosses agree, whether you have to pay tax on it and what the five-percent rule means, you can find out in this article. But it is no substitute for the advice of a specialized lawyer.

Severance pay in case of termination

First of all, most people are interested in how high the settlement can be, so what expectations are realistic. Unfortunately, there are no fixed rules here. The amount paid is usually purely a matter of negotiation. However, the amount depends on several factors. The most important ones are:

Length of service: the longer you have been with the company, the more you can receive.

What is the legal and factual situation?? This can best be assessed by a specialist lawyer. If you are a member of a trade union, you should seek help from there.

Do you have legal protection insurance? Then contact your insurance company and have a specialist lawyer put you in touch with them.

If there is an action for protection against dismissal and how the court proceedings proceed? The longer a lawsuit takes, the higher the cost risk for your former boss. So he will usually have an interest in shortening the procedure.

Most employers want to fill the vacant position quickly. This time pressure can have a positive effect on your claims.

The higher your chances are that any dismissal protection lawsuit will be in your favor, the higher is usually the achievable severance pay. Otherwise, the sum offered is lower. It becomes difficult, however, if the ordinary or extraordinary notice of termination does not contain any errors in terms of content or form. Whether it contains errors, again a lawyer can judge better than a legal layman.

There is no legal basis for so-called standard severance payments. But it can be a guideline. Often, half a gross monthly earnings per employment figure is applied.

Paying taxes on severance pay

After negotiating and receiving the settlement, the question remains what the tax office thinks about it? The tax allowance for severance payments was abolished as early as 2006. Your severance pay is therefore subject to income tax in full.

Severance pay, however, is treated specially for tax purposes as extraordinary income compared to ordinary employment income (§ 34 EStG). This is where the so-called rule of fifths comes into play.

The amount of severance pay depends on many factors. However, the tax to be paid can permanently cloud the joy.
Photo: Dean Drobot –

Severance pay and quintuple regulation

In principle, it’s easy to understand the one-fifth rule. In the first step, the wage or income tax must be calculated for the regular annual income. Then add a fifth of the severance pay to the income and again determine the income tax. You now quintuple the difference between the two income tax amounts. Add this item last to the tax burden that would result without your severance pay.

?The one-fifth rule therefore pays off especially for employees with rather lower incomes. It looks different with hear income.

Tax free severance pay

So, as stated, there is no such thing as tax-free severance pay. The severance pay also counts as your income and must therefore be taxed.

Severance pay and social security contributions

There are no additional taxes to pay for social security funds when you receive a severance pay. Neither for health and pension insurance nor for unemployment and nursing care insurance.

Severance pay and unemployment benefits

The amount of the severance pay has no influence on your claim. But it can be counted against your unemployment benefits. Namely, if you have agreed with your employer on the termination of the employment relationship in a severance pay settlement – for example, in the context of a dismissal protection procedure – and the notice period applicable to you has thereby been shortened.

But that’s not why you get less money from the employment agency altogether. This also does not apply to blocking periods. Payment of the benefits due to you then simply starts at a later date instead.

Still, caution is advised when it comes to severance and settlement agreements. Signing such contracts may adversely affect your entitlement to unemployment benefits. Since the whole matter is very complicated, you should get expert help. Ask a specialist in labor law before you sign such a contract.

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