Ask a tax advisor on the topic of Severance pay

1/5 rule

January 28, 2010 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

Dear tax consultant,

My company has offered me a termination agreement until 31.12.2010. The existing employment relationship will be terminated by the employer for operational reasons while observing the regular notice period. In return for the loss of my job, I would receive a severance payment of €124,910 as a social compensation according to §§9 KSchG.

My annual salary (2009) is:

~ €56,400 (not expected to significantly increase in 2010)

The severance payment would be paid out by 01.02.2011. I have the option to receive it in up to 6 installments (one per year).

I am not expected to receive any salary in 2011, possibly unemployment benefits.

Now my questions to you:
1. Does my employer have to or can they apply the 1/5 rule? Even though I will only receive the severance payment in 2011 if I choose to receive it in one lump sum.
2. What do I need to consider in 2011 regarding taxes and the expected annual unemployment benefits of approximately €17,280? Should I expect to pay additional taxes?
3. Will the employment agency deduct the severance payment from the unemployment benefits?
4. My employer will calculate the tax deduction amounts (severance payment = other income) based on the expected annual salary for 2011 using the annual income tax table. Since the payment would take place on 01.02.11, he will estimate the annual salary based on a projection using the last received salary in 2010. Is there a way to avoid this?

I would greatly appreciate your answers to my questions. While there are similar cases in the thread already, I want to make sure, as these are also "older" cases.

Thank you for your efforts.
Kind regards.

Dipl.BW/SB Ulrich Stiller

Dear inquirer,

Thank you for your inquiry, which I would like to answer based on the information provided and taking into account your efforts in the context of an initial consultation as follows:

First of all, you absolutely need detailed advice. This is only possible after reviewing the documents:

Question 1

If the severance payment exceeds the lost income from the employment relationship, which seems to be the case based on your information, then the "Fünftelregelung" (five-fifths rule) will apply. Another requirement is that the severance payment is paid out to you in a tax year. The inflow of the severance payment can also be in the year 2011, however, for the application of the "Fünftelregelung", the severance payment must flow to you in the year 2011. Distributing it over several years is detrimental for the "Fünftelregelung".

Question 2

The unemployment benefit is tax-free, but increases the tax rate on other income within the framework of the progression clause, so you may indeed have to expect a tax payment. You are definitely required to submit an income tax return to the tax office.

Question 3

If your employment relationship is not terminated earlier as part of a severance agreement than it would be possible in case of a regular termination by your employer, i.e. if the notice periods to be observed by the employer are not shortened by payment of a severance payment, the entitlement to unemployment benefit will not be suspended.

Question 4

Discrepancies in the payroll concerning the employer's calculations will ultimately be corrected through the income tax return. This can lead to both payments and refunds. Therefore, by submitting the annual income tax return, errors will definitely be corrected.

I hope my explanations have been helpful to you in the context of your efforts.

Sincerely,

Ulrich Stiller
Tax consultant