Can I pay out a severance package in installments?
November 29, 2023 | 50,00 EUR | answered by Edith Hartmann
Dear tax advisor,
my name is Bernd Voigt and I have been working in a medium-sized company for 15 years. Due to a restructuring, I will soon be entitled to a severance payment. However, I am unsure if it is possible to receive the severance payment in installments, as I am concerned that a one-time payment could have tax disadvantages.
My concern is that a large lump sum payment could result in a higher tax burden, as I would end up in a higher tax bracket. Therefore, I am considering if it is possible to receive the severance payment in multiple installments to reduce the tax burden. Additionally, it would be financially beneficial for me if I did not have to receive the severance payment all at once, but could spread it out over a longer period of time.
I am wondering if it is legally and tax-wise possible to receive a severance payment in installments. Are there specific requirements that must be met to receive the severance payment in this manner? What would be the tax implications of receiving the payment in installments compared to a one-time payment? And what are the advantages and disadvantages of receiving the payment in installments?
I would greatly appreciate it if you could help me with this question, as I am not well-versed in tax matters and unsure of the best course of action regarding my severance payment.
Thank you in advance for your assistance.
Sincerely,
Bernd Voigt
Dear Mr. Voigt,
Thank you for your inquiry regarding the payout of a severance in installments. I would be happy to assist you and provide you with all the relevant information on this topic.
In general, it is possible to receive a severance in installments. However, this must be specified in the severance agreement between you and your employer. It is important that the installment payments are clearly defined, both in terms of the amount of each installment and the period over which the payout will occur. Additionally, any potential interest or other terms should also be outlined in the agreement.
From a tax perspective, receiving a severance in installments has both advantages and disadvantages. With a one-time payout of a severance, it is typically treated as an extraordinary income and is subject to a higher tax rate. A gradual payout could be more tax-efficient, as the individual installments may fall into lower tax brackets, thereby reducing the overall tax burden. However, the tax liability can still vary depending on the amount of the installments and the individual tax rate.
It is important to note that there are no specific requirements to receive a severance in installments. This must be negotiated individually between the employee and the employer. It is advisable, however, to seek tax advice before finalizing the severance agreement to understand the tax implications of a gradual payout and potentially find tax-efficient solutions.
In conclusion, receiving a severance in installments can be tax advantageous, but it is important to carefully consider all financial and tax aspects to find the best solution for your individual situation.
I hope this information is helpful to you and I am available for any further questions.
Best regards,
Edith Hartmann, Tax Advisor
