Ina Reese Tax & Legal Practice – Flensburg | Harrislee

Employment law and tax advice under one roof

Law & Taxation Reese Flensburg
23.10.2026
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Severance pay, termination agreements, bogus self-employment: where employment law and tax intersect, and the benefits of one-stop advice in Flensburg.

Employment law and tax advice under one roof

Find a lawyer specialising in employment law and tax advice in Flensburg – all under one roof

Anyone who receives a notice of termination and is offered a severance payment at the same time usually has two questions. Is the termination valid, and is it worth challenging it? And how much of the severance payment will actually remain after tax?

The first question is usually dealt with by a solicitor, the second by a tax adviser. In practice, however, the two often do not speak to one another until the contract has already been signed. By then, however, the most important decisions have already been made: the termination date, the wording of the contract and the payment date determine how the severance pay is taxed and whether there is a risk of a waiting period for unemployment benefit.

In this article, we highlight the areas where employment law and tax law intersect, for both employees and employers. We also explain what you should look out for when seeking advice that covers both areas.

Severance pay: What you’re left with after tax

A severance payment is subject to tax. However, it is exempt from social security contributions insofar as it compensates for the loss of employment. The Federal Social Court ruled on this as early as 1990 (Federal Social Court (BSG), judgment of 21 February 1990, 12 RK 20/88). The situation is different for sums paid under the same contract for the period of employment, such as outstanding salary, bonuses or compensation for remaining holiday entitlement. These items constitute normal remuneration and are subject to contributions. The way the settlement is worded therefore has a direct impact on the net amount.

The one-fifth rule from 2025 onwards

A tax relief applies to severance payments in accordance with Section 34 of the Income Tax Act (EStG), known as the ‘one-fifth rule’. Under this rule, the tax office calculates as if only one-fifth of the severance payment were added to the rest of the income, and multiplies the resulting additional tax by five. This mitigates the jump in the tax rate that a large one-off payment would otherwise trigger. The rule is most effective when the remaining income in the same year is low.

Since 1 January 2025, employers have no longer taken the ‘fifths rule’ into account when deducting income tax; this is based on the Growth Opportunities Act. In the month of payment, the severance payment is therefore taxed in full as normal wages. The relief is only available via the income tax return, meaning the refund will be paid in the following year at the earliest (Vereinigte Lohnsteuerhilfe e. V.). Anyone receiving a severance payment should factor in this cash flow gap and ensure they submit their tax return in any event.

The date of payment

Whether the severance payment is made in December or January can make a noticeable difference. Anyone who is likely to earn less in the following year – for example, due to unemployment or a career break – will often pay less tax on a severance payment in the new year. The timing can be agreed in the termination or settlement agreement, but it is almost impossible to change it later on.

Caution is advised when making instalment payments over several years. The ‘one-fifth rule’ assumes that the compensation is received in a single lump sum in one year. If it is split into instalments, the reduction may be lost entirely.

Termination Agreement: Consider the waiting period and tax implications together

A termination agreement brings the employment relationship to an end by mutual consent. For employees, there is a catch: from the Employment Agency’s perspective, anyone who cooperates in drawing up such an agreement is deemed to have terminated the employment relationship themselves. Without good cause, this may result in a waiting period before unemployment benefit is paid. This usually lasts twelve weeks and, only in exceptional cases, three or six weeks (Section 159 of Book III of the Social Code (SGB III)). A twelve-week waiting period also reduces the total benefit period by at least a quarter (Section 148 of Book III of the Social Code (SGB III)).

The agency recognises, amongst other things, that a valid reason exists for a termination agreement if the employer would otherwise have given notice within the statutory period for operational or personal reasons, and the severance payment does not exceed half a month’s salary per year of service. It does not, however, examine whether the threatened dismissal would have been lawful. In the case of higher severance payments, it takes a closer look (Technical guidelines from the Federal Employment Agency regarding Section 159 of SGB III).

A second risk is the suspension of the entitlement (Section 158 of Book III of the Social Code (SGB III)). If the employment relationship ends earlier than the standard notice period would allow, and a severance payment is made, unemployment benefit will start later, but no later than one year. Exactly how long depends on the severance payment: depending on age and length of service, between 25 and 60 per cent of this amount is taken into account.

These points are directly linked to tax. The agreed termination date determines not only whether a qualifying period or a suspension period applies, but also in which calendar year the severance payment falls. If you consider unemployment benefit, tax liability and the amount of the severance payment separately, it is easy to lose out financially in one of these three areas.

Our advice: Do not sign a termination agreement until both sides have been checked. An offer from the employer can usually be renegotiated, but a signed agreement can hardly be amended. You can find further information on our page on employment law.

Claiming the costs of an employment dispute for tax purposes

In the first instance before the employment tribunal, each party bears its own legal costs, regardless of the outcome (Section 12a of the Labour Court Act (ArbGG)). However, these costs do not necessarily have to be borne entirely by the employee. Legal fees and court costs incurred in bringing an action for unfair dismissal or negotiating a severance payment are work-related and therefore constitute income-related expenses. They are entered in Appendix N of the tax return, as are travel expenses to court hearings or to the solicitor’s office.

For tax purposes, these costs are relevant only to the extent that your total income-related expenses exceed the employee’s standard allowance. Only the amounts you have paid yourself are deductible. If legal expenses insurance covers the costs, the deduction is not available for that amount; however, you can claim any excess. Keep hold of invoices and payment receipts for your tax return, which you will need to submit anyway due to the ‘fifth rule’.

Pseudo-self-employment: one case, three areas of law

Hardly any other issue illustrates this interdependence as clearly as ‘pseudo-self-employment’. A contractor works as a freelancer on a self-billing basis, but is subject to instructions and firmly integrated into the business. If the German Pension Insurance Fund, during a tax audit or in a status determination procedure (Section 7a of Book IV of the Social Code (SGB IV)) If a person is found to be in dependent employment, this has consequences on several levels.

Under social security law, the employer must pay the outstanding contributions, normally for up to four years, or for up to 30 years in the case of contributions deliberately withheld (Section 25 of Book IV of the Social Code (SGB IV)). He may only deduct the employee’s contribution retrospectively from the next three pay packets; he usually bears the remainder himself (Section 28g of Book IV of the Social Code (SGB IV)). For tax purposes, he is liable for any income tax that has not been deducted (Section 42d of the Income Tax Act (EStG)). On top of that, there is VAT: an employee is not a business owner. The client retroactively loses the right to deduct input VAT from the invoices, and the contractor is still liable for the VAT shown on them (Section 14c of the Value Added Tax Act (UStG)).

Under employment law, a former freelancer is suddenly entitled to holiday leave, continued payment of wages and, in certain circumstances, protection against dismissal. If contributions are deliberately withheld, this may ultimately also fall under criminal law (Section 266a of the German Criminal Code (StGB)). Find out more on our page on tax law and criminal tax law.

The following applies to both parties: the earlier the contract is reviewed in terms of employment, social security and tax law, the lower the risk of a costly additional claim.

For employers: When HR issues become tax issues

Companies, too, regularly encounter cases that cannot be clearly categorised under a single area of law. Here are a few examples from our advisory practice:

On-site payroll tax audit. Auditors pay particular attention to benefits in kind, company cars, travel allowances and mini-jobs. Whatever is agreed in the employment contract must also be correctly accounted for for income tax purposes; otherwise, the employer is liable (Section 42d of the Income Tax Act (EStG)).
Company cars in the event of leave of absence or termination of employment. Whether the car must be returned is governed by the employment contract. As long as private use is permitted, it remains a benefit in kind. Withdrawing this privilege prematurely may give rise to claims for damages.
Shareholder and managing director. Your contract of employment is usually not an employment contract. The Protection Against Unfair Dismissal Act does not apply to managing directors of limited liability companies (GmbH) (Section 14 of the Employment Protection Act (KSchG)). From a tax perspective, there is a risk of hidden profit distributions if the remuneration is disproportionate. Find out more on our page on commercial and company law.
Restructuring. In the event of a transfer of undertaking, employment contracts are transferred to the new owner (Section 613a of the German Civil Code (BGB)); this also applies to mergers and demergers (Section 324 of the German Takeover Act (UmwG)). Employees must be informed in advance. Obligations under employment law and the tax implications of the conversion should therefore be planned together. See also the law on company conversions.

If you take tax implications into account from the outset when drawing up employment contracts, remuneration schemes and severance agreements, you will avoid additional tax claims at the next tax audit.

What to look out for when searching

One-stop advice means more than just having two advisers under one roof. The key is that one person is able to assess both sides from a professional perspective and weigh up the implications against one another. These points will help you make your choice:

Check qualifications. The following shows whether a person is admitted to practise as a solicitor and which specialist qualifications they hold: National Official Directory of Lawyers the Federal Bar Association. Tax advisers are Directory of tax advisers registered with the Federal Chamber of Tax Advisers. Both registers are publicly accessible free of charge.
Ask about this during the initial consultation. Who calculates the tax implications of a settlement, and does so before the agreement is signed? Is the severance payment assessed in relation to the ‘one-fifth rule’ and unemployment benefit?
Keep an eye on deadlines. An action for unfair dismissal must be brought within three weeks of receiving the notice of dismissal (Section 4 of the Employment Protection Act (KSchG)). According to this, the notice of termination is generally deemed to be valid, even if it would not actually be so.
Prepare the documents. An employment contract, notice of termination or job offer, your most recent payslips and your latest tax assessment are sufficient for an initial assessment.

Employment Law and Tax at Reese Solicitors

Ina Reese is a solicitor, a specialist in tax law and a tax adviser. Since 2000, she has been advising employees, the self-employed and businesses from her practice in Flensburg and Harrislee. We therefore assess employment law issues from the outset alongside their tax implications, without the need for coordination between two offices and without any loss of information. Consultations are available in German, English and Spanish.

Have you received a notice of termination or a severance offer, or are you planning to leave your company? Book an initial consultation lasting around 15 minutes. We’ll assess your situation and advise you on the best next steps to take.

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