At what number of employees does Section 40(1) of the Income Tax Act (EStG) become worthwhile?

The figure of about 20 employees is based on a simple logic: The effort involved remains largely the same, while the savings increase with each insured person.

The effort

This option requires an application. The average rate must be applied for at the tax office, and the calculation must be clearly documented. It is recalculated annually, which means it ties up payroll accounting resources on an ongoing basis. Whether 15 or 150 people are insured makes little difference in this regard.

The savings

Unlike under Section 37b of the Income Tax Act (EStG), the contribution is not subject to social security taxes. Neither the employer’s nor the employee’s share is required. This has a twofold effect: the employer saves on its share, and the employee receives the benefit in full. This amount increases linearly with the number of insured individuals.

For companies with fewer than about 20 employees, the administrative burden is often out of proportion to the savings. For larger companies, the picture changes significantly.

Two boundaries remain in place

• 1,000 euros per employee per year: With a monthly contribution of 83 euros, the limit is reached. For most budget levels, the actual contribution is below this amount—but this is no longer the case for high budgets with extensive add-on modules.
• Only your own employees: Freelancers or business partners are not included.

Factors That Influence the Comparison

Just how cost-effective this option is depends on the average tax rate and, consequently, on the company's salary structure. The comparison with Section 37b of the Income Tax Act (EStG) must be calculated on a case-by-case basis and may vary from year to year.

An often-overlooked prerequisite

This option requires that the contribution be treated as other income. How this will be reflected in the pay stub must be clarified before a decision is made—the main benefit may not materialize at all depending on this.