Short-time work allowance is currently helping millions of people to bridge the loss of wages caused by the Corona crisis. But this advantage could mean that they have to pay taxes in 2021.
Those who benefit from short-time working allowance today may have to pay taxes tomorrow. Guilt is a rule that sounds complicated: the progression clause. In all likelihood, nothing will change in this regard when the Bundestag votes on the draft of the Annual Tax Act 2021 on Wednesday.
Although the FDP had applied to make exceptions in the Corona year 2020, the project should have no prospect of success in view of the majority situation. We explain what the progression proviso is all about, who is particularly affected and why short-time workers are required to file a tax return.
Why do short-time workers threaten back taxes?
Short-time work allowance is tax-free, but the recipient is indirectly debited afterwards. Because the benefit increases the tax rate for the rest of the taxable income. It’s called Progression reservation.
Because the employer is not allowed to use this higher tax rate for the monthly wage tax deduction – i.e. initially passes on less tax than is actually necessary – the tax office will collect the rest later. That is why short-time workers are also obliged to submit a tax return. The FDP assumes that, above all, many low-wage earners who have received short-time allowance will have to file a tax return for the first time.
Does every short-time worker have to pay taxes?
No. Whether the tax office will ask you to make an additional payment depends on how much income tax you have paid throughout 2020.
Anyone who only received short-time allowance in a few months – i.e. did not work at all – but was fully employed for the rest of the year can usually expect a tax refund. However, it often looks different if you have only received 50 percent short-time allowance. If you receive the benefit in addition to your wages, you are often threatened with additional payment.
Difference between 50 and 100 percent short-time work
Two examples provided by the Taxpayers’ Confederation for a Married Single Earner show the difference. It is assumed that the man is assessed in tax class 3 and earns 4,500 euros gross per month.
- Case 1: Three months short-time work benefit at 50 percent, nine months regular
In the three months in which he receives short-time allowance, his gross income is 2,250 euros plus around 881 euros in short-time work allowance (67 percent of the net loss of wages; Read more about the calculation of short-time work benefits here) – makes a total of 2,643 euros in state benefits (3 x 881 euros = 2,643 euros).
In the nine months with regular wages, he has already paid 4,329 euros in wage tax, for the remaining three months 81 euros – a total of 4,410 euros.
The short-time allowance now increases its tax rate. The tax office therefore charges him a total of 4,650 euros in income tax. 240 euros more than has already been withheld in wage tax. He has to pay the 240 euros.
- Case 2: Three months of 100 percent short-time allowance, nine months regular
Because the employee no longer receives nine full months plus three months “half” of his regular salary, but only nine months, the income tax is reduced – from 4,650 to 3,722 euros.
Because the employee has already paid 4,329 euros in income tax in the nine regular months, he gets something back from the tax office: 607 euros.
Danger: It is not the case that you get money back with 100 percent short-time work allowance and pay back with 50 percent. That also depends, for example, on how much income-related expenses you can claim and what tax bracket you are in. Read here what you can deduct from tax.
What applies to co-payments from the employer?
If the employer voluntarily increases the state short-time work allowance, this also remains Co-payment recently tax free – but only for a limited period and up to a certain amount. This is what the Corona Tax Aid Act provides.
Specifically, this means: the short-time work allowance and the allowance together may not exceed 80 percent of the loss of wages due to short-time work. Here, too, the progression proviso applies: the grant increases the tax burden on the remaining income.
What should short-time workers do now?
The German Trade Union Confederation (DGB) advises to prepare early for an additional tax payment and to create a financial cushion. It is sufficient if you save between 10 and 12 percent of your short-time allowance. With the Calculator of the Bavarian State Office for Taxes you can determine how the progression proviso affects you.
Isn’t the progression proviso unfair?
Not generally. The Federal Constitutional Court has approved the mechanism and even the DGB does not reject it from the outset as unjust.
The basic idea behind the rule is: Those who earn more are considered to be more economically efficient and should also have to pay a larger part of their income than taxes. Tax-free payments such as short-time work allowance also increase productivity.
Will the progression proviso be suspended for 2020 and 2021?
At least that is what the FDP would like. A first application was rejected, however, and the second, which will be discussed in the Bundestag on Wednesday, faces the same fate. The FDP demands that those millions of employees who are or were on short-time work due to the Corona crisis be exempted from the tax return obligation.
“With the suspension of the tax declaration for short-time work, there would no longer be a risk for recipients of short-time allowance that they would face additional tax payments in the coming year,” said Markus Herbrand, FDP tax expert and member of the Bundestag finance committee, t-online. “Those who have already suffered financial losses as a result of months of short-time work would have financial planning security at least at this point and would be relieved in a targeted manner.”
FDP expects back tax payments in the six-digit range
The German tax union had also advocated suspending the progression proviso for 2020. Federal chairman Thomas Eigenhaler said in an interview with t-online.deThat the rule is difficult to convey to people in Corona times: “Politicians must ensure that the little people don’t get the impression that only the economy is given a lot.”
The obligation to submit a tax return for recipients of short-time work allowance should also mean that the tax offices would have to process a lot more tax returns than in previous years. In May around 6 million people were on short-time work, in September 2.2 million. With the new lockdown, the numbers should increase again.
FDP tax expert Herbrand assumes that both the number of additional tax returns and the number of unexpected back tax payments will be at least in the six-digit range.