calculation of severance pay
November 12, 2010 | 40,00 EUR | answered by Oliver Burchardt
Dear Sir or Madam,
the following situation:
I work part-time (20 hours) with tax class 5, annual salary of 28,800 euros. The company is now going through layoffs with severance pay. The severance pay calculation includes:
- Years of company seniority
- Personal age
- Number of children
Now I am offered two severance pay options:
- one-time severance pay of 67,200 euros with termination date 31.03.2011, or
- severance pay of 71,250 euros with termination date 31.12.2011.
Using a severance pay calculator, where the salary in 2011 and the amount of the severance pay must be entered, I calculated that it would not be worth staying employed until 31.12.2011, as the reduction in the net severance pay amount is higher than the net salary I earn every month.
Net severance pay according to calculator when leaving on 31.03.: 55,000
Net severance pay according to calculator when leaving on 31.12.: 47,081
Net earnings in total for April-December: 10,872
This means a severance pay loss of 7,919 euros compared to earnings of 10,872 - no relation for me to work for 9 months.
My questions:
- is what I calculated generally correct (I don't mean the specific numerical value but the general calculation)?
- does the unemployment benefit I will receive from April onwards factor into the net income calculation?
- my husband is the main earner of the family with an annual income of approximately 80,000 euros: does this need to be taken into account somehow? We are assessed for tax purposes jointly.
Dear inquirer,
Thank you for your inquiry, which I am happy to answer as part of an initial consultation.
Please note that the tax assessment is based on the information provided. Adding or omitting information can significantly affect the outcome.
I can understand your calculation in principle. However, online calculators always simplify things, as reality is often more complex. Additionally, they usually only show the effects on wage taxes. This is too limited, as wage tax is not a separate tax, but rather an advance payment on income tax.
In your case, the questions you raised are indeed the key points of the calculation.
Although unemployment benefits are not taxable income, they trigger what is known as the progression clause. Specifically, this means that your tax rate increases, on the basis of which the tax is calculated. To illustrate this with an example:
You earn 28,000 EUR without unemployment benefits. You pay nearly 5,000 EUR in income tax (for simplification without including your husband), which corresponds to a tax rate of nearly 17.9%. Now you receive 5,000 EUR in unemployment benefits. You will now pay 5,500 EUR in income tax at a tax rate of 19.6%. In the end, a portion of the unemployment benefits is indeed taxed.
The combination of severance pay and unemployment benefits leads to a very complex calculation of the actual tax effect, but ultimately results in a higher tax payment on the severance pay. In your case, this reduces the "severance pay loss."
Through joint assessment, all income earned by both your husband and yourself is combined, and the tax burden is calculated based on the total income earned. An isolated consideration only of the wage tax effects for you could potentially lead to a wrong decision. It is important to add up the total income and make decisions based on that.
Roughly speaking, the tax burdens look as follows:
Severance pay by 31.12.2011: Total income 180,050 EUR, after all taxes are deducted, you have 112,183 EUR left.
Severance pay by 31.3.2011: Total income 154,400 EUR, unemployment benefits 10,000 EUR, after deducting all taxes, you have 118,500 EUR left (108,500 EUR from taxable income and 10,000 EUR from unemployment benefits).
Please note that both the tax calculations and the determination of unemployment benefits are non-binding model calculations for which I cannot assume liability due to lack of further information.
I hope that my explanations have provided you with an overview of the tax situation.
Oliver Burchardt
Tax consultant
