(2023)
How are short-time work benefits and maternity pay taxed?
Short-time work allowance and maternity pay are not taxed, but they are subject to the progression clause. This means that receiving short-time work payments can negatively affect the employee in the tax assessment. The progression clause means that tax-free wage replacement benefits are added to the taxable income. A special tax rate is calculated for this amount, and this special rate is then applied to the taxable income - excluding the wage replacement benefits.
How do wage replacement benefits increase my tax rate?
Wage replacement benefits such as short-time work allowance or maternity pay supplement are paid to you tax-free. However, these benefits are subject to the progression clause. This means that the tax-free income is added to your income to determine your personal tax rate. Due to the now higher income, a higher tax rate is applied to your remaining income. This means you may have to pay additional taxes or receive a lower refund than in the previous year without the wage replacement benefit.
A single mother has an annual income of 26.000 Euro gross. She also receives 6.000 Euro parental allowance, making a total income of 32.000 Euro. The income tax for this would be around 5.706 Euro, which corresponds to a tax rate of 17.83 percent. However, this tax rate is only applied to the income without parental allowance, so the tax is 4.636 Euro.
Without the progression clause, the tax for an income of 26.000 Euro would only be 3.911 Euro. This means that for the actually tax-free parental allowance of 6.000 Euro, an additional 725 Euro in taxes must be paid. In addition, church tax and (for high incomes) the solidarity surcharge may increase.
In this way, income that is below the basic allowance and therefore actually tax-free is also taxed. If the actual income including wage replacement benefits exceeds the basic allowance, the increased tax rate can be applied. However, if the income remains below the basic allowance even with wage replacement benefits, it does not have to be taxed. If you only receive wage replacement income within a year, everything remains tax-free and the progression clause is not applied.
Tip: If you have to repay a wage replacement benefit later, for example because you previously received too much unemployment benefit, you should submit a tax return. This creates a negative progression because the repaid wage replacement benefit can reduce your tax rate. However, if you had no taxable income in the relevant year, it is not worth submitting the repaid wage replacement benefit, as this has no tax implications for you.
Tip: Many employers top up the short-time work allowance to 80, 90 or even 95 percent. So far, this top-up amount to the short-time work allowance is taxable as wages. In social security law, such supplements up to 80 percent of the last net salary are not considered wages and are therefore exempt from social security contributions (§ 1 Abs. 1 Nr. 8 SvEV).
With the "Corona Tax Assistance Act", employer supplements to short-time work allowance and seasonal short-time work allowance were made tax-free, provided they do not exceed 80 percent of the difference between the target salary and the actual salary together with the short-time work allowance. This regulation was initially limited from 1.3.2020 to 31.12.2020. The tax exemption for employer supplements to short-time work allowance was then extended until 30.06.2022. The employer supplement has been taxable again since July 2022.
