Do social security contributions have to be paid on a severance payment?
January 4, 2023 | 50,00 EUR | answered by Albrecht Schlüter
Dear team,
I am Chloé Fischer and I am facing the decision of whether to accept a severance package or not. My employer has offered me to leave the company and pay me a severance package. Now I am wondering if social security contributions need to be paid on this severance package and how this would affect my financial situation.
I have been working in the company for 10 years and have always gotten along well with my colleagues. Unfortunately, the situation has deteriorated recently and I no longer feel comfortable in my work environment. That's why I have seriously considered my employer's offer.
However, I am worried that I will not be left with much of the severance package if social security contributions have to be paid on it. I am wondering if it is possible to receive the severance package tax-free or if there are certain regulations that I need to consider.
Can you please explain to me if social security contributions have to be paid on a severance package? Are there ways to avoid or minimize them? What would be the effects on my financial situation and what steps should I take in this situation?
Thank you in advance for your help and support.
Kind regards,
Chloé Fischer
Dear Chloé Fischer,
I can understand that the decision of whether to accept your employer's severance package is an important and perhaps difficult one. It is good that you are considering these questions and seeking information to make an informed decision.
Firstly, I would like to address whether social security contributions must be paid on a severance package. In principle, severance packages are subject to social security contributions, meaning that contributions to statutory health, long-term care, pension, and unemployment insurance are due. The exact amount of deductions depends on various factors, such as the amount of the severance package and your previous income.
However, there are also ways to avoid or minimize social security contributions on severance packages. One option is to receive the severance package in installments, as in this case, contributions are only paid on the part of the severance package that is paid out in that particular month. Another option is to utilize exemptions and regulations that aim to reduce the burden of social security contributions.
It is important to note that there are specific regulations and exemptions that apply to severance packages. For example, you can use an exemption of up to 1,800 euros, which remains tax-free. Furthermore, there is the possibility to include the severance package in a so-called "fifth rule", which aims to reduce the tax burden on severance packages.
Regarding your financial situation, it is advisable to seek advice to explore the best options for you. A tax advisor can help you understand the tax implications of a severance package and identify potential optimization opportunities.
In this situation, it is important that you proceed calmly and thoughtfully and inform yourself well before making a decision. I hope that this information will assist you in your decision-making process and am available for further questions.
Best regards,
Albrecht Schlüter
