Ask a tax advisor on the topic of Severance pay

Net severance pay

March 1, 2011 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

Dear tax consultant,

I have some questions regarding the taxation of a severance payment.

- Background information:

My employer terminated my employment at the end of 2010.
A settlement was reached in February 2011 in the labor court. It states that

- the parties agree that the employment relationship ended due to the employer's ordinary termination without the fault of the employee on December 31, 2010,

- the employment relationship was handled according to the contract until the termination date,

- the employer will pay the employee a social severance payment according to sections 9, 10 of the Protection Against Unfair Dismissal Act in the amount of €20,000.00 gross for the loss of the job.

In other words, I withdraw the lawsuit, acknowledge the termination, and receive a severance payment in return. I expect to receive the severance payment in March 2011.

- Personal information:

Tax class I, single
Income tax allowance for 2011 on tax card: €17,500 per year;
Total gross income received in 2010: €48,000;
I have been receiving sick pay since December 2010 until presumably July 2011, and possibly thereafter unemployment benefits
I will most likely receive an occupational disability pension from June 2011, which would be taxed based on the earnings portion;

Therefore, I am currently not sure of the exact annual income I will have in 2011 and how high my tax burden will be.

- Questions:

Naturally, my goal is to keep as much of the gross severance payment as possible.

1. How is the taxation of my severance payment exactly and what can I do to have a direct tax-reducing impact on the payment from the employer?

2. Sick pay, possibly unemployment benefits, and occupational disability pension are subject to the progression clause, as far as I know. What effect does this have on the taxation of the severance payment in March 2011?

3. Do you have any other tips on what I should consider before the payment regarding communication with the tax office, etc.

Thank you for your answers!

Dipl.BW/SB Ulrich Stiller

Dear inquirer,

Thank you for your inquiry, which I would like to answer based on your information and in the context of your situation in a preliminary consultation as follows:

The severance payment constitutes income from non-self-employment according to § 19 paragraph 1 no. 1 EStG and is to be considered for tax purposes in the year of receipt, here in 2011. Even taking into account the registered tax-free allowance on your income tax card, your employer will not deduct any income tax from you. The severance payment is also exempt from social security contributions.

However, in 2012 you will need to file an income tax return for 2011. In this case, you will need to claim legal and court costs as deductible expenses in the N attachment under income from non-self-employment.

The sickness benefit and unemployment benefit I are subject to the progression clause according to § 32b EStG in the context of an employment subject to social security contributions, whereas the occupational disability pension would be tax-free if paid by a statutory accident insurance. It is subject to income tax with the yield portion if paid by a private insurance, and subject to income tax with at least 50% of the tax portion as other income if the occupational disability pension is paid from the statutory pension insurance. In any case, the occupational disability pension is not subject to the progression clause.

A precise tax calculation will be determined conclusively upon submission of the income tax return. Depending on the level of the progression clause and the pension affecting it, a supplementary payment may result, which can only be calculated based on the exact figures.

I hope I could be of assistance to you.

Best regards,

Ulrich Stiller
Tax advisor/Diploma in Business Administration