From 26 October 2022, employers may grant their employees a tax- and contribution-free bonus of up to €3,000. The so-called inflation compensation bonus is intended to help employees better cushion the financial impact of inflation. It is a voluntary benefit provided by the employer. Below, we answer some questions regarding the inflation compensation bonus:
1. Who is eligible to receive the inflation compensation bonus (IAP)?
A tax-free inflation compensation bonus may be received by employees in the tax-law sense, regardless of the type of employment. Examples include:
- Employees in full-time or part-time positions
- Short-term employees
- Mini-jobbers or marginally employed persons (520-euro job)
- Trainees
- Employees in paid internships
- Employees on short-time work
- Employees on parental leave
- Employees receiving sickness benefits
- Volunteers
- Persons in the Federal Voluntary Service
- Etc.
2. Do special rules apply to employment relationships between related parties?
A prerequisite for the tax recognition of such an employment relationship is that it has been seriously agreed upon (intended to be long-term) and that the agreed work is actually performed. In the case of an employment relationship between related parties, it must be examined in particular whether the IAP would also have been granted between unrelated third parties. If an employment relationship is concluded solely in order to pay a tax-free inflation compensation bonus to a related party, this is unlawful.
3. Is the duration of the employment relationship relevant?
No, the commencement and duration of the employment relationship are not relevant for the tax-free granting of the inflation compensation bonus. The only important point is that it is paid in addition to the wages owed in any case within the privileged period (26 October 2022 – 31 December 2024).
4. Can the IAP also be paid out in instalments?
Yes, a staggered payout (e.g. monthly) of the inflation compensation bonus is permitted from a tax-law perspective. The only requirement is that the maximum amount of €3,000 is not exceeded.
5. Can the €3,000 tax-free allowance be paid out in each year of the privileged period, for a total of €9,000?
No, a total allowance of €3,000 applies for the entire privileged period from 26 October 2022 to 31 December 2024. Any payments exceeding this amount that are made as an inflation compensation bonus are subject to wage tax and social security contributions.
6. Can the payout also be made in the form of benefits in kind?
Yes, pursuant to § 3 Nr. 11 c) EStG, the employer may grant the inflation compensation bonus to the employee either as a monetary or non-cash benefit.
7. Can the inflation compensation bonus of €3,000 be paid out anew for each employment relationship, or must the employer check whether a payout has already been made?
The tax exemption under § 3 Nr. 11 c) EStG can generally be claimed separately up to €3,000 for each employment relationship, or also for several concurrent employment relationships. Accordingly, the employer is not required to check whether an employee has already received an inflation compensation bonus from a previous employment relationship. However, the maximum amount of €3,000 applies in the case of several consecutive employment relationships with the same employer during the privileged period.
8. Must there be a connection between the inflation compensation bonus and inflation?
As the name suggests, the bonus must be paid as compensation for inflation. A written agreement between employer and employee regarding the payout of the inflation compensation bonus is not required. However, it must be noted that the designation "inflation compensation bonus" must appear on the pay slip or transfer document. An actual examination by the employer as to whether the employee is affected by inflation is not necessary.
9. Can the IAP also be paid out as a Christmas bonus?
Can the employer grant the IAP instead of a voluntary special payment in 2023?
If the Christmas bonus is paid in the form of the inflation compensation bonus, the connection to inflation is lacking and such a payment is therefore excluded from the tax exemption under § 3 Nr. 11 c) EStG. In addition, employer benefits based on a contractual agreement or a legal obligation may not be converted into an inflation compensation bonus. However, if there is no contractual agreement or legal obligation, and the special payment (e.g. gratuities) is granted voluntarily by the employer, conversion into an inflation compensation bonus is possible.
10. Does the tax-exempt effect also apply to inflation bonuses that were decided upon before 26 October 2022?
What matters for the tax-free payout of the IAP is that it accrues to the employee within the privileged period (26 October 2022 – 31 December 2024). This means that the timing of the decision to grant the inflation compensation bonus with the employee is not relevant — only the payout date matters.
11. Is the tax-free inflation compensation bonus subject to the progression proviso?
No, the tax-free inflation compensation bonus is not subject to the progression proviso. Consequently, there will be no subsequent higher income tax burden after filing the tax return.
12. Must the tax-free inflation compensation bonus be reported on the wage tax certificate or in the income tax return?
No, no reporting is required either on the wage tax certificate or in the income tax return.
Frequently asked questions
Frequently asked questions
What is the inflation compensation bonus (Inflationsausgleichsprämie) and what is the maximum tax-free amount?
The Inflationsausgleichsprämie (IAP) is a voluntary employer benefit designed to help employees cope with inflation-related financial burdens. It can be granted free of tax and social security contributions up to a total amount of EUR 3,000 during the eligible period from 26 October 2022 to 31 December 2024. This maximum applies to the entire period, not per year.
Which groups of employees are eligible to receive the inflation compensation bonus?
In principle, all employees within the meaning of tax law can receive the inflation compensation bonus (IAP), regardless of their type of employment. This includes full-time and part-time staff, mini-jobbers, short-term employees, trainees, paid interns, employees on short-time work, parental leave or sick pay, as well as volunteers and participants in the Federal Voluntary Service.
Can the inflation compensation bonus be paid in installments or as a benefit in kind?
Yes, staggered payment – for example on a monthly basis – is permissible under tax law, provided the total amount of EUR 3,000 is not exceeded. Pursuant to § 3 No. 11 c) EStG, both cash and in-kind benefits are permitted.
Does the €3,000 tax-free allowance apply per employment relationship or per employee?
The €3,000 allowance can generally be claimed separately for each employment relationship, including multiple concurrent jobs with different employers. The employer is not required to verify whether the employee has already received the IAP from a previous employment relationship. However, for consecutive employment relationships with the same employer, the maximum amount applies only once.
Can a Christmas bonus or a contractually agreed special payment be converted into an inflation compensation bonus?
A conversion of Christmas bonuses or special payments based on contractual agreements or legal obligations into an inflation compensation bonus (IAP) is not possible, as the required link to inflation is missing. Only voluntary special payments without a contractual or legal basis – such as gratuities – can be converted into a tax-free IAP. The payment must be shown on the payslip as „Inflationsausgleichsprämie“.
Does the inflation compensation bonus need to be reported in the tax return or on the income tax certificate?
No, the tax-free IAP does not have to be reported either on the income tax certificate (Lohnsteuerbescheinigung) or in the income tax return. It is also not subject to the progression clause (Progressionsvorbehalt), so there is no risk of a subsequent increase in your income tax burden.