"Corona special payments" to employees

(Last Update: 19 November 2020)

At an early stage of the corona pandemic, the German Federal Ministry of Finance [Bundesfinanzministerium, BMF], after consultation with the federal states, announced in a press release dated 3 April 2020 that special payments granted to employees between 1 March 2020 and 31 December 2020 would be exempted from wage tax and social security contributions. The German Corona Tax Assistance Act [Corona-Steuerhilfegesetz] of 19 June 2020, with the insertion of § 3 No. 11a into the German Income Tax Act [Einkommensteuergesetz, EStG], created a corresponding statutory regulation for the tax exemption of the special payments.

In addition to its time limitation, the exemption from wage tax and social security contributions is limited to a bonus amount totalling EUR 1,500.00 per employee. There is no restriction to individual professional groups. However, a requirement is that the special payment is granted in addition to the employee’s agreed and owed wage or salary, i.e. that it actually is an additional bonus payment. In a letter dated 26 October 2020, the Federal Ministry of Finance specified the conditions for the tax exemption to the effect that the aid and support was being provided to mitigate the additional burden of the corona crisis. The bonus payments therefore must be granted for special work efforts of employees during the corona crisis. A coincidence with other reasons is to be avoided. In order to document the event it is advisable, for example, to point out to employees that "the payment is being granted to mitigate the additional burden of the corona crisis".

In labour law disputes that lead to a termination of the employment, the corona special payment therefore should not be paid as a hidden severance payment. In particular, if the employee was released from employment duties for a longer period of time during the relevant period, the corona special payment can be declared as gross wage in any later examination.

The payment must be recorded in the payroll account and should be identified with a corresponding note. It is also possible to provide support in kind. Other tax exemptions, valuation allowances or lump sum taxation options are not affected by the scheme and may be claimed in addition to the tax exemption. However, the BMF letter makes it clear that employer contributions to short-time work compensation are only eligible for tax relief under the conditions of § 3 No. 28a EStG. This regulation was also introduced by the legislator with the Corona Tax Assistance Act of 19 June 2020.

At present, there are also efforts to extend the eligibility period beyond 31 December 2020 to 31 January 2021. A final decision on this is still pending.

An overview of the conditions for exemption from income tax and social security contributions:

• Real bonus payment (or bonus in kind), i.e. no part of the already agreed wage or salary
• The reason for the special payments is the mitigation of additional burdens due to the corona crisis; a (joint) basis for a special payment for other reasons does not meet this criterion (at best, the purpose of the payment should be documented when informing the employees)
• Period: granted (disbursed) between 1 March 2020 and 31 December 2020
• Amount: in total up to EUR 1.500,00
• Entry in the employee's payroll account

When paying the corona special payment, most companies opt to pay a uniform amount that is the same for all recipients. However, this is not mandatory, as different amounts are possible. However, the principle of equal treatment requires that such differences also have to be justified.

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