Executive summary

Yes—but only in a limited way. When an employer refunds excess withholding tax on compensation to a resigned employee, the employer may generally offset (credit) that refunded amount against its next remittance(s) of withholding tax on compensation for the same calendar year.
No cross-application. That credit cannot be used to reduce the employer’s own income tax or other kinds of taxes; it’s confined to the same tax type (withholding on compensation).
Timing and documentation are critical. The right to offset hinges on doing a proper separation/annualization computation, actually refunding the employee, and keeping robust documentation (payroll runs, BIR Form 2316, proof of payment/refund).
If the credit cannot be fully used (e.g., no more payroll for the year), remedies include carrying the over-remittance to subsequent months within the year and, in narrower circumstances, filing a refund or TDM (tax debit memo) claim, subject to strict substantiation and prescriptive periods.

Legal scaffold

1) Nature of withholding on compensation

Employers act as withholding agents for the government under the National Internal Revenue Code (NIRC). Amounts withheld are a trust fund for the State; the employer’s obligation is to withhold, report, and remit.
Sections 24/25, 32, 58, and 79 of the NIRC (as amended, including by the TRAIN Law) set the framework for compensation taxation and withholding; Revenue Regulations (RR) No. 2-98 (and amendments) provide granular rules.

2) Annualization and refunds

Under Section 79 and RR 2-98, employers must annualize an employee’s compensation either at year-end or upon separation.
If tax withheld exceeds the tax due based on the annualization to date of resignation, the excess must be refunded to the employee (or netted in the final/separation pay).
Conversely, if there is a deficiency, the employer must withhold and remit the shortfall from the final pay; if final pay is insufficient, the employer may have to fund and remit the deficiency to avoid withholding exposure.

3) Statutory/administrative basis to offset employer’s refund

The implementing rules allow employers who actually made a refund to employees (because of over-withholding revealed by annualization) to adjust their subsequent withholding tax on compensation remittances to recover the amount paid out.
This is an intra-tax-type offset (withholding on compensation vs. future withholding on compensation). It is not a credit against corporate income tax, percentage tax, VAT, or other withholding tax categories (e.g., expanded withholding).

Practical scenarios and treatments

A) Employee resigns mid-year, single employer for the year

Compute annualized tax up to date of separation.
If over-withheld, refund via the final payroll or a cash refund (document it).
Offset the refunded amount against the next month’s BIR Form 1601-C remittance(s) within the same calendar year.
Issue BIR Form 2316 (for the year of separation) to the employee within 30 days from separation, showing total compensation, tax due, and tax withheld after the refund/adjustment.

B) Employee had a prior employer before joining you (or moves to a new employer after leaving)

The current employer must request the prior employer’s BIR Form 2316 and consolidate compensation for proper annualization.
If your computation at separation shows an excess withholding, you refund and offset as above.
If the resigned employee transfers to a new employer within the same year, you still finalize your side and issue the employee’s Form 2316 (not for substituted filing) so the next employer can continue annualization.

C) Over-remittance discovered after year-end

If you refunded before January payroll cutoffs (or as part of year-end adjustment) and couldn’t fully absorb the credit in December/January remittances, you may carry the balance into the next available months of the same year.
If still unabsorbed, explore a formal refund/TDM route. This is documentary-heavy and scrutinized—expect to establish that:
- tax was actually over-withheld and remitted,
- an actual refund to employees was made (or that you bore the cost), and
- the claim is timely (observe the general two-year prescriptive period counted from the date of remittance/payment).

What a valid “credit/offset” looks like (step-by-step)

Do the annualization at separation
- Aggregate taxable compensation and allowable exclusions (e.g., de minimis benefits; tax-exempt separation pay in cases beyond the employee’s control; 13th month/exempt benefits up to the statutory cap).
- Recompute tax due using the applicable TRAIN withholding tables for the months covered.
Quantify the over-withholding
- Compare cumulative tax due vs. cumulative tax withheld from the start of the year to separation date.
Refund the difference to the employee
- Preferably through the final pay, with clear payslip lines; if cash/check, secure employee acknowledgment.
Recognize the refund in your payroll/withholding ledger
- Record a negative adjustment to tax withheld on compensation for that payroll period.
Reflect the offset in compliance forms
- In BIR Form 1601-C for the next remittance(s), reduce the amount due by the total refunds made (subject to the form’s instructions for adjustments/over-remittances).
- Ensure the Alphalist and Form 2316 show the corrected year-to-date figures.
Keep a tight audit file
- Separation computation sheets, payroll registers, payslips showing the refund, signed quitclaim/release (if any), Form 2316 copy given to employee, bank proofs, and working papers tying the refund to the offset in 1601-C.

Boundaries and common pitfalls

No offset against other tax types. A refund of compensation withholding cannot reduce your expanded withholding, final withholding, VAT, or corporate income tax payables.
Substance over form. You may only offset what you actually refunded (or what you actually bore on behalf of the employee). Paper adjustments without cash effect to the employee invite disallowance.
Late or missing 2316. Failing to issue a timely BIR Form 2316 (within 30 days of separation) jeopardizes both the employee’s compliance and your audit trail.
Under-withholding on separation. If the final pay is insufficient and you do not fund and remit the deficiency, you risk assessment of deficiency withholding tax, surcharges, and interest against the employer as withholding agent.
Misclassification of separation pay. Separation pay is tax-exempt only when due to death, sickness, physical disability, or causes beyond the employee’s control (e.g., retrenchment, redundancy, installation of labor-saving devices). Voluntary resignation generally does not qualify; misclassifying this can distort the computation.

Accounting view (illustrative)

Upon refund to separated employee (over-withholding):

Dr Withholding tax payable – compensation
Cr Cash/Payroll clearing

Upon filing the next 1601-C:

The payable is naturally lower by the credited refund amount; ensure your ledger matches the return.

(Actual account titles may vary by company policy; the essence is to reverse the portion of payable that pertained to the refunded excess.)

Documentary checklist

Separation/annualization worksheet (signed by payroll/accounting reviewer)
Payroll register and payslip for final pay showing tax refund line
Bank proof or signed acknowledgment if refunded outside payroll
BIR Form 2316 (issued within 30 days of separation)
BIR Form 1601-C and QAP/Alphalist reflecting the adjustment
Reconciliation schedule mapping each employee-level refund to the aggregate offset

Compliance tips & governance

Build separation as a standard payroll event with a mandatory annualization step.
Lock cutoffs so refunds later flow cleanly into the next 1601-C.
Tag credits by employee ID to ease tie-out during audit.
Quarterly internal reviews of withholding balances reduce year-end surprises.
Train HR/payroll on tax-exempt vs. taxable separation payments.

Bottom line

Employers can recoup the cash outlay of refunds of over-withheld compensation tax to resigned employees—but only by offsetting those amounts against subsequent withholding-on-compensation remittances (same tax type, same calendar year, supported by actual refunds and complete documentation). Treat the offset as a mechanical recovery of a trust-fund over-remittance, not as a credit against your own corporate taxes.