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Gross for net payout

December 8, 2010 | 30,00 EUR | answered by Michael Herrmann

My question: In 2010, I received a severance package plus unemployment benefits for approximately 9 months. Additionally, I made an agreement with my employer that in the event of a reduction in my unemployment benefits, my employer would cover the difference. My unemployment benefits were reduced. My employer is transferring the difference amount to me as gross for net amount. How should I be taxed on this amount from my side?

Michael Herrmann

Dear questioner,

First of all, thank you for your inquiry, which I would be happy to answer based on the information provided and considering your situation within the scope of an initial consultation. The response is based on the facts presented. Any missing or incorrect information regarding the actual circumstances can affect the legal outcome.

Severance payments due to termination of employment are tax-reduced. This is ensured by taxation according to the "Fünftelregelung" (Section 34 (1) EStG). To apply the "Fünftelregelung" to the taxable part of your severance payment, the following conditions must be met:

The severance payment must be made within one calendar year, either as a lump sum or in multiple installments (Federal Fiscal Court judgment of September 6, 2000, XI R 19/00, BFH/NV 2001 p. 431).

The severance payment plus other income resulting from the termination of the contract must be higher than the salary lost by the end of the year (Federal Fiscal Court judgment of October 9, 2008, IX R 85/07, BFH/NV 2009 p. 558). If this condition is not met, the taxable income of the year of the severance payment must be higher than that of the previous year, or the annual income including the severance payment (including unemployment benefits, early retirement benefits, income from new employment, etc.) must be higher than the comparable annual income of the previous year (Federal Ministry of Finance letter of May 24, 2004, BStBl. 2004 I p. 505 paragraph 10-12).

Subsequent increase of the severance payment is not uncommon, for example, after labor court proceedings due to a calculation error. In these cases, the increase is taxed in the same way as the original severance payment. The employer must report the payment to the tax office and withhold taxes. He will then issue a wage tax certificate, which you may have already received.

You will then include this information in your income tax return. The severance payment is entered in Annex N line 17. As a result, a portion of the payout amount will be subject to taxation.

I hope that these details provide you with a sufficient overview of the situation within the scope of your inquiry and this initial consultation.

Kind regards,

Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax Advisor