Employer's kindergarten allowances: Wage tax exemption and Corona pandemic

May 16, 2022

Benefits paid by the employer in addition to the wages owed anyway for the accommodation and care of employees’ children who are not of school age in kindergartens or comparable institutions are exempt from wage tax. On this basis, many employers reimburse such costs to their employees tax-free. Problems may now arise due to the fact that in the Corona pandemic, kindergarten or childcare fees were not collected when facilities were closed or contributions already collected were refunded to the employee. If the employer has nevertheless paid subsidies to the employees in these cases, these cannot in principle remain free of wage tax, but such continued employer benefits trigger taxable wages. If the employer is aware that the employee did not actually have to pay kindergarten contributions, the employer must make a correction to the wage tax deduction. Otherwise, there is a risk of a liability claim.

Currently, the Financial Administration has agreed on the following procedure - apparently uniformly throughout Germany: In cases in which cities and municipalities have not collected kindergarten or childcare fees due to the Corona pandemic or have already refunded collected fees, it will not be objected for the calendar year 2020 if, with regard to the subsidies paid by the employer, it is assumed that the employer has granted a loan to the employee. Thus, the employer’s benefits remain tax-exempt for the year 2020. The subsidies paid in 2020 are to be offset against the accommodation and care costs for the children arising in 2021. This means that a renewed tax-free reimbursement in 2021 is not permissible.

Recommendation for action: In the specific case, it should be examined whether there is a need for correction in this respect.