Tax-free payment by employers
Specifically, the promulgated law provides that employers can pay their employees a tax- and social security-free allowance of up to EUR 3,000 to mitigate inflation (Section 3 No. 11c German Income Tax Act). The employer is free to decide whether and to what extent such a bonus is granted. All cash payments and payments in kind that are paid in addition to the salary that would otherwise be due and that do not replace other remuneration are eligible for a bonus. In particular, this tax exemption is excluded in the case of a salary waiver or salary conversion.
According to the explanatory memorandum to the legislation, the bonus can generally be claimed on a pro-rata basis for each employment relationship. This shall also apply to subsequent employment relationships with different employers, provided that these are concluded in the favored period.
Note: The equal treatment principle under German labor law must also be taken into account when paying out the compensation premium.
Limited benefit period
Tax-free payment of allowances and benefits in kind is possible from October 26, 2022 to December 31, 2024.
As long as all payments are made within this benefit period, employers can pay out the bonus up to an amount of EUR 3,000 free of tax and social security contributions, either as a single payment or in several installments. This is intended to provide employers wwith flexibility in terms of the timing of premium payments.
In order to ensure that the bonus can be correctly classified as a tax-free bonus payment, it should be accounted for separately and identified on the payroll.
In addition, according to the explanatory memorandum to the law, a connection between the grant and price increases must be made clear by the employer, whereby no special requirements are imposed. Payment of the bonus for employees should be associated with a low level of bureaucratic effort, this can be done in any form, such as a corresponding note on the remittance slip.
For reasons of labor and tax law, we recommend that the granting of the bonus be additionally fixed by a written notice to the employees and that this document be kept available for questions in the event of a subsequent external wage tax audit.