Payroll tax at a farewell party: This is what companies should know

Farewell parties are often classified differently for tax purposes than they appear at first glance. When companies say goodbye to managers, events are organized that usually fulfill several functions: They express appreciation for the departing person, serve to represent the company and are often used to introduce a successor. This is precisely why they are more than just a social occasion and are often not clearly classified for income tax purposes. The classification is then carried out schematically using amount limits. This supposedly creates clarity, but falls short.

A decision published this year by the Federal Finance Court (BFH) starts here. It draws attention away from the occasion and the cost and towards the actual question: Is the event privately attributable to the employee or is it a company celebration for the employer?

Why is the 110 euro limit no longer sufficient as a wage tax benchmark?

The official wage tax guidelines – administrative instructions for the tax authorities – work with typical specifications and, when adopted, are based in particular on the 110 euro limit per employee. The BFH breaks away from this and focuses on the overall assessment.

If this results in the event being attributable to the employer, there is no wages. An advantage is then not a remuneration, but a mere reflex of the company’s own celebration. This also applies to the expenses incurred by the employee himself and by the employee’s family members invited by the employer.

The payroll tax guidelines treat farewells and birthday parties differently, although what matters is whether the event is attributable to the employer or to the private sphere. This is precisely where the weakness of the administrative logic becomes apparent: differentiation based solely on the cause does not support the different tax treatment of these cases.

Which criteria determine the income tax classification?

• who organizes the event and acts as host,
• according to which criteria the guest list is determined,
• whether professional or private contacts predominate,
• in which context the event takes place and what overall impression it conveys.

The introduction of a successor can further underline the company’s character.

How can companies actively shape their tax classification?

The income tax classification does not begin with the billing, but rather with the design. You can control who invites, how the group of participants is determined and in what context the event takes place. This means that the result can also be controlled. If, on the other hand, the event is clearly influenced by private interests, there is a lot to be said for wages. What is important is not the amount of expenditure, but rather the classification. Especially when saying goodbye to managers, it is worth considering these questions early on. This creates clarity before it has to be worked out afterwards.