Is overtime based on the payment period

Linking overtime and retirement provision

If an employee works more per month than agreed in the employment contract, he works overtime. Both parties benefit from this initially. Employers receive additional benefits from their employees. This helps to bridge personnel bottlenecks or to achieve higher workloads. The employee has the option to work less on other days in line with the overtime. Alternatively, he or she expresses the wish for compensation for the overtime with the next salary payment. As a result, earnings are higher, which is why the state demands more taxes and social security contributions. The tax rate may even increase due to the increased gross salary. This is annoying for the employee.

For this reason, there are different models in which the employee is given alternatives to dealing with his overtime. One possible principle is based on the combination of overtime and company pension schemes. Said variant works on the basis of a time account. The employer automatically credits overtime hours that the employee works more than specified in the contract to the time account. The employer converts the time credit in the account into a company pension. The solution promises advantages for both contracting parties. The employee invests in his future with overtime instead of additional deductions. The employer avoids additional wage costs that would result from overtime payable. At the same time, the combination of overtime and provision is sufficient for the deferred compensation claim required by the first paragraph of the Company Pension Act (BetrAVG for short).

Company pension schemes are considered a profitable investment for the future. The reason is funding from the state. Amounts of up to four percent of the income threshold are exempt from social security contributions and taxes. In this way, the employee pays the gross wage he is entitled to for overtime into his pension. If he instead requests a payment in order to invest in a private pension, he would only have the net wage at his disposal. In this case, the net payout is on average almost half less. In addition, interest effects make the model presented even more attractive.

The principle of converting overtime into the company pension is based on a continuous basic conversion. In this regard, the law stipulates a minimum amount of 300 euros per year. The employer deducts the agreed value from the overtime account and pays it into the company pension plan accordingly. If the number of overtime hours fluctuates and falls below the base amount, the employee converts gross earnings into the pension plan accordingly. In addition, the employee has the option of paying additional sums into his company pension - until he reaches the maximum limit set by the state. Thus, he again prevents the payment of tax and social security contributions and invests the full gross amount in the pension.

In summary, the company and its employees benefit from the "company pension from overtime" model. In addition to the monetary saving of additional wage costs, the employer achieves higher motivation and loyalty of his employees. In addition, the process is relatively easy for administration and the company's balance sheet remains unaffected.

The greatest advantage for the employee lies in the attractive conversion of his overtime into a provision for the time after work. The overtime is credited to the time value account before it is taken into account for tax purposes. The employee pays the gross amount owed to him from the overtime into the company pension and continues to receive the regular monthly wage to which he is entitled under the employment contract. The following example demonstrates the advantages of the model with a simple calculation. With an agreed base amount of 500 euros, the full amount is taken into account in the old-age provision. There are initially no charges. If, on the other hand, the employee wishes the aforementioned sum to be paid out, assuming taxes of 45 percent, they will only receive EUR 275 net and lose EUR 225.

Furthermore, the tax-free amount for the Riester pension is set significantly lower than for the company pension scheme. If the employee exceeds the tax exemption there, he pays taxes twice: on the payment of overtime and the subsequent investment in the pension. In contrast, the combination of overtime and company pension enables old-age provision with gross instead of net amounts, which is also considered safe by an audited and monitored facility. The model is made even more attractive thanks to the option of flexible deposits up to the maximum value.

The company pension scheme does not levy any taxes at the time of payment. However, the model is not entirely royalty free. In contrast to the payment of wages, the state does not demand taxes immediately on earnings. The tax claims only arise when the employee retires and receives his monthly pension. However, the tax rate (as a percentage of income) is lower at this point in time. As a result, the employee pays lower and late contributions to the state compared to private provision.

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