During the Corona crisis, an estimated 10 million employees received wage replacement benefits (e.g. unemployment benefits, sick pay, parental allowance, etc.) or, in particular, short-time work allowance (Kurzarbeitergeld) from their employer. In its letter dated 19 February 2021, the Federal Ministry of Finance (BMF) points out that wage replacement benefits, just like Corona-related employer subsidies, are granted tax-free. However, after the end of the calendar year, this income must be taxed under the progression clause (§ 32b EStG). Due to this subsequent taxation, employees in the 2020 calendar year are often required to file a tax return for the first time pursuant to § 46 Abs. 2 Nr. 1 EStG, because they received more than EUR 410 in Kurzarbeitergeld during the year.
Progression Clause on Wage Replacement Benefits
The progression clause applies to employees who received wage replacement benefits pursuant to § 32b Abs. 1 Nr. 1a EStG in the 2020 calendar year. The employees concerned are then subject to a modified tax rate on the income under § 32 Abs. 1 EStG, which is determined based on the current income together with the wage replacement benefits. However, this modified tax rate is ultimately applied only to the current income and not to the wage replacement benefits themselves.
Employer Subsidies to Short-Time Work Allowance
Corona-related subsidies paid by some employers during the period from 1 March 2020 to 31 December 2021 are initially tax-free. However, it must be noted whether the employee, through the combination of Kurzarbeitergeld and employer subsidies, receives more than 80% of their original wage. If the employee receives more than 80%, this subsidy must be taxed retroactively.
Relief for Employers on Social Security Contributions
In addition to employees, employers may also receive reimbursements on social security contributions when granting wage replacement benefits. The employer's share of social security contributions on lost working hours of employees is reimbursed under the Corona aid packages.
Calculation Examples for the 2020 Tax Return
A single employee A without children generally earns a gross salary of more than EUR 3,200 per month. In the 2020 calendar year, A was on 50% short-time work for 9 months.
Months 1-3: EUR 530.80 (60 per cent of the net wage difference) x 3 months
EUR 1,592.40
Months 4-6: EUR 619.27 (70 per cent of the net wage difference) x 3 months
EUR 1,857.81
Months 7-9: EUR 707.74 (80 per cent of the net wage difference) x 3 months
EUR 2,123.22
= Kurzarbeitergeld for the year 2020
EUR 5,573.43
First, the income tax on the current income (excluding Kurzarbeitergeld) for the 2020 calendar year is calculated:
Calculation:
3 * EUR 3,200 + 9 * EUR 1,600 = EUR 24,000
The income tax on EUR 24,000 = EUR 3,432 (14.3%).
Next, the income tax on the total income in 2020 is calculated:
Taxable income
EUR 24,000
Kurzarbeitergeld Kurzarbeitergeld
EUR 5,573.43
Notional taxable income
EUR 29,573.43
The income tax on EUR 29,573.43 = EUR 5,057 (17.1%).
The new tax rate must then be applied to the current income (excluding Kurzarbeitergeld):
Taxable income
EUR 24,000
Income tax 17.1%
EUR 4,104
Finally, the difference between the income tax already withheld and the amount still outstanding must be calculated:
EUR 4,104 - EUR 3,432 = EUR 672 additional payment.
Frequently asked questions
Frequently asked questions
Who is required to file an income tax return for 2020 due to short-time work allowance?
Employees who received more than 410 euros in wage replacement benefits in the 2020 calendar year — such as short-time work allowance (Kurzarbeitergeld), unemployment benefits, sick pay, or parental allowance — are required to file an income tax return under § 46 Abs. 2 Nr. 1 EStG. This obligation applies to many employees for the first time due to the Corona-related short-time work phases.
How does the progression clause affect wage replacement benefits?
Under § 32b Abs. 1 Nr. 1a EStG, wage replacement benefits are themselves tax-free but increase the tax rate applied to other taxable income. A fictitious taxable income including the wage replacement benefits is calculated, and the resulting average tax rate is then applied only to the regular taxable income. This regularly leads to additional tax payments.
Are employer subsidies to short-time work benefits tax-free?
Employer subsidies to short-time work benefits (Kurzarbeitergeld) are generally tax-free during the period from 1 March 2020 to 31 December 2021. However, if the short-time work benefits and the subsidy together exceed 80 percent of the original gross wages, the excess portion is subject to retroactive taxation. Regardless of this, the subsidies are subject to the progression clause (Progressionsvorbehalt).
Are employers reimbursed for social security contributions during short-time work?
Yes, as part of the Corona relief packages, the employer's share of social security contributions for work hours lost due to short-time work is reimbursed. This provides additional relief to employers beyond the wage replacement benefits granted to employees.
How is the additional tax payment calculated for Kurzarbeitergeld (short-time work allowance) under the Progressionsvorbehalt (progression clause)?
First, the income tax on the regular income excluding Kurzarbeitergeld is determined. Next, a hypothetical income including Kurzarbeitergeld is calculated, and the resulting higher average tax rate is applied to the actual taxable income. The difference between this amount and the wage tax already withheld constitutes the additional payment — for example, 672 euros on an income of 24,000 euros plus 5,573 euros of Kurzarbeitergeld.