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Through 31 March 1999, German tax and social insurance law provided for taxation of low-paying jobs (geringfügige Beschäftigung, literally, "slight, marginal employment") at a flat rate of just under 23 % (including church tax and solidarity surcharge). While the flat rate tax was payable by the employer as a matter of tax law, the employer could agree with his employee that, as between them, the employee would bear the flat rate tax. No withholding of social charges was necessary as long as the employee had no other dependent employment income. Even if this requirement was not met, it was difficult to detect outside income as a practical matter.
The flat rate taxes remitted by the employer satisfied all income tax liability of the employee with respect to the employment as long as the employee did not work for the same employer in any other capacity in addition to the low-paying job. Additional work for other employers was not relevant for tax purposes (though it did in theory change the social insurance treatment). The monthly income limit up to which this arrangement applied was periodically adjusted and lower in the new German states than in the rest of Germany, where it was last set at DM 630 per month.
To combat perceived abuses, the new government of Social Democrats and Greens has created a completely new regime for low-paying jobs from 1 April 1999 onwards (Law Changing the Treatment of Low-Paying Jobs, passed in March 1999). The key features of the new regime are as follows:
- The wages from low-paying jobs are now subject to certain social insurance charges payable by the employer at special reduced rates.
- If the low-paying job is the employee's sole source of income, no income tax is withheld or owing on the wages.
- Low-paying jobs are no longer treated in isolation for tax purposes (just as they were in theory hitherto not so treated for social insurance purposes). An employee with total income exceeding the income limits is thus subject not only to full social insurance withholding (except for unemployment insurance) as before, but also to wage tax withholding.
- The compliance system for enforcing the new regime is greatly improved.
It should be noted that the new regime does not apply to "short-term" work as defined in the Code of Social Law (sec. 8 (1) no. 2 SGB IV). Short-term work is by its nature or by contract limited in duration to not more than two months or 50 working days. Seasonal work in the agricultural sector (harvest help) is a prime example. Short-time work remains exempt from social insurance contributions and, under the additional conditions specified in sec. 40a (1) EStG, subject to flat rate tax of just over 28 % (including church tax and solidarity surcharge).
Low-paying jobs are now uniformly defined for all of Germany as jobs paying not more than DM 630 per month for work not exceeding 15 hours per week (sec. 8 (1) no. 1 SGB IV). The social insurance treatment of such jobs follows either a special regime or a modified normal regime.
Under the special regime, the employer is required to remit a pension insurance contribution of 12 % and, subject to certain exceptions, a medical insurance contribution of 10 % to the appropriate authorities. The total of 22 % owing under this special regime is approximately the same as the wage taxes previously owing, but far under the normal social charges, which exceed 40 % of wages and are borne half each by the employer and the employer.
The employer is not permitted to pass the social charges along to the employee. Employers which previously passed the wage tax along to employees may now find that their total costs have increased considerably as a result of the reform. It is unclear to what extent they could compensate for this by reducing the wage amount.
The 10 % medical insurance contribution is payable only for employees who are already insured through the public medical insurance system. Members of families in which one spouse has a normal job are probably the primary example of persons in this category, since all family members can be insured under a single wage earner. If such a family member takes a low-paying job to earn extra income, the 10 % medical insurance contribution paid by the employer will not give rise to any additional medical insurance coverage. The situation is no different, however, when both spouses hold normal jobs. While the whole family could be insured under just one spouse, if both work, both must generally pay medical insurance contributions (together with their employer, who pays half under the normal regime). This is a consequence of the social principle of contribution to the public medical insurance system in accordance with ability to pay.
The new rules apply to domestic help as well. Hence, private persons must register their cleaning and household help with the appropriate social insurance agencies.
The pension insurance contributions remitted cause pension insurance rights to accrue in the employee's favour. These rights are less than under the standard system because the contribution of 12 % is less than the standard 19.5 % contribution. Employees have the option of voluntarily paying the difference and so acquiring the full standard pension (and disability) insurance.
The special regime does not apply if the employee's wages from the particular job together with income earned from all other employment relationships, whether with the same or with different employers and whether low-paying or otherwise, exceed the limit amount of DM 630. If the limit amount is exceeded, then all employers must remit social charges on a normal basis, except that no unemployment insurance contribution (6.5 %) is owing for low-paying jobs. However, the normal pension, medical, and nursing care insurance contributions are owing (19.5 %, ca. 13.3 %, and 1.7 % respectively). The total contributions (approx. 34.5 %) are borne half each by employer and employee.
This may be thought of as a modified normal regime, in that the same rules apply as under a normal work relationship except for unemployment insurance, which is not owing.
New sec. 3 no. 39 EStG creates an income tax exemption for the wages from a low-paying job. However, the exemption only applies if the two conditions are met:
- The employment relationship must qualify for the special regime for social insurance purposes (see sec. 3 above) and
- The employee may have no positive income from any other source after considering certain standard deductions. (Income earned by the employee's spouse is not counted.)
Furthermore, to qualify for the exemption, the employee must provide his employer with certification from the tax authorities that the employee meets the total income limit requirement. This certification must be renewed annually. Should additional income in fact be earned after issuance of such certification, the employee is required to file a tax return for the year in question (sec. 46 (2a) EStG).
If the conditions for the exemption are met, the employer has no obligation to withhold tax from the employee's wages. If they are not met, the employer has two options:
- As long as the income and work time limits are not exceeded for any single job held, the employer can withhold at a flat rate as under the present law. Tax so withheld continues to satisfy the employee's income tax liability from the low-paying job. However, it is remitted in addition to the social insurance contributions as described in sec. 3.
- The employer may instead apply the normal withholding procedures, under which tax is withheld at variable rates depending on income earned. He must apply the normal withholding procedures if either the income or the work time limit is exceeded for the individual job. Wage tax withheld under these procedures is creditable against income tax owed for the year.
There are an estimated five to six million low-paying jobs in Germany. The government believes that a significant number of employees hold multiple low-paying jobs or work a low-paying job in addition to normal employment. The government also believes that there is a trend for employers to subdivide normal jobs into low-paying jobs, thus increasing the number of people working without social insurance.
By looking to total earnings from dependent employment both for social insurance and tax purposes, the new system seeks to reduce the incentive which currently exists to offer and to accept low-paying jobs. While the nominal pay may be slight, such jobs in combination with other employment become attractive since, under the old system, they offered a means of avoiding Germany's high progressive tax rates and high social charges (over 40 % of wages, up to certain limits). Since social charges are normally borne half each by employee and employer, employers also had a direct incentive to favour low-paying jobs over normal jobs in certain circumstances.
By requiring employers to remit pension insurance contributions, the new law causes all low-paying jobs to be registered with the pension insurance authorities. The pension insurance authorities, and the medical insurance associations with which they work, should be able to detect any employment relationships which the employee has not disclosed to a particular employer. They are required to report such to the tax authorities. The tax authorities can also determine in many cases whether persons with low-paying jobs have a normal job in addition.
The new legislation is intensely unpopular with employers and the affected employees, who also enjoy widespread popular sympathy. Certain industry groups have alleged that the new legislation will destroy over one million low-paying jobs, or cause these jobs to be continued on an undeclared, that is, illegal basis. Such a turn of events would be disastrous from both a fiscal and a labour policy perspective. Fiscally, it would mean that the wage tax remitted under the old system would simply be lost to the national, state, and local treasuries without any offsetting increase in contributions received by the social insurance systems. From the standpoint of labour policy, it would mean depriving many individuals of the protection of the law they now enjoy.
Nor is this all. The new regime for low-paying jobs may deprive many persons on the lower end of the economic ladder of needed cash income and hence lead to genuine hardships. Furthermore, certain sectors are highly dependent on persons working low-paying side jobs. Since these jobs may no longer be sufficiently attractive in the future, the affected sectors may be seriously impaired in their ability to function.
The government is concerned about all of the above, but has so far indicated willingness to make only minor adjustments in its new legislation.
The new legislation may also be challenged on constitutional grounds.
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