Computing Tax Refund upon Resignation

Disclaimer: The following information is provided for general educational purposes only and should not be construed as legal, tax, or accounting advice. For specific concerns or questions regarding your own situation, it is best to seek the assistance of a certified public accountant (CPA), tax practitioner, or qualified legal professional familiar with Philippine laws and regulations.

Overview

In the Philippines, when an employee resigns, it is standard practice for the employer to compute the final pay and any applicable tax refund or tax payable. Under Philippine tax laws and regulations, employees are subject to withholding tax based on their compensation. Throughout an employee’s tenure, the employer withholds taxes from the monthly salary (and certain benefits) and remits these to the Bureau of Internal Revenue (BIR).

At the end of the year—or upon separation from service (including resignation)—the employer has the duty to reconcile the total compensation earned with the taxes that have been withheld. If there has been over-withholding, the employee is entitled to a tax refund. Conversely, if there has been under-withholding, the employee may need to settle the additional tax due.

Below is a comprehensive discussion of the key points, legal basis, and practical considerations in computing a tax refund for a resigning employee in the Philippines.

Legal Basis

  1. National Internal Revenue Code (NIRC) – The primary law governing taxation in the Philippines, including rules on individual income tax and withholding tax on compensation.

  2. BIR Regulations on Withholding Tax – Various Revenue Regulations (e.g., RR 2-98, RR 10-2008, among others) and Revenue Memorandum Circulars set guidelines on how employers should withhold taxes from employee compensation and file related returns.

  3. Labor Code of the Philippines – While primarily dealing with employment standards, wages, benefits, and separation from service, it also touches upon final pay obligations. However, detailed tax provisions fall under the BIR’s jurisdiction.

What Constitutes Final Pay

When an employee resigns, the employer computes the final pay (sometimes referred to as “last pay”) which typically includes:

  1. Unpaid Salaries – All compensation earned up to the date of resignation.
  2. Pro-rated 13th Month Pay – If the employee resigns before the calendar year ends, the 13th month pay is computed proportionally for the months of service within that calendar year.
  3. Conversion of Unused Leave Credits – If company policy or the law grants monetization of unused leave balances (e.g., vacation or sick leave convertible to cash), these may form part of the final pay.
  4. Separation Pay (if applicable) – Normally granted in cases of retrenchment, redundancy, or health reasons, but not always mandatory for voluntary resignation. The tax treatment of separation pay depends on the circumstances—separation pay mandated by law due to retrenchment or illness may be exempt from tax.
  5. Other Benefits – Any remaining allowances, incentives, commissions, or bonuses the employee has earned under company policies.

Once the total final pay is computed, the employer then checks the total tax withheld year-to-date.

Year-to-Date Withholding Tax Reconciliation

1. Determination of Annual Tax Due

Upon resignation, the employer is required to do a year-to-date reconciliation (often called the “annualization” process) for the resigning employee. This involves:

  1. Summing up the employee’s total taxable compensation from the start of the year (or from the start of employment within that year) up to the date of separation.

  2. Applying the annual graduated tax rates (as per Section 24(A)(2) of the NIRC, as amended) to determine the annual tax due for the portion of the year the employee was employed.

    For reference, the current (TRAIN Law) rates for individual income in the Philippines are structured in brackets, with increasing rates for higher taxable income. The employer usually uses BIR-prescribed withholding tax tables for monthly or semi-monthly withholding, but for final computations, the annual scale is considered to check if there has been over- or under-withholding.

2. Comparing Actual Withholding vs. Annual Tax Due

The total tax withheld from the employee’s compensation (from January 1 to date of separation) is then compared with the annual tax due (prorated) for that same period.

  • If total tax withheld > annual tax due, there is over-withholding, and the employee is entitled to a tax refund.
  • If total tax withheld < annual tax due, the employee must pay the additional tax or have it deducted from the final pay.

The employer nets this out before paying the resigning employee’s final compensation.

How the Tax Refund is Processed

  1. Employer Responsibility: The employer generally makes the adjustment in the last payroll cycle or shortly thereafter and issues the tax refund to the employee.
  2. Certification: When an employee resigns, the employer must provide the employee with BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) covering the period of employment. This certificate indicates total compensation earned and total taxes withheld.
  3. Relief from Filing an ITR:
    • If the resigning employee has no other sources of income and does not transfer to another employer within the same year, the BIR Form 2316 may serve as the equivalent “substitute filing” of the Income Tax Return (ITR). In such a case, the employee typically is not required to file a separate annual ITR (BIR Form 1700) if the final withholding tax computations are correct.
    • If the employee moves to a new employer in the same year, the new employer will request the BIR Form 2316 from the previous employer to continue the annualization process up to the end of the year. Any adjustments at year-end will be handled by the new employer.
    • If the employee has other sources of income (e.g., business or freelance earnings) aside from the salary, they are generally required to file an annual income tax return (BIR Form 1701 or 1701A, depending on the circumstances) covering both employment and other income.

Special Considerations

  1. Tax-Exempt Benefits: Certain benefits are exempt from tax up to a certain threshold, such as the 13th month pay and other bonuses up to PHP 90,000 (as of the latest regulation under the TRAIN Law). Any excess over the threshold is taxable.
  2. Separation Pay Due to Involuntary Causes: Under Section 32(B)(6)(b) of the NIRC, separation pay received by an employee due to death, sickness, or other involuntary reasons (e.g., redundancy, retrenchment) as prescribed by law may be exempt from income tax. For voluntary resignation, separation pay (if any) is typically taxable, unless specifically excluded by law.
  3. Deadline for Final Pay: While the Labor Code does not prescribe a hard deadline for the release of final pay, Department of Labor and Employment (DOLE) issuances advise releasing it within 30 days from the date of final separation or as indicated by company policy or collective bargaining agreements.
  4. Documentation:
    • Always request and keep a copy of BIR Form 2316.
    • If there is a tax refund, ensure the relevant payslip or final pay notice clearly indicates any “refund” amount or additional tax withheld.
  5. Year-End Adjustment: If the resignation happens very close to year-end (e.g., December), the employer’s year-end adjustment might be simpler as it essentially covers the full calendar year. However, resignations mid-year require prorating for the months of employment in that tax year.

Step-by-Step Guide to Computing Tax Refund

Below is a simplified outline of how an employer typically computes the tax refund for a resigning employee:

  1. Gather Compensation Data:

    • Monthly salaries and/or commissions
    • 13th month pay (prorated if not yet paid in full)
    • Any taxable allowances or benefits
    • Monetized leave benefits
    • Other taxable income within the year

  2. Determine Taxable Compensation:

    • Sum all taxable compensation.
    • Exclude tax-exempt benefits, such as de minimis benefits or 13th month pay and bonuses within the allowable threshold.

  3. Apply Annual Tax Rate / Withholding Tax Table:

    • Compute the annualized tax based on the total taxable compensation for the period employed in that calendar year.
    • Take into account personal or additional exemptions only if applicable under older rules (Note: Under TRAIN Law, personal exemptions were largely removed, but older records or special situations might still arise. Generally, the current system simply applies the bracket-based tax).

  4. Compare with Year-to-Date Taxes Withheld:

    • Obtain total withholding from payroll records (Jan–Resignation Date).
    • The difference (whether positive or negative) determines the refund or additional tax due.

  5. Issue the Final Pay:

    • If there is an overpayment of taxes, the net amount is added to the final pay as a tax refund.
    • If there is an underpayment, the difference is deducted from the final pay to settle the correct tax.

  6. Prepare BIR Form 2316:

    • Reflect correct figures for total compensation and total taxes withheld.
    • This form is provided to the employee on or before final settlement.

  7. Employer Remittance to the BIR:

    • The employer remits any final tax withheld using the appropriate BIR form (e.g., BIR Form 1601-C for monthly withholding on compensation or the updated forms under eFPS/eBIR system).

Practical Tips for Employees

  1. Check Your Payslips: Ensure that the monthly withholding tax amounts look consistent with your salary and benefits.
  2. Keep Records: Keep copies of your payslips, employment contract, and previous year’s BIR Form 2316. These records help verify correct computation.
  3. Request BIR Form 2316: Upon resignation, it is your right to request the final BIR Form 2316 from your employer. This document is important if you transition to a new employer or if you later need to file an annual ITR.
  4. Inquire About Final Pay Timeline: Ask HR or the payroll department for the timeline of your final pay release and the breakdown (including the tax adjustment).
  5. Verify the Computation: If you receive a tax refund, verify that the numbers tally with your own record of year-to-date salary and withheld taxes.
  6. Consult a Professional: If you suspect errors or inconsistencies, speak with your HR, a CPA, or a tax lawyer.

Conclusion

Computing a tax refund upon resignation in the Philippine context boils down to the employer’s year-to-date reconciliation, ensuring that the correct amount of income tax has been withheld based on actual compensation earned up to the separation date. If the employee has been over-withheld, the employer should issue a tax refund as part of the final pay settlement. Detailed documentation (such as BIR Form 2316) and thorough review of payslips, final pay computation, and tax regulations help both employer and employee stay compliant with the law.

Employees are advised to keep thorough records and consult qualified professionals for any questions about their unique tax situation—especially if they have additional sources of income, change employment during the year, or are unsure about whether they need to file an annual income tax return.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

Privacy Policy

Terms of Use

Lawyer Login

 
 
Privacy Policy         Terms of Use         Lawyer Login