Salary extras for your employees

With these salary extras, your employees will receive a higher net salary than with normal salary increase

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With these salary extras, your employees will receive a higher net salary than with normal salary increase (Completion status: July 2019).

| Almost all employees want more “net of gross”. Since German fiscal authorities offer numerous preferential salary components, wage taxes and social security contributions can be optimized. This leaflet shows interesting remuneration components and what should be considered when implementing them. Usually they mean more admin work for the employer, but sometimes it is worth it.

1. What does “tax-privileged“ mean?

On the one hand, if employers grant a regular salary increase, there is often not much left net for the employee

Example

An employer wants to “reward” a dedicated employee (single, childless, confession: Roman Catholic), which is why his salary is increased from 2,000 to 2,200 EUR per month. That is thus 2,400 EUR more wage annually. When doing so the employer annually has approximately 468 EUR of additional wage costs, i.e. the costs of the salary increase for the employer is even 2,868 EUR p.a.

After taxes (EUR 609 higher annual tax burden) and social security contributions (EUR 482 higher annual tax burden), for the employee only has approx. EUR 1,309 per year remain
(2.400 EUR less 609 EUR and 482 EUR) from the salary increase.

On the other hand, tax-privileged remuneration components are partially or completely exempt from taxes and social security contributions. The advantages:

• No more social security contributions are due on the employer side.

Employees pay no social security contributions and no taxes for the additional remuneration. For selected remuneration components, employers only have to deduct a flat-rate wage tax of 15 or 25% instead.

Example (continued)

If the salary increase were tax-privileged, the employee would have EUR 1,091 more in his wallet than a “normal” salary increase of EUR 2,400 per year.

All arrangements have a small disadvantage: For the tax-privileged salary components no contributionsare paid for the employee into the legal old age pension insurance. There will be no pension for this later.

On the other hand, in the case of a normal salary increase, the acquired pension entitlement is offset by higher payments to the health insurance fund if the contribution assessment limit has not yet been reached.

Practical tip If employees want to do something for their old-age provision, a private or tax-privileged company old-age pension provision is more suitable.

The Income Tax Act (Einkommensteuergesetz – EStG) contains numerous preferential salary extras. Below are some examples of interesting additional benefits:

2. Token Gifts

Benefits in kind can be received by employees or their relatives for special personal reasons (e.g. birthday) up to a maximum amount of EUR 60 per occasion, tax and contribution-free.

Notice If the value of the benefit in kind exceeds the exemption limit of 60 EUR, the full amount of the benefitis subject to tax and contributions.

3. Support Benefits

Employers can provide employees with the following benefits in particular:

Private employers can support employees with up to EUR 600 p.a. tax- and duty-free, if the support is justified according to the occasion (e.g. in cases of illness or accident). Higher amounts are possible in special emergencies.

Note: Companies with more than four employees must comply with certain tax exemption requirements listed in R 3.11 para. 2 of the income tax guidelines.

If recovery allowances do not fall under this tax exemption, employers can pay the wage tax at a flat tax rate of 25% for the employees. There are no social security contributions. These subsidies are subsidised up to EUR 156 (per year) for the employee himself, EUR 104 for the spouse and EUR 52 for each child.

The money must be used for recreational purposes. This is to be assumed if it is paid in connection with a holiday. In order to prevent any “problems” during an external audit, employers should take a written confirmation from the employee to the payroll account.

4.Company Bicycles

The non-cash benefit from the provision of a company bicycle is tax-free with effect from 1.1.2019 (initially limited until the end of 2021).

The prerequisite is that the advantage is granted in addition to the wage already owed. In contrast to the tax exemption for job tickets there is no offsetting against the commuting allowance here.

Notice The tax exemption applies both to electric bicycles and to bicycles. However, if an electric bicycle is to be classified as a motor vehicle under traffic law – e.g. electric bicycles whose motor also supports speeds of more than 25 kilometres per hour are regarded as motor vehicles – the regulations on company car taxation must be applied for the assessment of this monetary advantage.

5. Meal Subsidies/Restaurant Cheques

Subsidies, employers grant to their employees on working days, e.g. by meal vouchers, which can be redeemed in restaurants or bars, are to be assessed as a monetary advantage under certain conditions as remuneration in kind (values for 2019: breakfast = EUR 1.77, lunch and dinner each EUR 3.30). Any additional payment by the employee must be deducted from this amount.

The requirements are set out in a letter from the Federal Ministry of Finance(18.1.2019,

Az. IV C 5 – S 2334/08/10006-01). These are in particular:

  • The subsidy must not exceed the official remuneration in kind of the meal by more than

EUR 3.10. In 2019, a food allowance may therefore not exceed EUR 6.40.

(EUR 3,30 + EUR 3,10).

  • The grant may not exceed the actual priceof the meal.
  • For each meal, only one allowance may be claimed per working day(excluding sick leave and holidays).
  • A meal must be purchased with the meal voucher. If individual foodsare purchased, they must be suitable for immediate consumption or intended for consumption during meal breaks.
  • The subsidy cannot be claimed by employees engaged in an activity away from home for which the first three months have not yet expired.
Notice The employer must prove or document in detail compliance with the requirements for the inclusion of a meal with the official remuneration in kind value. 

6. Travel Allowances

Nutzen Arbeitnehmer für den Weg zwischen ihrer Wohnung und ihrer ersten Tätigkeitsstätte ihren privaten Pkw, gewähren Arbeitgeber oft einen Zuschuss, der grundsätzlich zu steuerpflichtigem Arbeitslohn führt. In Höhe der Entfernungspauschale können Arbeitgeber indes eine Pauschalierung der Lohnsteuer mit 15 % vornehmen, die zur Beitragsfreiheit in der Sozialversicherung führt.

7. Company Cars

The provision of a company car for private use is not tax-privileged, but offers the employee economic advantagesif the employer bears the costs. For the employer, the costs are operating expenses, even if the employee uses the company car privately. However, he can also pay part of the costs, which reduces the monetary advantage. There are two options for tax treatment: 

Flat-rate taxation: For the non-cash benefit from private use, 1 % of the gross list price is taxable monthly. In addition, there is 0.03% per month and distance kilometre for journeys between home and the first place of work.

Instead of the monthly 0.03%, it is possible to assess each individual trip at 0.002% per distance kilometre if the employee declares in writing monthly on which days (with date) he drove by car from his home to work (BMF letter dated 4.4.2018, Az. IV C 5 – S 2334/18/10001). However, this only makes sense if there are less than 180 days per year.

Notice Since 1.1.2019, the employer has been obliged to make an individual assessment if the employee requests this and nothing to the contrary arises from the employment contract or from any other legal basis.

 

If the individual valuation does not take place in the wage tax deduction procedure of the employer, only the employee can correct the wage tax via his own tax return.

Logbook: If the employee keeps a proper logbook throughout the year, the private journeys and the journeys between home and the first place of work can be recorded with the proportionate vehicle costs. This method is particularly worthwhile in the case of low private use and/or a high gross list price.

8. Health Services

In § 3 No. 34 EStG, certain health promotion measures – in addition to the already owed wage – are made tax-free, provided that they do not exceed EUR 500 in the calendar year(= exemption amount). This is intended to improve the general state of health and strengthen occupational health promotion.

Since 1.1.2019, the tax exemption only applies to health measures that meet the requirements of §§ 20 and 20b SGB V with regard to quality, earmarking, targeting and certification. This means that health measures started in 2019 must be certified.  

9. Vouchers

Free or discounted payments in kind can be made up to a monthly exemption limit of

EUR 44 (gross) – in total for all advantages – tax- and duty-free. Remuneration in kind includes, for example, goods vouchers (including fuel vouchers).

Notice If the value exceeds the exemption limit of 44 EUR, the benefit is fully subject to tax and contributions.

Example
In January 2019, an employee will receive remuneration in kind of EUR 20. In February, the value of the benefits in kind received amounts to EUR 60.

In January, the benefits in kind remain tax and contribution-free, as the exemption limit of EUR 44 was not exceeded. On the other hand, the benefits in kind of 60 EUR are fully subject to tax and contributions in February. This is because they exceed the exemption limit of EUR 44.

As this is a monthly exemption limit, it is not permissible to make up for unused amounts. This means that the unused amount of EUR 24 (EUR 44 minus EUR 20) in January 2019 cannot be transferred to the following month.

Notice Since the EUR 44 exemption limit only applies to remuneration in kind and not to cash wages, it is decisive what exactly is granted to the employee.

Keep in mind For benefits in kind from the employer’s product range, an annual discount allowance of EUR 1,080 (gross) applies instead of the monthly exemption limit.

Attention: According to a draft bill of the Federal Ministry of Finance this tax savings model shall be restricted from 1. January 2020. The legal amendment is intended to redefine the concept of (non-privileged) cash benefits as distinct from (privileged) non-cash benefits. As a result, the following income does not represent remuneration in kind, but cash benefits:

  • earmarked cash benefits,
  • subsequent reimbursement of costs,
  • Money surrogates,
  • other advantages denominated in an amount of money, and
  • future security services.

According to the new regulations, vouchers should only qualify as non-cash purchases if the exhibitor is identical with the company whose goods or services can be purchased with them. This will considerably restrict the existing voucher models.

10. Job Tickets

With effect from 1.1.2019, the tax exemption for employer benefits (subsidies and benefits in kind) for expenses for the use of public transport in regular employee transport between home and the first place of work was reintroduced. In addition, the tax relief was extended to private journeys in local public transport.

Please notethat only services provided by the employer in addition to the wages already owed are tax-exempt. Benefits that are financed by the conversion of the already owed wage (salary conversions) are not covered by the tax exemption. In addition, the tax-exempt benefits are offset against the travel allowance in the income tax return.

Practical tip Since the job ticket is now tax-free, the monthly EUR 44 threshold is not checked. This means that the exemption limit can be used for other benefits in kind.

11. Kindergarten Subsidies

In addition to the wages owed anyway, the employer’s benefits for the accommodation and care of children of employees who are not required to attend school (usualy until the age of 6 years) in kindergartens or comparable institutions are exempt from tax and social security contributions.

Notice In the case of cash grants, it is a prerequisite that the employee can prove to the employer that they have been used for the purpose in question. The employer must keep the original proofs as receipts for the payroll account.

12. Meals during an external activity

If employers provide their employees with participations in their own company or an affiliated company free of charge or at a reduced price, the non-cash benefit remains tax- and social security-exempt up to EUR 360 per year(§ 3 No. 39 EStG).

The participation must be open at least to all employees who are in a current employment relationship with the company for one year or longer without interruption at the time the offer is announced.

 

13. Employee Shareholdings

The advantages from the private use of company telecommunication devices such as smartphones, mobile phones, laptops, tablets etc. are tax and social security free. The tax exemption applies not only to the private use of the telephone at the workplace, but also if the employer leaves a smartphone to the employee for permanent private use.

The administration interprets the tax exemption regulated in § 3 No. 45 EStG as follows (cf. R 3.45 of the wage tax guidelines):

The tax exemption only applies to the transfer for use by the employer or due to the employment relationship by a third party. In these cases, the connection fees (basic fee and other running costs) paid by the employer are also tax-free.

Attention: For the purposes of tax exemption, it does not matter whether the benefits are provided in addition to the wages already owed or on the basis of an agreement with the employeron the reduction of wages.

Keep in mind Tax exemption does not apply if the employer gives the employee a smartphone, laptop, etc. as a gift or transfers it at a reduced price. In these cases, the employer can tax the pecuniary benefit at a flat rate of 25% if the transfer is in addition to the already owed wage.

 

14. Private use of company telecommunications equipment

The advantages from the private use of company telecommunication devices such as smartphones, mobile phones, laptops, tablets etc. are tax and social security free. The tax exemption applies not only to the private use of the telephone at the workplace, but also if the employer leaves a smartphone to the employee for permanent private use.

The administration interprets the tax exemption regulated in § 3 No. 45 EStG as follows (cf. R 3.45 of the wage tax guidelines):

The tax exemption only applies to the transfer for use by the employer or due to the employment relationship by a third party. In these cases, the connection fees (basic fee and other running costs) paid by the employer are also tax-free.

Attention: For the purposes of tax exemption, it does not matter whether the benefits are provided in addition to the wages already owed or on the basis of an agreement with the employeron the reduction of wages.

 

Keep in mind Tax exemption does not apply if the employer gives the employee a smartphone, laptop, etc. as a gift or transfers it at a reduced price. In these cases, the employer can tax the pecuniary benefit at a flat rate of 25% if the transfer is in addition to the already owed wage.

 

15. Reimbursement of travel expenses

Travel expenses reimbursed by the employer are tax and contribution-free as long as they do not exceed the amounts deductible as income-related expenses.

Example
An employee has his first place of work with his employer and uses his private car for various customer visits (external work). The employer can reimburse him the travel costs for the customer visits at EUR 0.30 per kilometre driven, free of tax and social security contributions.

The following flat-rate meals can be paid tax-exempt for a foreign professional activity in Germany:

  • For one-day business trips without an overnight stay with an absence of more than

more than 8 hours a flat rate of 12 EURcan be considered.

Attention:This also applies if the employee performs his or her external activity overnight (i.e. on two calendar days) – i.e. not overnight – and is therefore also absent for a total of more than 8 hours.

  • For business trips lasting several days, a flat rate of 24 EURapplies if the employee is absent for a full 24 hours (intermediate day).
  • For the day of arrival and departure of an external activity lasting several days with overnight accommodation, a flat rate of EUR 12can be taken into account without checking a minimum absence period.
Practical tip The employer can grant up to twice as high lump sums for additional catering expenses if he pays 25% lump tax on the amounts exceeding the normal lump sums.

 

 

16. Provision of parking spaces free of charge

Especially in large cities and attractive inner-city locations, employers can retain employees by providing them with parking spaces.

If the employer makes a parking facility available free of charge for parking the vehicle during working hours, this is a form of comfort that is free of wage tax and social insurance and is provided in the employer’s own interest. Wages do not exist in this respect. This also applies if the employer himself rents parking or parking spaces from a third party and leaves them to his employees free of charge.

Notice  |  The finance court Cologne (15.3.2006, Az. 11 K 5680/04) decided that the provision of parking space on the part of the employer to his employees is to be treated as a taxable wage. Since this decision contradicts the administrative opinion coordinated uniformly throughout Germany, the tax authorities do not apply the judgement beyond the decided individual case (see also OFD Münster 25.6.2007).

Keep in mind: If the employer reimburses the employee the parking fees which he has paid himself, e.g. for a parking bay rented by the employee in the proximity of the job, tax and social security-obligatory wages are present. Also a lump sum taxation of 15% (§ 40 exp. 2 S. 2 EStG) is not possible, since the parking fees are settled by the distance lump sum and cannot be set separately as income-related expenses.

17. Surcharges for Sunday, public holiday or night work

Supplements paid by employers for Sunday, public holiday and night work in addition to the basic wage are tax-free to a certain extent. The respective limits are regulated in § 3b EStG.

Tax exemption presupposes that the surcharges are paid in addition to the basic wage. They may not be part of a uniform remuneration for the entire activity. It is also necessary that the bonuses are paid for work actually performed on Sundays, public holidays or at night.

Keep in mind The maximum basic hourly wage to which the tax exemption for surcharges applies is EUR 50. In contrast, a maximum amount of only EUR 25 applies under social security law.

18. Flat-rate income tax for benefits in kind (§ 37b)

In order to simplify the taxation procedure, § 37b EStG provides a lump-sum option which enables the employer to levy a lump-sum of 30% of the wage or income tax on benefits in kind to employees and non-employees. This flat-rate tax compensates the recipient for the tax recording of the non-cash benefit. The emplyer pays the tax and informs the employee. This possibility of the compensatory taxation is limited to gifts and business benefits in kind. Benefits to non-German residents and private customers are not to be included in the tax base. The flat-rate tax is not possible if the value of the benefits exceeds 10,000 € per employee and financial year.

Example
An employee can choose between an annual bonus in cash of 1,500 € or a bonus in kind (TV, computer, etc.) in the value of 1,100 €. If he accepts the bonus in kind his employer has to pay wage tax and social security contributions. Depending on his tax rate he may be better of to accept the benefit in kind as the employer pays 30% flat tax and the amount will not have to be taxed by him again.

Disclaimer: The contents of the circular have been prepared to the best of our knowledge and belief. The complexity and constant change of legal matters make it necessary to exclude liability and warranty. The circular does not replace individual personal advice.