Which income replacement benefits must I declare?

Wage or salary replacement benefits are received when your employer no longer pays you your full salary for various reasons. These benefits are tax-free, but they are included in the calculation of your tax rate (progression clause). This means they are used to determine your tax rate, which can lead to a higher percentage being applied to your other income. Therefore, you must declare all wage replacement benefits in your tax return.

These include:

• Unemployment benefit I,
• Short-time work allowance and seasonal short-time work allowance,
• Insolvency benefit in the event of employer insolvency,
• Parental allowance under the Federal Parental Allowance and Parental Leave Act,
• Maternity benefit and maternity benefit supplement,
• Sickness, injury, and transitional benefits for disabled persons or similar wage replacement benefits,
• Top-up amounts and partial retirement bonuses under the Partial Retirement Act or civil service law,
• Income security benefits for older employees from the employment agency.

If you receive tax-free wage replacement benefits of more than 410 Euro per year, you are required to submit a tax return. The recipient receives a certificate for the wage replacement benefits received, which must be declared in their tax return. Most wage replacement benefits are provided by social security institutions, such as the employment agency and health insurance, and are reported to the tax office using a special "certificate for the tax office". In addition, since 2011, the benefit providers have been reporting the income replacement benefits paid electronically to the tax office, stating the respective tax identification number. If the employer pays the benefits, they are certified in the "printout of the electronic wage tax certificate", e.g. short-time work allowance, maternity benefit supplement, top-up amount, and partial retirement bonus.

Note: Under the "Corona Tax Assistance Act", employer subsidies for short-time work allowance and seasonal short-time work allowance were made tax-free, provided they did not exceed 80 percent of the difference between the target salary and the actual salary together with the short-time work allowance. This regulation was initially limited from 1.3.2020 to 31.12.2020. The tax exemption for employer subsidies for short-time work allowance was then extended until 30.06.2022. The employer subsidy has been taxable again since July 2022.

(2023): Which income replacement benefits must I declare?

What do I not need to declare as wage replacement benefits in the tax return?

There are also tax-free benefits that are not included in the progression clause and therefore do not lead to a higher tax rate. These include in particular:

• Child benefit, parental benefit, housing benefit, social assistance,
• Unemployment benefit II,
• Additional expense allowance for 1-euro jobs.
• Unemployment benefit received from abroad,
• Daily sickness allowance from private health insurance,
• Winter allowance and additional winter expenses,
• Strike pay and lockout pay,
• Military pay for voluntary military service,
• Pocket money for youth voluntary services (from 2011),
• Start-up subsidy for business founders (§ 93 SGB III),
• Care support allowance from 2015 (§ 44a para. 3 SGB XI).

(2023): What do I not need to declare as wage replacement benefits in the tax return?

Do I have to pay tax on strike pay?

Strike pay and so-called lockout support paid by the union during a strike are not considered taxable wages.

They are completely tax-free and are not subject to the progression clause. Therefore, they do not need to be declared in the income tax return.

(2023): Do I have to pay tax on strike pay?

How do wage and income replacement benefits increase my tax rate?

Income replacement benefits are paid to you tax-free, but they affect the progressive tax rate. This means that the tax-free income is added to your income to determine your personal tax rate.

Example: A single mother has an annual income of 26.000 Euro gross. In addition, she receives 6.000 Euro parental allowance. This makes a total income of 32.000 Euro. The income tax for this would be around 5.295 Euro, which corresponds to a tax rate of 16.54 percent. However, this tax rate is only applied to the income without parental allowance, so the tax is 4.300 Euro.

Without the progressive tax rate, the tax for an income of 26.000 Euro would only be 3.556 Euro. This means that for the actually tax-free parental allowance of 6.000 Euro, 744 Euro more in taxes must be paid. In addition, the solidarity surcharge (for very high incomes) and church tax may increase.

In this way, income is also taxed that would actually be below the basic allowance and thus tax-free. If the actual income including income replacement benefits exceeds the basic allowance, the increased tax rate can be applied. However, if the income remains below the basic allowance even with income replacement benefits, it does not have to be taxed.

If you receive only income replacement benefits within a year, everything remains tax-free, and the progressive tax rate is not applied.

If you have to repay an income replacement benefit later, for example because you previously received too much unemployment benefit, you should submit a tax return. This results in negative progression, as the repaid income replacement benefit can reduce your tax rate.

However, if you had no taxable income in the relevant year, it is not worth submitting the repaid income replacement benefit, as this has no tax implications for you.

(2023): How do wage and income replacement benefits increase my tax rate?

Why might individual assessment for spouses be beneficial in the case of wage replacement benefits?

If only one spouse receives wage or income replacement benefits, while the partner has only taxable income, it may be beneficial to choose individual assessment for spouses instead of joint assessment.

With wage replacement benefits, the tax rate for the taxable income would increase in a joint assessment, which would also increase the amount of tax both spouses have to pay.
In the case of individual assessment for spouses, both spouses are considered separately for tax purposes, so the progression clause does not affect the spouse who does not receive tax-free wage replacement benefits. You should definitely calculate this option, even if the favourable splitting rate for joint assessment is no longer applicable in this case.

(2023): Why might individual assessment for spouses be beneficial in the case of wage replacement benefits?

What are income replacement benefits?

Recipients of social benefits are not always employees. Income replacement benefits, which are subject to the progression clause, are also paid to traders, self-employed persons, freelancers or farmers.

These income replacement benefits are tax-free, like wage replacement benefits, but they still affect the amount of tax payable. This is because income replacement benefits are included in the progression clause and thus have a significant impact on the calculation of the personal tax rate.

You receive income replacement benefits as a non-employee, for example as a freelancer or trader:

• Benefits under the Maternity Protection Act (maternity pay, parental allowance)
• Benefits from statutory health insurance (sickness benefit payments)
• Benefits under the Artists' Social Insurance Act

Income replacement benefits subject to the progression clause (e.g. unemployment benefit, parental allowance, insolvency benefit, sickness benefit, maternity pay and comparable benefits from an EU/EEA country or Switzerland) must be entered in the main tax form.

(2023): What are income replacement benefits?

Which income replacement benefits do not need to be declared in the tax return?

You do not need to declare the following benefits as income replacement benefits in your tax return. They are not subject to the progression clause:

• Daily sickness allowance from private health insurance.
• Start-up grant for new businesses
• Unemployment benefit II
• Parental benefit, housing benefit, social assistance, child benefit
• Supplementary winter allowance and additional winter allowance
• Strike pay and lockout pay
• Military pay for voluntary military service, pocket money for youth voluntary services
• Pocket money for youth voluntary services
• Care support allowance from 2015 (§ 44a para. 3 SGB XI).

(2023): Which income replacement benefits do not need to be declared in the tax return?

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. These include according to § 32b EStG:

• 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 top up bridging allowances
• Benefits under the Social Code that serve as a means of subsistence
• 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 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.

(2023): What is the progression clause?

What special conditions apply to sickness benefit?

In the event of prolonged incapacity for work, employees are entitled to sickness benefit from the health insurance after the employer's 6-week salary continuation period has expired.

This benefit is treated differently for tax purposes:

• Sickness benefit from statutory health insurance is tax-free but is included in the progression clause. This means that the tax rate applied to the remaining income is higher, leading to an increased tax burden.
• Sickness benefit from private health insurance is tax-free and is not included in the progression clause.

This different treatment is acceptable according to the Federal Fiscal Court.

Sickness benefit from statutory health insurance is included in the progression clause not only for those with compulsory insurance but also for those with voluntary insurance.

However, sickness benefit from private health insurance is rightly disregarded. While statutory health insurance is largely based on the principle of solidarity, private health insurance follows the equivalence principle. The sickness benefit is therefore based on corresponding contributions (BFH ruling of 26.11.2008, BStBl. 2009 II p. 376).

(2023): What special conditions apply to sickness benefit?

What are the special features of insolvency payments?

For employees of a company whose assets are subject to bankruptcy proceedings, the Federal Employment Agency pays insolvency benefit, formerly known as bankruptcy compensation. This insolvency benefit is tax-free but subject to the progression clause.

If the employee has transferred their wage claim to a third party, such as a bank, for the advance financing of wages before applying for insolvency benefit, the benefit is paid to the third party. Nevertheless, the insolvency benefit is still attributed to the employee and increases their tax rate. The employee receives a certificate from the employment agency, which can be attached to their tax return.

Special feature:
Expenses related to tax-free income are generally not deductible as income-related expenses. However, this is different for commuting between home and workplace during the period for which insolvency benefit is paid. The journeys are not for obtaining the insolvency benefit, so there is no direct economic connection between the travel costs and the insolvency benefit. Instead, the journeys are related to the employment, even during the period for which the insolvency benefit is paid. Therefore, the travel costs are deductible as income-related expenses (BFH ruling of 23.11.2000, BStBl. 2001 II p. 199).

(2023): What are the special features of insolvency payments?