What is the progression clause?
Tax-free wage replacement benefits - also known as income replacement benefits for non-employees - and tax-free foreign income are included in the progression clause (§ 32b para. 1 no. 1 EStG).
The progression clause means that the tax-free replacement benefits are added to the taxable income. A special tax rate is then determined for this amount. The taxable income - without the wage replacement benefits - is then taxed at this special tax rate (§ 32b para. 2 EStG). Overall, the progression income leads to higher taxation of your other income.
Most wage replacement benefits are not found in the employer's income tax statement. According to § 32b EStG, these include:
- Transitional retirement benefit
- Transitional retirement benefit compensation
- Unemployment benefit under the Military Pensions Act
- Unemployment benefit
- Integration assistance under the Employment Promotion Act
- Integration assistance under the Social Code
- Parental allowance under the Federal Parental Allowance and Parental Leave Act
- Compensation for loss of earnings under the Infection Protection Act
- Insolvency benefit
- Sickness benefit from statutory health insurance
- Sickness benefit under the Farmers' Health Insurance Act
- Payments from the European Social Fund to supplement bridging allowances
- Payments under the Social Code for living expenses
- Maternity benefit
- Special support under the Maternity Protection Act
- Tax-free top-up amounts or supplements under § 3 no. 28 EStG
- Partial unemployment benefit
- Transitional allowance
- Maintenance allowance
- Compensation for loss of earnings under the Federal Epidemic Act
- Injury benefit
- Care sickness benefit under the Federal Pensions Act
- Allowance under the Maternity Protection Ordinance or corresponding state regulations
- Allowance for maternity benefit
All tax-free benefits not listed in § 32b EStG are also not subject to the progression clause and therefore do not need to be declared in the tax return. This includes, for example, unemployment benefit II (Hartz IV).
Note: The "Corona Tax Assistance Act" made employer subsidies for short-time work benefits and seasonal short-time work benefits tax-free, provided they did not exceed 80 percent of the difference between the target income and the actual income together with the short-time work benefits. This regulation initially applied from 1.3.2020 to 31.12.2020. The tax exemption for employer subsidies for short-time work benefits was then extended until 30.06.2022. The employer subsidy has been taxable again since July 2022.
