In recent years, many people who were dismissed by decree-laws have applied to the courts and been granted the right to reinstatement, so a significant number are requesting to return to their positions. When employees are reinstated, their unpaid salaries for the period they were out of work are often paid in a lump sum. However, it is important to pay attention to the tax rates applied when such lump-sum payments are made.
Taxation of Lump-Sum Back Pay
Numerous individuals who were tried and later found not guilty have been reinstated and returned to public service. In these cases, the salaries for the period they were removed from duty are often paid collectively. These lump-sum payments are still subject to income tax based on salary rules. Although taxes on amounts would normally be assessed according to the tax rates that applied in the years when the payments would have been received (often taxed at 15% if paid in those years), receiving the amounts as a lump sum in a later year can push the taxpayer into higher brackets, increasing the effective tax rate up to around 30%. Higher taxation can also affect salary payments received during the year the lump sum is paid.
People removed from office for various reasons typically file reinstatement lawsuits to return to work. When courts or commissions rule in favor of reinstatement, the public employees who are returned to duty receive payment for the salary forfeited from the date they were removed until the date of reinstatement. When these amounts are paid at once, recipients can face an unexpected tax burden. For example, someone who was out of duty for three years and is reinstated in 2020 will have the total unpaid salary for those three years treated as 2020 income, and the 2020 income tax schedule will be applied to that entire amount.
How Are Tax Rates Calculated?
The key point in calculating tax rates in reinstatement cases is to use the tax brackets and rates that apply in the year the reinstatement occurs. For instance, a civil servant at a certain pay grade who is unmarried will be taxed according to that year’s income tax schedule for the full year—even if a raise was applied in July, the salary aggregated for the year is assessed under the applicable annual rates. Part of the December salary may be taxed at a higher bracket as well.
For this example, the annual tax calculated might be roughly 3,700 TRY. Because the unmarried employee would have been eligible for an annual tax-free allowance (minimum living allowance) of around 2,600 TRY in 2020, that allowance is subtracted, leaving a net tax due of approximately 1,100 TRY. However, if that employee had been out of work for 36 months and the unpaid salaries for those 36 months were paid in the same year, the entire amount is treated as income for that year. If, for example, a lump-sum payment of 140,000 TRY is made for 36 months, taxation would be applied progressively: the portion up to 22,000 TRY would be taxed at 15%, the portion between 22,000 and 49,000 TRY at 20%, and the portion above 49,000 TRY at 27% (based on the relevant year’s tax schedule).
Be Aware of the Minimum Living Allowance
One of the most significant losses for those who were dismissed and later reinstated concerns the annual minimum living allowance (tax credit). The minimum living allowance is considered a yearly net benefit that an employee receives through regular monthly salary payments. For monthly payroll, the annual allowance is divided by 12 and applied each month; the monthly benefit cannot exceed one‑twelfth of the annual amount. In other words, the minimum living allowance for years when the employee was away from work is not applied retroactively to the lump-sum payment made upon return. Reinstated individuals therefore typically do not receive the months they were absent as additional monthly allowances retroactively; the allowance is only applied within the normal monthly payroll cycle for the current year.