In the Philippine employment landscape, the resignation of an employee triggers several financial obligations for the employer, collectively known as "final pay." A critical, yet often misunderstood, component of this final settlement is the Income Tax Refund. Under the National Internal Revenue Code (NIRC) and various Bureau of Internal Revenue (BIR) regulations, employers are mandated to perform a year-end adjustment that frequently results in a refund for the departing employee.
1. The Legal Basis: Substituted Filing and Withholding Tax
The Philippine tax system operates on a Withholding Tax on Compensation scheme. Employers are required by law to deduct and withhold a portion of an employee's gross income every payroll period. These deductions are estimates of the employee’s total tax liability for the calendar year.
Because these deductions are based on monthly or semi-monthly averages, the total tax withheld by the time an employee resigns often exceeds the actual tax due, especially if the employee does not complete the full calendar year or has fluctuating bonuses and allowances.
2. The "Annualized" Tax Calculation
When an employee resigns, the employer is required to perform what is known as Annualization. This process involves:
- Totaling all taxable compensation earned from January 1 (or the start date) until the last day of employment.
- Applying the Tax Table: Using the current graduated income tax rates under the TRAIN Law (Republic Act No. 10963).
- Comparing Totals: The employer compares the Actual Tax Due against the Total Tax Withheld from previous months.
The Rule of Thumb: > * If Tax Withheld > Actual Tax Due, the employer must refund the excess to the employee.
- If Tax Withheld < Actual Tax Due, the employer must deduct the deficiency from the employee’s final pay.
3. Common Scenarios Leading to a Refund
A resigning employee is likely to receive a tax refund in the following situations:
- Resignation Mid-Year: Since the tax withheld was calculated as if the employee would earn that high salary for 12 months, stopping mid-year often drops them into a lower tax bracket or reduces the total taxable base.
- Non-Taxable 13th Month Pay: If the total of the 13th-month pay and other benefits does not exceed the ₱90,000 threshold, it remains non-taxable. If the employer previously withheld tax assuming these would be taxable, a refund is due.
- De Minimis Benefits: Excess withholdings on benefits that should have been classified as non-taxable de minimis benefits.
4. Employer Obligations and Timeline
Under BIR Revenue Regulations (RR) No. 2-98, as amended, the employer is the designated withholding agent. Their responsibilities include:
- Inclusion in Final Pay: The tax refund is not a "bonus" from the company; it is the employee's own money. It must be released as part of the final pay, typically within 30 days from the date of resignation, provided the employee has completed the clearance process.
- Issuance of BIR Form 2316: The employer must provide the resigning employee with the Certificate of Compensation Payment/Tax Withheld (BIR Form 2316). This document is vital for the employee’s next employer to ensure correct tax calculation for the remainder of the year.
5. Treatment of "Minimum Wage Earners" (MWEs)
Statutory Minimum Wage Earners are exempt from income tax. If an employee was classified as an MWE but had taxes withheld (perhaps due to a mid-year promotion or temporary commissions), the employer must refund all withheld taxes upon resignation if the total annual income remains within the exempt threshold.
6. Impact of the TRAIN Law
Since 2018, the individual income tax brackets have been significantly adjusted. Currently, individuals earning an annual taxable income of ₱250,000 or below are subject to a 0% tax rate. If a resigning employee’s total year-to-date earnings are below this amount, every centavo withheld by the employer throughout the year must be refunded.
7. Summary Table: Tax Refund Checklist
| Feature | Description |
|---|---|
| Component of Final Pay | Yes, mandated by the NIRC. |
| Calculation Method | Annualization (Total Earnings vs. Total Withheld). |
| Required Document | BIR Form 2316 (to be issued by the employer). |
| Tax Rate Basis | TRAIN Law Graduated Rates ( to ). |
| Exempt Threshold | First ₱250,000 of annual taxable income is 0% tax. |
| Deadline | Usually within 30 days of resignation (along with final pay). |
8. Non-Compliance Consequences
Failure of an employer to refund excess withheld taxes constitutes a violation of the National Internal Revenue Code. Employees have the right to file a complaint with the Department of Labor and Employment (DOLE) for non-payment of final pay or directly with the Bureau of Internal Revenue (BIR) for tax-related infractions. Overheld taxes are considered held in trust for the government; retaining them after the annualization process is legally indefensible.