Supreme Administrative Court ruling on tax exemption for overtime

Although the case assessed by the Administrative Court primarily concerned overtime on Sundays (§ 68(1) of the Income Tax Act), the decision also addresses other aspects relating to time recording and flexible working time models.

Problem No. 1: Tax exemption for SFN overtime bonuses

The tax exemption of surcharges for overtime worked on Sundays, public holidays, and at night ( § 68 (1) EStG) requires that the exact time worked and the amount of the surcharge be clearly documented for each hour of overtime. The hours eligible for the exemption must therefore be explicitly identified (“marked”) in the company's working time or payroll records. The aim of this stricter “formal requirement” is to ensure that the records of § 68 (1) EStG surcharges are as accurate as possible so that their correctness can be easily verified at any time without GPLB auditors having to investigate or recalculate themselves.

In practice, this means two things in particular:

• In order to meet the requirements for tax exemption of SFN overtime bonuses, even complete (e.g., manually maintained) working time records are only sufficient if they contain a marking of the respective eligible hours. Companies should therefore clarify whether the time and payroll software they use allows tax-exempt surcharges to be specifically assigned to the working hours recorded by day and time and displays them in an easily verifiable manner.
• The application of labor law simplifications under the Working Hours Act with regard to working time records (e.g., mere balance recording in accordance with § 26 (3) AZG in the case of predominantly home-based work or freely operating field staff) generally results in the tax relief under § 68 (1) EStG being “sacrificed.”

Problem No. 2: Calculable working hours or flexitime

In the case of working time averaging or flexitime, transferable surplus hours within the averaging or flexitime period are not to be considered overtime (but merely as surplus normal working hours). The tax exemption pursuant to § 68 (2) EStG can therefore only be applied in the case of calculated working hours or flexitime – apart from “immediate” overtime – for those months in which the calculation or flexitime period ends. This means that for a three-month period, for example, the tax exemption pursuant to § 68 (2) EStG is therefore only possible four times a year, for a six-month period only twice a year, and for a 12-month period only once a year.

In practice, this means: overtime payments during the current calculation or flexitime period are not tax-exempt under § 68 (2) EStG.

! For internal payroll departments as well as external payroll service providers, it is advisable to clarify with decision-makers or clients whether adjustments are necessary when calculating SFN overtime surcharges and/or in the company's average working time or flexitime model. A concise summary of the tax issues may be helpful as a basis for discussion (especially for raising awareness of the problem among managers who are not familiar with payroll accounting).