Eco-Social tax reform 2022: Impact on payroll

Overview

2022 brings some - partially significant - legal changes in payroll accounting. The eco-social tax reform recently enacted contains a significant part of the innovations, such as the gradual tariff reduction for income and wage tax, the increase of the family bonus plus and the possibility of tax-free profit participation. Therefore, we summarize the essential contents of the eco-social tax reform and its impact on payroll accounting to plan ahead below.

Reduction of wage and income tax

The first tariff level was already reduced from 25 % to 20 % in 2020. Now, the eco-social tax reform has resulted in further relief in wage and income tax, namely in the second and third tariff levels. The second tariff tax rate will be reduced from 35 % to 30 % and the third tariff tax rate from 42 % to 40 %, in the initial years 2022 and 2021 so-called “mixed tax rates” will be applied. Instead of the originally planned reduction of the second tariff level from 35 % to 30 % from July 2022 during the year, a so-called “mixed tax rate” of 32.5 % for the second tariff level will be applied from 1 January 2022, to avoid significant additional complexity in the payroll accounting. From calendar year 2023, the full reduction of the second tariff level to 30 % will apply. As of 1 January 2023, the third tariff level will be reduced as well, whereby instead of the reduction from 42 % to 40 % during the year from July 2023, a “mixed tax rate” of 41 % will be considered from 1 January 2023. From calendar year 2024, the full reduction of the third tariff level to 40 % will then apply. If the agreed tax reduction cannot be taken into account in payroll accounting yet (eg due to a pending software update), the employer must carry out a roll-up as soon as possible, but by 31 May 2022 at the latest.

Tax-free profit participation for employees

Profit participation by the employer to active employees is tax-free up to EUR 3,000 per calendar year from 1 January 2022, whereby the tax exemption is subject to certain conditions. The profit participation must be granted to all or specific groups of employees. Insofar as the sum of the profit participation granted annually exceeds the corporate law earnings before interest and taxes (EBIT) of the financial years ending in the last calendar year, there is no tax exemption. Deviating from this, in the case of companies that are integrated into a group structure, the previous year's EBIT of the group can also be used as an alternative to the previous year's EBIT of the (individual) company. Furthermore, the profit participation may not be paid in place of the remuneration previously paid or in place of a regular wage or salary increase. Therefore, it must not be a salary conversion. Likewise, profit participation may not be based on a wage-structuring regulation (eg CLA). It is exclusively a wage tax exemption, there is currently no exemption in the area of social security and ancillary labor costs for such profit participations.

Increase in family bonus plus and child allowance

The family bonus plus will be increased from 1 July 2022, from EUR 125 per month to EUR 166.68 per child up to the age of 18 (EUR 2,000.16 per year from 2023). For children over the age of 18 – for whom family allowance is still paid – the family bonus plus will be increased from EUR 41.68 per month to EUR 54.18 (EUR 650.16 per year from 2023). There is also a gradual increase in the child allowance from EUR 250 to up to EUR 450 (tax assessment 2023) per child and year, which can also be paid out as a negative tax

Increase in traffic deduction

The surcharge on the traffic deduction will be increased from the previous EUR 400 to EUR 650 and the surcharge will be gradually reduced to zero for incomes between EUR 16,000 and EUR 24,500. This strengthening of low earners was implemented instead of the initially rumored reduction of social security contributions.