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 earns 26.000 Euro gross per year and receives an additional 6.000 Euro parental allowance:
- Total income: 32.000 Euro
- Determined tax rate: 15.24%
- Tax only on 26.000 Euro income: 3.962 Euro
- Without progression clause: Tax only 3.195 Euro
Result: Due to the parental allowance, 767 Euro more tax is payable – even though it is tax-free. Church tax and possibly the solidarity surcharge may also increase.
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.
