In the Philippine employment landscape, the resignation process involves more than just the turnover of tasks and the issuance of a COE (Certificate of Employment). One of the most critical financial components is the tax treatment of the employee's final pay, which often results in a tax refund.
Under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law, the mechanism for this refund is rooted in the "Annualization" process.
1. The Principle of Withholding Tax on Compensation
Throughout the year, employers act as withholding agents for the Bureau of Internal Revenue (BIR). They deduct a portion of an employee's monthly salary based on projected annual income.
However, since these deductions are estimates, the total amount withheld by the time an employee resigns often exceeds the actual tax due for that specific period of service. This discrepancy is what creates the eligibility for a refund.
2. When is a Resigning Employee Eligible?
An employee is generally eligible for a tax refund upon resignation if:
- Over-withholding occurred: The total tax withheld from January 1 up to the last day of service is greater than the actual tax due based on the graduated income tax rates.
- Mid-year Resignation: Because the monthly withholding assumes you will earn that same salary for 12 months, resigning mid-year often places you in a lower actual tax bracket than the one used for monthly deductions.
- Non-Taxable Income: A portion of the final pay—such as the de minimis benefits and the PHP 90,000 threshold for 13th-month pay and other benefits—is exempt from tax. If these were factored into tax calculations prematurely, a refund is triggered.
3. The Mechanism: Year-End Adjustment (Annualization)
Per Revenue Regulations (RR) No. 2-98, as amended, employers are required to perform "Annualization" when:
- The employer-employee relationship is terminated before the close of the calendar year.
- The calendar year ends (for stay-in employees).
The Process:
- The employer calculates the total gross compensation earned by the employee from the start of the year until the last salary.
- Non-taxable portions (SSS, PhilHealth, Pag-IBIG contributions, and the PHP 90,000 bonus ceiling) are deducted.
- The tax due is computed using the BIR Graduated Tax Table.
- The tax due is compared against the total tax already withheld.
- If Tax Withheld > Tax Due, the employer must refund the excess to the employee.
4. Inclusion in the "Final Pay"
Legal practice and labor standards in the Philippines dictate that the tax refund should be integrated into the employee's Final Pay (or "Backpay").
| Component | Description |
|---|---|
| Pro-rated 13th Month | Mandatory 1/12 of the basic salary earned during the calendar year. |
| Last Salary | Unpaid wages for the final days worked. |
| SIL Encashment | Money value of unused Service Incentive Leaves (for those with at least 1 year of service). |
| Tax Refund | The excess tax collected during the year, returned via annualization. |
5. Documentary Requirements (BIR Form 2316)
The employer is legally mandated to issue BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) to the resigning employee.
- Timing: This must be issued on the day the last payment of wages is made.
- Purpose: If the employee moves to a new employer within the same year, they must submit this Form 2316 to the new employer. The new employer will then consolidate the income from both jobs at the end of the year to perform a final annualization.
6. Key Legal Considerations
- Substituted Filing: Resigning employees who find a new employer within the same year lose the privilege of "substituted filing" for that year. They are technically required to file their own Annual Income Tax Return (BIR Form 1700) by April 15 of the following year, using the 2316 forms from both employers.
- The "Net Pay" Trap: If an employee's total annual income (after consolidation) jumps into a higher tax bracket because of the new job, they might actually owe the BIR more tax at year-end, which would offset the refund they received from their previous employer.
- Employer Refusal: An employer's failure to return excess withheld tax can be grounds for a complaint with the Department of Labor and Employment (DOLE) as it constitutes a violation of the rules on the payment of final pay, or with the BIR for violating withholding tax regulations.
Summary of Rights
The tax refund is not a "bonus" from the company; it is the employee's own money that was over-collected by the government. Upon resignation, the employer acts as the conduit to return these funds during the clearance process. Consistent with Labor Advisory No. 06, Series of 2020, all final pay—including tax refunds—must be released within thirty (30) days from the date of separation or resignation, unless a more favorable company policy exists.