How are short-time work benefits and maternity pay taxed?
Short-time allowance and maternity pay are tax-free but subject to the progression clause. This means that these wage replacement benefits are used to determine the tax rate, even though they are not taxed themselves. The progression clause can lead to an increase in your tax rate and thus the tax burden on your taxable income.
How does the progression clause affect my tax rate?
Although wage replacement benefits such as short-time allowance and maternity pay are tax-free, they are added to your income to calculate your personal tax rate. This results in a higher tax rate, which is then applied to your actual taxable income. This may mean that you have to pay additional taxes or receive a lower tax refund.
A single mother has an income of 26.000 Euro and receives an additional 6.000 Euro in parental allowance. The total income is therefore 32.000 Euro, and the tax rate for this is 15.70%. However, this tax rate is only applied to the income without parental allowance. As a result, the tax is 4.082 Euro. Without the progression clause, the tax on the income of 26.000 Euro would only be 3.328 Euro. The progression clause results in additional taxes of 754 Euro.
Impact on the basic allowance:
If your income, including wage replacement benefits, exceeds the basic allowance, the increased tax rate will be applied. If the total income is below the basic allowance, the wage replacement benefits remain tax-free.
Tip for repayment of wage replacement benefits:
If you have to repay overpaid unemployment benefit or short-time allowance, you should submit a tax return. The repayment can reduce your tax rate (negative progression), which may result in a tax refund.
Employer supplements to short-time allowance:
Many employers top up the short-time allowance to 80% or more. These top-up amounts were temporarily tax-free, provided they did not exceed 80% of the last net salary together with the short-time allowance (Corona Tax Assistance Act, until 30.06.2022). Since July 2022, employer supplements to short-time allowance are taxable again.
