In the event of termination by the employer, severance pay is often paid as compensation. However, this must be fully taxed. We explain how this works and where you declare your severance pay in Taxfix.
What is severance pay?
A severance payment is a one-time special payment made by the employer to an employee to terminate employment with the termination agreement. This compensates the working person for the loss of the job and, above all, for the future loss of earnings. Thus, a severance payment may not be a payment for entitlements already earned in the past, such as salary not yet paid, company car or bonus payments.
There is no legal entitlement to severance pay. Thus, the amount of a possible payment is also not specifically regulated. In general, half a month's salary per year of employment with the company is considered appropriate.
Is severance pay taxable?
Severance pay is taxable and is therefore subject to wage tax deduction in the same way as salary. Severance payments are considered extraordinary income and are fully taxed. However, you do not have to pay social security contributions (pension, health, nursing care and unemployment insurance).
As your income increases, so does your tax rate. This can have a negative effect, especially in the case of a high severance payment. Your tax rate then rises sharply and you have to pay more tax.
What is the one-fifth rule?
The so-called one-fifth rule (Fünftelregelung) offers the possibility of somewhat cushioning the amount of tax on a severance payment. The full amount is taxed, but only one fifth affects the tax rate.
Normally, the one-fifth rule is already applied by the employer when the payment is made, if the conditions for this are met. If this is not the case, the tax office will subsequently check the application of the one-fifth rule for you and apply it if necessary. This can lead to a tax refund.
How do I declare the severance pay in Taxfix?
The severance pay is always part of your annual payslip (Lohnsteuerbescheinigung) from your employer.
If your employer has applied the one-fifth rule, the gross amount is on line 10 of the annual payslip. If it was not applied, the severance pay is part of the total gross salary in line 3. In addition, the gross amount of the severance pay is listed in line 19 as information for the tax office.
In the Taxfix app, in both cases, you simply enter the data from your annual payslip in the "Income" section. The severance payment or the application or non-application of the one-fifth rule does not have to be entered again separately. The tax office receives all the necessary information exclusively via the annual payslip.