Service: Severance Pay Calculation

The payment of severance pay upon termination of an employment relationship often raises questions in payroll accounting. Social security, taxes (particularly the fifth rule) and the effects on unemployment benefits must be considered exactly separately.

1. Social insurance: Usually non-contributory

A "real" severance payment, which is paid because of the loss of the job (compensation for the loss of future earning opportunities). no wages subject to social insurance contributions within the meaning of Section 14 SGB IV.

Conclusion SV: A real severance payment is completely exempt from social security (Health, nursing care, pension and unemployment insurance do not apply).
Beware of “false” severance payments: If outstanding salary claims, vacation compensation or overtime are actually paid out under the guise of severance pay (hidden additional payment), these amounts are fully subject to social security liability!

2. Taxes & the fifth rule (§ 34 EStG)

In contrast to social security, severance pay always subject to wage tax in full. Since a high one-off payment would lead to a massive tax burden due to tax progression, the legislature has introduced the so-called Fifth rule created.

How does the fifth rule work?

The severance payment is fictitiously spread over five years in order to cushion the tax progression.

Step 1

The tax is calculated on the regular annual income (excluding severance pay).

Step 2

The tax is calculated on the regular annual income plus exactly 1/5 (one fifth) the severance payment.

Step 3

The tax difference from steps 1 and 2 is included 5 multiplied. This is the final tax for the entire severance payment.

Requirement: There must be an “aggregation of income.” The employee must have more total income in the year of the severance payment than he or she would have had if the employment relationship had continued normally.

Important legal change: As a result of the Growth Opportunities Act, the fifth rule has been removed from the wage tax deduction procedure from 2025!

That means: The employer is no longer allowed to use the discount in payroll. The severance payment is taxed in full and regularly in the settlement. The employee can only claim the tax relief (fifth rule) in the following year via his or her personal account Income tax return get it back from the tax office.

3. Impact on social benefits (blocking period vs. rest)

A severance payment can have serious effects on the receipt of unemployment benefit (ALG I). A strict distinction must be made between two mechanisms:

Closing period (employment agency)

A blocking period (usually 12 weeks) occurs if the employee's unemployment is "his own fault" (e.g. by giving notice or concluding a termination agreement without an important reason).

Consequence: During this time, not only is no money paid, but the total period of entitlement to ALG I is irrevocably shortened! The mere payment of a severance payment solves the problem no Blocking period is out - but the termination agreement behind it is.

Suspension of the claim (§ 158 SGB III)

The suspension occurs when the employment relationship ends regular notice period was not observed was made and at the same time a severance payment was made.

Consequence: The start of the ALG I payment is postponed (until the regular end of the notice period). In contrast to the blocking period, this does not shorten the overall entitlement; the payments simply postpone.