Progression Clause for Short-Time Work Benefits Hidden Tax Burden: What Employees Should Keep in Mind Regarding Short-Time Work Benefits

Short-time work benefits (Kug) are a wage replacement benefit and are generally tax-free. However, they increase the tax rate applied to the employee’s remaining taxable income. This is known as the “progression clause.” The result: Anyone who receives an income replacement benefit such as Kug, unemployment benefits, or sick pay in a calendar year must expect additional tax assessments from the tax office. This also applies to benefits such as maternity, transitional, injury, or parental benefits, as well as transitional retirement and early retirement benefits.

Here’s how the splitting rate is calculated for married couples

• The childless married couple, the Webers, had a taxable income of 26,109 euros in 2019. Mr. Weber received 5,400 euros in short-time work benefits during that calendar year.
• The sum of the taxable income of 26,109 and the progressive income of 5,400 euros is therefore 31,509 euros, which constitutes the notional taxable income.
• The income tax on the notional taxable income is 2,658 euros. The progressive tax rate is therefore 8.4356 percent (2,658 euros multiplied by 100 divided by 31,509 euros).
• The income tax for the tax year without short-time work benefits would have been 1,384 euros. Due to the progressive tax rate, the tax amounts to 2,202 euros (26,109 euros times 8.4356 percent divided by 100). The Webers must therefore pay 818 euros more in taxes to the tax authorities, excluding the solidarity surcharge and church tax.

Those on short-time work must file a tax return

Employees receiving short-time work benefits are required to file a tax return if the short-time work benefit exceeds 410 euros per year. Whether a back tax payment is due at all—and how much it will ultimately amount to—depends on the employee’s income situation in the year the short-time work benefit was paid. It is recommended that employees on short-time work set aside at least 10 percent of their monthly wage replacement benefit so they can pay any tax liability that may arise. If there is no other taxable income—for example, because the spouse has no income—there is generally no additional tax payment due.