Article
How are bonuses taxed?
(As at: Germany)
Employers are very keen to use bonuses as a flexible component of monthly or annual salaries. They use this tool to provide targeted incentives to encourage a certain level of extra effort from employees.
Often, however, the employees’ delight is short-lived. At the very latest when they open their payslip , they are brought back down to earth and realise that the net bonus paid out is lower than they had hoped. For most employees, frustration over the high tax payments lingers, and the intended boost to employee motivation fails to materialise.
How are bonuses How exactly does the 50-euro benefit in kind and the change in the law work? Which tax-free benefits in kind are permitted? We address all these questions and outline the various options.
Table of Contents
Bonuses and tax – how does it work?
Bonus payments increase the total gross salary, which forms the basis for calculating taxes and social security contributions. From a tax perspective, employees receive income from employment that is subject to withholding tax. However, when determining the income tax to be withheld and paid, bonus payments are not treated as regular pay but as other forms of remuneration. As a result, the tax burden on bonus payments is higher, as no tax deductions can be applied to the amount.
Example calculation for a bonus payment included in remuneration
| Regular wages | Cash bonus | Annual wages | |
|---|---|---|---|
| Total gross | €3,000.00 | €528.00 | €36,528.00 |
| - Tax deduction | - €428.41 | - €147.84 | - €5,288.76 |
| - Social security contributions deduction | - €600.75 | - €105.81 | - €7,314.81 |
| = Net earnings | €1,970.84 | €274.35 | €23,924.43 |
How does the 50-euro non-cash benefit work?
The tax-free benefit in kind is an attractive and, above all, cost-effective alternative whereby neither employers nor employees have to pay tax or social security contributions. With a tax-free benefit in kind, employers have the option of providing their employees with a benefit worth up to 50 euros. However, it is important to note that this must be exclusively a benefit in kind.
Example calculation for the provision of a tax-free benefit in kind
| Regular salary | Monthly bonus as a benefit in kind | Annual salary | |
|---|---|---|---|
| Total gross | €3,000.00 | €50.00 | €36,600.00 |
| - Tax deduction | - €428.41 | - €0 | - €5,140.92 |
| - Social security contributions deduction | - €600.75 | - €0 | - €7,209.00 |
| = Net earnings | €1,970.84 | €50.00 | €24,250.08 |
The extra amount compared to the cash bonus: €325.65
Legislative amendment regarding tax-free benefits in kind in January 2020
At the end of November 2019, a legislative amendment was passed which significantly restricts the scope and options for tax-free benefits in kind. The following provision was set out in the resolution.
(Federal Council Document 552/19 (Resolution), p. 10):
“Section 8 is amended as follows:
1. a) The following sentences are added to paragraph 1:
‘Income in cash also includes earmarked cash payments, retrospective reimbursements of expenses, cash equivalents and other benefits denominated in a monetary amount. Sentence 2 does not apply to vouchers and prepaid cards which exclusively entitle the holder to purchase goods or services and which meet the criteria of Section 2(1)(10) of the Payment Services Supervision Act.’“
What exactly does this mean, and which benefits will continue to be classified as tax-free benefits in kind from 1 January 2020?*
*Please note that Awardit does not provide tax advice and accepts no liability whatsoever for the applicability of tax relief. Please contact your tax adviser for further information.
Which benefits will continue to be classified as tax-free benefits in kind in 2020?
Vouchers/Prepaid cards (closed-loop)
Provided that these can be used exclusively for goods or services.
Prepaid card (Controlled Loop card)
Provided that these can be used exclusively for goods or services at contractually affiliated merchants.
Which bonuses don’t work (anymore)?
Prepaid card (open-loop card)
An open-loop cash card has all the functions of a standard debit or credit card. You can withdraw cash, make bank transfers or buy foreign currency, for example. These features mean that the cash card does not qualify as a non-cash benefit for tax purposes.
Earmarked cash benefits | Retrospective reimbursement of expenses | Cash equivalents and other benefits denominated in a monetary amount
Since 1 January 2020, these benefits have been classified as ‘income in cash’ and are therefore fully taxable.