Net Pay Taxation

Net wage taxation is the most costly of the four options above the 50-euro exemption threshold—and at the same time, the only one under which the employee truly keeps all of their earnings. The employer pays the tax and the full social security contribution, including the portion that would otherwise be paid by the employee.

Impact on Employees

The benefit is paid out in full, net of taxes. The salary is not reduced, no back pay is required, and the full value of the plan is available.

Of all the options, this is the strongest signal of appreciation—and the easiest to convey. One sentence is all it takes: “The insurance won’t cost you anything, not even through payroll.” Under Section 37b of the Income Tax Act (EStG) or when treated as a regular non-cash benefit, the same message requires several sentences and a qualification.

Impact on the Employer

Covering the employee's share makes this option the most expensive. In addition to the contribution, tax and both social security contributions must be paid.

For larger workforces, this adds up to a significant cost, which must be factored into the budget from the very beginning. Anyone who doesn't calculate the costs of this option until after making a commitment to the workforce will quickly face the choice of either increasing the budget or backtracking on that commitment—neither of which is pleasant.

When to Consider This Option

• If maximum appreciation is the stated goal of the initiative and not just a side effect
• If the supplementary health insurance (bKV) is part of a compensation package that is calculated on a net basis
• When a small, clearly defined group is insured and the additional costs remain manageable
• When the communication impact clearly justifies the premium price

Distinction from the fourth option

It differs from being treated as a monetary benefit—such as a regular salary—in exactly one respect: In that case, employees pay their own taxes and social security contributions, which reduces their take-home pay. Both options are taxed on an individual basis, but the distribution of the tax burden is opposite—one is the most expensive for the employer, while the other is the least expensive.

A Comparison with the Flat-Rate Options

Compared to Section 37b of the Income Tax Act (EStG), net wage taxation offers the advantage that nothing is deducted from the employee’s pay—under Section 37b, the employee’s share of social security contributions remains in effect. Compared to Section 40(1) of the Income Tax Act (EStG), the difference is smaller than it initially appears: In that case as well, the benefit is received in full because this option is exempt from social security contributions—and at significantly lower costs.

In practical terms, this means that anyone looking to minimize the impact of net wage taxation should first check whether Section 40(1) of the Income Tax Act (EStG) applies. If the workforce is large enough, the annual contribution is less than 1,000 euros, and there is sufficient lead time for the application process, one can achieve a very similar result for less money.

Conclusion

Net wage taxation buys impact with money. Anyone who wants to use the bKV as a visible signal and has the budget will achieve the cleanest result here. In many cases, however, the flat-rate method under Section 40(1) of the Income Tax Act (EStG) delivers a comparable effect at a lower cost—this comparison should be made before a decision is reached.

This article provides a general overview and is not a substitute for tax advice in specific cases.