Since the beginning of the crisis in Germany, companies have announced reduced working hours for over 11 million workers. The compensation for short time work is tax-free, but it requires the obligation to submit the tax return at the end of the year with a high probability of having to return money to the tax authorities.

For employees, payment for short time work (Kurzarbeitgeld) has an impact on their income which is lower than usual and not only in the months in which they receive it. The underlying annual income for tax purposes also changes, because although the compensation for short time work is in itself tax-free, it is subject to the so-called progression clause, which means that the Kurzarbeitgeld increases the tax rate and thus the tax burden on residual income.

The extent of the increase in the tax burden, however, can only be determined after the tax return has been submitted. For periods in which the employee works normally, i.e. receives income subject to social security contributions, the employer deducts wages tax as usual. The tax return will ultimately be used to check how much income tax the employee actually has to pay, taking into account the short-time work allowance, and how much tax he has already paid through the deduction of income tax.


When does the Kurzarbeitgeld raise the tax rate?
Uwe Rauhöft, managing director of the BVL (Bundesverbands Lohnsteuerhilfevereine) says that if an employee receives 100% of the short-time working allowance for a certain period of time, i.e. no working hours or working days per week, he will almost always receive a refund, because the increase in the tax rate does not usually compensate for the lack of income (the reason is that too much payroll tax is regularly withheld during months of normal employment). The situation is different if, for example, only 50% of short-time work allowance are paid, because those who receive tax-free benefits in addition to their wages will often have to pay taxes in arrears.

Rauhöft is convinced that many employees in temporary short-time working hours will receive a tax refund. However, he advises that any possibility of having to return money to the tax authorities should be taken into account in order to not be taken by surprise when making the tax assessment.

The Taxpayers’ Association has calculated several scenarios:

  • Payment of 50% tax arrears due to compensation for part-time work
    The first example concerns a married couple with two dependent children where only one adult works (tax class 3) and earns 4,500€ gross per month. This year, however, he works regularly for only 9 months and for 3 months receives 50% for the short-time working hours allowance. During this period, his gross income is 2,250€ plus about 881€ of short-time work allowance. Overall, in that year, he will receive a salary replacement allowance of 2,643€. He has already paid 4,329€ in payroll tax for the 9 months on a regular salary and 81€ for the 3 months on a salary of 2,250€, i.e. a total of 4,410€. For 2020, together with the compensation for short-time working hours, there is an income tax of 4,650€ and this means that the worker still has to pay 240€ of taxes.


  • Payment of 100% of the tax arrears due to compensation for short-time working hours
    Second example: the same scenario as above, but with a short-time work allowance of 100% for 3 months instead of 50%. In this case the tax burden has changed, since while the wage tax for the 9 months of regular work remains unchanged at 4,329€, the 3 months in which compensation for short-time work is received (in this case 2,072€ per month) remain tax-free. The income tax calculated for the whole year would be 3,722€ and, in this case, the employee has already paid too much tax and will therefore receive a refund of €607 from the tax authorities.


  • Short-time work allowance: when additional tax payment is required
    Matthias Warneke, Director of the German Taxpayer’s Institute (DSi), warns against the general application of the 2 examples just mentioned and he explains that: with taxes it always depends on the individual case, since the progression is never linear. The point on the marginal tax curve at which the relevant person is located and from which point the tax rate increases is always decisive. In other words, those who receive a short-time work allowance of 50% may also receive refunds and those who receive a 100% short-time work benefit may also be forced to pay something to the tax authorities. Some tax class combinations of married couples may lead to a different situation. In the case of spouses assessed together, the income of the partner is also subject to the progression clause. The employer’s contributions for short-time work should also be taken into account.