Tax on Separation Pay in the Philippines

A 2025 practitioner’s guide

1. Overview

“Separation pay” is a statutory or voluntarily granted benefit paid to an employee whose services are terminated other than for just cause. While labour statutes prescribe when it must be paid, the National Internal Revenue Code of 1997 (NIRC, as amended) determines how it is taxed. The governing provisions are found mainly in:

NIRC § 32(B)(6)(b) – exclusions from gross income;
Revenue Regulations (RR) 02-98, as amended (withholding rules);
RR 08-2018 (TRAIN Law consolidation);
Various Revenue Memorandum Circulars (e.g., RMC 50-2018, RMC 79-2020);
Jurisprudence (e.g., CIR v. Court of Appeals & Ateneo de Manila University, G.R. 124043, 14 June 1999; Commissioner v. PLDT, G.R. 178697, 19 August 2015).

2. The Two-Track Tax Treatment

Track	Description	Income-Tax Result
Statutorily/ involuntarily separated	Termination is beyond the employee’s control (redundancy, retrenchment to prevent losses, installation of labour-saving devices, closure, disease, death, total & permanent disability)	Fully excluded from gross income under § 32(B)(6)(b) ⇒ 0 % tax, no withholding
Voluntary or disciplinary separation	Resignation, mutually agreed separation, retirement below optional age, termination for just cause	Taxable compensation income ⇒ Withhold following graduated rates (TRAIN: 0 %–35 %)

Key principle: The triggering event—not the label—controls. ©

3. What counts as “beyond the employee’s control”?

Cause	Source of obligation	Proof normally required by BIR
Redundancy/ retrenchment/ closure	Labour Code arts. 298-299	Termination board resolution & notices to DOLE
Disease	Art. 299	Medical certificate (company doctor + public health officer)
Total & permanent disability	SSS or EC claim award; company policy	Medical findings & SSS/GSIS decision
Death	Art. 301; Civil Code	Death certificate

4. Employer compliance checklist

Determine exemption status. Document the cause.
Compute separation pay under the Labor Code or company CBA.
If exempt
- No tax withheld.
- Still issue BIR Form 2316 indicating “Exempt – § 32(B)(6)(b)”.
If taxable
- Treat as supplementary compensation.
- Apply cumulative average method if paid mid-year.
- Remit via BIR Form 1601-C and include in Alphalist.
File BIR Form 2316 & 1604-C on normal deadlines.
Retain substantiating documents for at least 10 years (RR 17-2013).

5. Illustrative computations

A. Exempt case – redundancy

Length of service: 9 years Monthly pay: ₱30,000 Statutory formula: 1 month pay × years

Separation pay = ₱270,000 Tax due = ₱0

B. Taxable case – resignation

Assume the same facts, resignation on 30 June 2025.

Step	Amount (₱)
Separation pay	270,000
Less TRAIN 0 % bracket (2025)	250,000
Taxable base	20,000
Graduated tax (20 % over ₱250 k)	4,000

Withhold ₱4,000; employee receives ₱266,000 net.

6. Jurisprudential highlights

Ateneo de Manila (1999) – Separation benefits under retirement plans, when paid on closure, are exempt despite plan label.
PLDT (2015) – Tax-exemption hinges on “involuntariness”; employer’s nomenclature (“retirement incentive”) irrelevant.
Mateo v. Coca-Cola (G.R. 226541, 13 Oct 2021) – Disease termination must be certified by a competent public health authority; otherwise employer remains liable but tax treatment unchanged.
CIR v. San Miguel (CTA EB 1949, 2023) – Confirmed that post-TRAIN, § 32(B)(6)(b) remains intact; no distinction between managerial and rank-and-file.

7. Frequently asked questions

Question	Short answer
Is separation pay different from retirement pay?	Yes; retirement pay is governed by § 32(B)(6)(a) and may be tax-exempt if a BIR-registered plan exists and the employee is at least 50 yrs old & 10 yrs in service (post-TRAIN).
What if the company gives more than the statutory minimum?	The entire amount is exempt if the underlying cause is beyond the employee’s control; no cap.
Are payouts under voluntary separation programs taxable?	Generally taxable because they are elective, unless the employer can prove closure/retrenchment circumstances.
Does the 13th-month component of separation packages enjoy the same exemption?	If it represents a pro-rated 13th-month mandated by Presidential Decree 851, it is likewise exempt up to the statutory ₱90,000 ceiling; any excess is taxable unless § 32(B)(6)(b) applies.
Is employer non-withholding a crime?	Yes. Under § 255, failure to withhold or remit subjects the responsible officer to penalties (fine up to ₱50k &/or imprisonment).

8. Practical tips for practitioners

Front-load documentation. Draft board resolutions explicitly citing Art. 298 or 299 grounds.
Segregate payouts. State in the quitclaim the amounts that are “statutorily mandated separation pay” versus bonuses or gratuities (taxable).
Audit payroll systems. Ensure TRAIN brackets are updated annually (BIR issuances usually in December).
Educate employees early. Misunderstandings often arise during redundancy programs; sharing the § 32(B)(6)(b) text helps.
Consider net-of-tax arrangements only after computing the true tax cost; otherwise, the employer may shoulder unintended tax.

9. Future outlook (as of June 2025)

Congressional bills periodically propose to:

Expand exemption to include mutually agreed early-retirement incentives;
Cap exemption amounts to prevent perceived abuse;
Mandate e-filing of separation-related BIR forms within 15 days of payment.

None have yet become law, but practitioners should monitor BIR’s website and DOF press releases.

10. Conclusion

Under Philippine tax law, the decisive factor is why the employee is separated. If the termination is involuntary or due to disability/death, the separation pay is fully tax-exempt; otherwise, it is taxable compensation income subject to withholding. Proper documentation and strict adherence to withholding obligations are essential to avoid exposure for both employer and employee.

Disclaimer: This article is for general information only and does not constitute legal or tax advice. For specific situations, consult a Philippine tax professional or the BIR.