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How to do your tax declaration for 2020 if you were put on short-time work

I’ve been put on short-time work. Do I have to file an income tax return? Do I owe taxes or will I get a refund? Read this article to find out.

6 min read

The coronavirus pandemic has wreaked havoc on countless aspects of our lives––most notably on the labor market. A recent report from Asempleo puts the number of employees put on short-time work––or ERTE in Spanish––at 900,000 and the number of jobs lost at 400,000. 

If you’ve been put on short-time work and still haven’t prepared your 2020 tax return, this article is for you. We’ve compiled the most important information on what short-time work is and how it affects employees who are filing their tax returns. Read on to find out everything you need to know. 

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What is short-time work?

Short-time work is a European program designed to suspend or reduce employment on a temporary basis due to exceptional or volatile circumstances, such as a pandemic or a financial crisis. Companies can apply for assistance to reduce or completely cut their employees’ hours and the government will make up a portion of the lost wages for the employee. Companies decide themselves whether to implement this measure, and employees are entitled to resume their full working status as soon as conditions improve.

Short-time work can be applied to all staff or can be limited to specific staff members or departments. Companies must provide technical, organizational, or production reasons for the decision. Alternatively, as is the case with the COVID-19 pandemic, short-time work can be instated due to force majeure––natural and unavoidable catastrophes which interrupt plans and prevent workers from fulfilling their obligations. 

Employees on short-time work stop receiving company pay, but are entitled to government aid from the SEPE (the Spanish State Employment Service). This aid equates to 70% of their gross salary before the layoff for the first six months, and 50% from then on.

While this is the general rule, it’s important to remember that there’s a minimum that workers can receive, and that payments are also capped at a certain amount.  

The difference between short-time work and terminations

The main difference between short-time work and termination is that the former is temporary. Terminations are final, permanent dismissals made legally by the company.

When a worker has their contract terminated, they become unemployed and can choose to receive unemployment benefits. Short-time work, on the other hand, is a temporary partial or full suspension of work. Both termination and short-time work are regulated by the Spanish Workers' Statute and Spanish Royal Decree 3/2012.

Types of layoff and termination

According to existing legislation, there are three kinds of layoffs. These can all be either temporary layoffs or permanent contract terminations.

  1. Multiple layoffs: This is when several members of staff or all staff are laid off.
  2. Contract suspensions: In this case, employee contracts are temporarily suspended.
  3. Reductions in working hours: If business demand is insufficient, employee working hours can be reduced.

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Short-time work and your 2020 tax return

As we’ve mentioned, employees who’ve been temporarily laid off stop receiving at least a portion of their salary and get unemployment aid from the SEPE instead. The SEPE then deducts social security contributions and the employee receives the difference deposited into their account. 

However, unlike salary payments where companies withhold taxes at the source, the SEPE doesn't deduct any income tax when distributing payment. This means that employees who were on short-time work at any point last year and received SEPE payments may discover that they owe tax when filing their 2020 return. This is because the tax on the SEPE payments wasn’t deducted at the source, and needs to be paid back to the government.    

I was put on short-time work last year. Do I have to file a tax return?

According to current Spanish Tax Agency legislation, taxpayers with more than one source of income must file a tax return if their total income exceeds €14,000, and if the amount they receive from their second income source exceeds €1,500.

Is the SEPE aid considered a second source of income?

Yes, the SEPE aid is considered to be a second source of income. So, if you were put on short-time work, received unemployment aid from the SEPE, and received payment from your company during the 2020 tax year, you’ll have to file a return this year if your total earnings were above €14,000 and your second source of income totaled over €1,500. If your earnings were under both thresholds, you won’t need to file a 2020 return.

In recent months, advisers at Hacienda (Spanish Ministry of Finance) recommended that employees who are put on short-time work request an income tax withholding from the SEPE. This would help them avoid any nasty surprises when they file their tax return. They also advised companies to make adjustments so that they can withhold larger amounts of their employees’ pay to compensate.

When in doubt, it’s a good idea to consult your employer to see if they’ve withheld taxes on your behalf. You can also go to the SEPE website, where you’ll find answers to FAQs on short-time work.

How much tax will I need to pay on my short-time work payments? 

When filing your income tax return for 2020, you’ll need to declare both the payment you received from your company as well as your short-time work payments (70% of your normal monthly salary). Both payments count as taxed income. The amount of taxes you’ll owe depends on how much money was deducted at source for each of your income sources in 2020.

For example, if your annual salary is €20,000 and you were on short-time work for two months in 2020, you received 70% of your salary for two months. This means you received €2,333.33 through SEPE. In total, this means you earned €19,000 before taxes in 2020.

Since you had two income sources, your total income exceeded €14,000. What’s more, you earned more than €1,500 from your second source (your SEPE payment), so you’ll need to file a tax return. Since no tax was withheld at source from the amount you received from the SEPE, you’ll need to pay Hacienda––the Spanish tax office––around €700. Here’s a breakdown of the example in numbers:

Short-time work and Hacienda payments––An example tax calculation
Salary before tax"€20,000 per year"
Short-time work period 2 months
Amount received during short-time work 70% of salary before tax x 2 months = €2,333.33
Total income in 2020 €16,666.66 from company + €2,333.33 from the SEPE = €19,000 before tax
Have personal income tax withholdings been applied? No
Required to file an income tax return for 2020? Yes—you have two income sources, your total income exceeds €14,000 and you’ve earned more than €1,500 through your second source (SEPE)
Amount to pay from the temporary layoff Approx. €700

Don’t worry––it’s not all bad news. Hacienda is allowing employees who were on short-time work in 2020 to divide their tax payments into six interest-free installments. The first payment will be due on July 20, 2021 and the final one on December 20, 2021. They’ve also created a useful tool called Renta Web Open for taxpayers to simulate their tax returns. This is a great way to find out if you owe money or will get a refund.

Still have questions? Here’s a short summary of the latest 2021 tax returns.

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Filing income tax returns with N26

Being put on short-time work is tough, and when you add taxes into the mix, it’s even harder. At N26, we’re here to make managing your finances easy so that you can focus on more important things. That’s why we developed a 100% mobile banking app. Open an account in minutes right from your smartphone and discover all our innovative features. It’s that easy!

Not sure whether you can pay taxes as a freelancer, to Social Security, or through a personal account with N26? Check out this article to learn more.

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