Short-time work (Kurzarbeit) & Taxes: What workers in Germany should know

The coronavirus pandemic and the political actions taken to contain it have shaped the job situations of many. Since March 2020, for example, short-time work (often known by its German name, Kurzarbeit) has been announced for more than eleven million employees in Germany. What do those affected have to expect in terms of taxes? 

What is the short-time work allowance (Kurzarbeit)?

Short-time work compensation is a state tool designed to help avoid mass layoffs during economic crises, by providing state support to ailing companies. The Federal Employment Agency (Bundesagentur für Arbeit) bears the costs for this.

If your employer applies for short-time work for you, you will receive 60 percent of your lost earnings from the state (67 percent if you have children). Some employers top up this percentage a little bit.

In May 2020, the German federal government decided on further increases within the Social Protection Pact II (Konjunkturpaket II) for those who have been particularly hard hit. If your working hours have been reduced by more than 50 percent, the following applies:

• From the fourth month, you can receive a short-time work allowance of 70 percent of your salary (77 percent for parents)
• From the seventh month, the percentage increases to 80 percent (87 percent for parents)

The advantage, from your employer’s perspective, is that they can save on salary and social security expenses over a certain period, making it easier to retain your job. 

Who can make use of the short-time work allowance?

An employer can register short-time work for all employees who are in a permanent employment relationship with them. This also includes temporary workers and employees with fixed-term contracts. Self-employed persons and mini-jobbers, on the other hand, are unfortunately not eligible. 

The short-time work allowance can be mutually beneficial: Although you will receive a lower income for some time, you can start working again as soon as your company’s situation improves. The aim is to save your company from having to terminate your contract due to a lack of operating income. 

Short-time work allowance and taxes

Most employees in Germany are used to the fact that income tax is automatically deducted from their monthly paycheck. They might take a look at their payslip from time to time but nothing else is required of them. You may be wondering if the short-time work allowance will change that. 

Is the short-time work allowance taxable?

The short-time work allowance itself is tax-free. This means you do not have to pay taxes on the amount you receive. Nevertheless, it is subject to the “progression proviso” and can lead to an additional tax payment. Here’s why.

In Germany, the tax rate increases with income. This is called tax progression (Steuerprogression). If you earn a lot, you also pay more in taxes. All of your income is added up and results in your tax rate for the year, depending on the amount and your tax class. 

The progression provisio & wage replacement benefits

Wage replacement benefits (Lohnersatzleistungen), including, for example, unemployment benefit I or parental allowance, are not taxed but are subject to the progression proviso. This means that they are added to the sum of your annual income and thus increase your tax rate - this increased tax rate is then applied to all of your taxable income. 

The proportion of your income that comes from the short-time work allowance remains tax-free, of course, but if you have income from other sources, it may be taxed.  

How is this different to before? While your monthly salary is taxed directly, resulting in a net amount in your tax account, the short-time work allowance can result in tax arrears. You may find at the end of the tax year that you have paid too much or too little tax via your regular wage deduction. 

Watch out: Short-time workers must fill out a tax return

To calculate this, the tax office will want to see what income you had throughout the year and how much tax you have already paid. Therefore, if you have received short-time work benefits of more than 410 euros, you must submit a tax return. The deadline for submitting your 2020 tax return is July 31, 2021. 

Therefore, you should start thinking in good time about which expenses you can deduct from your tax return, and carefully keep proof of these expenses. This way, you can reduce your taxable income.

On its website, the Taxpayers' Association (Bund der Steuerzahler) has calculated several cases in which the short-time work allowance results in either a tax refund or a back payment. You should take a look at these to classify your situation correctly and, if necessary, put money aside for next year. 

For example, a single person without children (tax class I) on a regular salary of 2.500 euros per month, who has been on short-time work for six months (50 percent), could receive a tax refund of around 300 euros per month.