I. Overview: why a “tax refund” happens when you resign
In the Philippines, most employees earning purely compensation income pay income tax through withholding tax on compensation. Your employer acts as the withholding agent—they compute and deduct tax from your salary and remit it to the Bureau of Internal Revenue (BIR).
When you resign mid-year, two things often cause a refund (overwithholding):
- Withholding is done per payroll period, but the “correct” income tax is ultimately based on total taxable compensation for the year (or, for a resigning employee, total taxable compensation earned during employment as properly annualized/adjusted under BIR rules).
- Certain items included in your final pay (13th month pay/bonuses, leave conversions, separation pay, etc.) may be tax-exempt, partly exempt, or taxable, and the correct classification changes the final tax due.
Your tax refund upon resignation is simply:
Tax Refund (or Tax Payable) = Total tax withheld to date − Correct income tax due on taxable compensation (as adjusted/annualized)
If the result is positive → you should receive a refund.
If negative → you will owe additional tax that the employer may withhold from your final pay.
II. Key legal framework (Philippine context)
The governing rules come mainly from:
- The National Internal Revenue Code (NIRC), as amended, including the TRAIN law changes to personal income tax rates and the treatment of certain benefits.
- BIR regulations on withholding tax on compensation, annualization, and the issuance of BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld).
- Labor standards and Department of Labor and Employment (DOLE) guidance on final pay timing and release (important for when you receive the refund, not how tax is computed).
This article focuses on the computation and the usual payroll mechanics that determine whether a refund is due.
III. Concepts you must know before computing
A. Taxable vs. non-taxable compensation
Your “gross pay” is not automatically “taxable pay.” Taxable compensation generally includes:
- Basic salary/wages
- Taxable allowances
- Taxable portion of bonuses/benefits exceeding exemptions
- Taxable portion of monetized leave beyond exemptions
- Taxable separation pay (if not covered by exemptions)
- Other compensation treated as taxable under the Tax Code/BIR rules
Common non-taxable items include (subject to conditions and documentation):
- Mandatory government contributions (SSS, PhilHealth, Pag-IBIG) deducted from the employee (these reduce taxable income)
- De minimis benefits within BIR-prescribed limits
- 13th month pay and other benefits up to the statutory cap (see below)
- Certain retirement benefits and some separation benefits if they qualify for exemption under the Tax Code
B. “13th month pay and other benefits” exemption cap
In practice, the law provides an aggregate exemption for 13th month pay and “other benefits” (e.g., bonuses, productivity incentives, Christmas bonus, etc.) up to a cap. Amounts beyond the cap become taxable compensation.
Commonly applied cap under TRAIN-era rules: ₱90,000 aggregate exemption.
(If future laws/regulations change this, payroll systems should follow the updated cap. The method below remains the same.)
C. Annualization (why resignation triggers a recomputation)
Employers are generally required to recompute (annualize/adjust) the employee’s withholding tax to ensure that the tax withheld matches the tax due based on actual taxable compensation.
For a resigning employee, employers typically recompute at the last payroll/final pay:
- Determine total taxable compensation earned from the employer for the period of employment during the calendar year;
- Compute the income tax due using the applicable graduated rates;
- Compare with total tax withheld to date;
- Refund the excess or withhold the deficiency.
D. Form 2316 (the document that proves your tax and withholding)
Your employer must issue BIR Form 2316, which shows:
- Total compensation income (taxable and non-taxable portions)
- Total tax withheld
- The year covered and employer details
This document matters because:
- If you will have another employer within the same year, your new employer often needs it to compute withholding properly.
- If you are not qualified for substituted filing (see below), you use it to prepare your annual income tax return.
IV. Step-by-step: how to compute your tax refund upon resignation
Step 1 — Gather payroll and final pay components
You need totals from January 1 up to your separation date (or up to the payroll cutoff used in the final pay computation):
- Taxable salary/wages to date
- Allowances (identify taxable vs non-taxable)
- Bonuses/13th month/other benefits received or accrued (and how much is exempt)
- Monetized leave (vacation/sick leave conversion amounts)
- Separation pay or other separation-related payments (if any)
- Employee share of SSS/PhilHealth/Pag-IBIG contributions deducted
- Withholding tax actually deducted per payslip (total year-to-date)
Your employer’s payroll register usually already summarizes these in the final computation and in Form 2316, but it’s useful to understand the mechanics.
Step 2 — Compute total non-taxable compensation to date
Add all non-taxable items, typically including:
- Employee mandatory contributions deducted (SSS/PhilHealth/Pag-IBIG)
- De minimis benefits within limits
- Exempt portion of 13th month pay and other benefits (up to the cap)
- Exempt portions of leave monetization (if applicable)
- Exempt retirement/separation benefits (if qualified)
Step 3 — Compute total taxable compensation to date
A practical structure:
Taxable Compensation =
- (Gross compensation and taxable benefits)
minus
- (Non-taxable benefits and exclusions)
minus
- (Employee mandatory contributions, if treated as exclusions in payroll tax base)
Payroll systems typically compute “taxable compensation” directly.
Step 4 — Compute the correct income tax due using graduated rates
For Philippine compensation income, the tax due is computed using the graduated income tax rates in effect for the year.
For reference, TRAIN-era schedules are commonly presented in two phases:
A. Rates for 2018–2022 (TRAIN initial schedule)
- ₱0–₱250,000: 0%
- ₱250,000–₱400,000: 20% of excess over ₱250,000
- ₱400,000–₱800,000: ₱30,000 + 25%? (often shown as 30% for this bracket under the initial schedule; payroll references vary by year—use the schedule applicable to the year in question)
- Higher brackets increase progressively up to 35%
B. Rates for 2023 onward (TRAIN later schedule)
Common payroll reference:
- ₱0–₱250,000: 0%
- ₱250,000–₱400,000: 15% of excess over ₱250,000
- ₱400,000–₱800,000: ₱22,500 + 20% of excess over ₱400,000
- ₱800,000–₱2,000,000: ₱102,500 + 25% of excess over ₱800,000
- ₱2,000,000–₱8,000,000: ₱402,500 + 30% of excess over ₱2,000,000
- Over ₱8,000,000: ₱2,202,500 + 35% of excess over ₱8,000,000
Important: The method never changes: apply the rate table applicable to the taxable income for that year.
Step 5 — Compare with total tax withheld to date
Refund = Total tax withheld (YTD) − Correct income tax due
- If positive → refund to employee (usually included in final pay)
- If negative → employee owes deficiency (usually withheld from final pay)
V. Worked example (typical resignation mid-year)
Assume (illustrative only):
- Resigned on June 30
- Basic salary: ₱40,000/month
- Received mid-year bonus: ₱20,000
- Total employee contributions (SSS/PhilHealth/Pag-IBIG) deducted YTD: ₱9,000
- Withholding tax deducted YTD per payslips: ₱25,000
- No separation pay
- No leave conversion
- 13th month not yet paid (or not part of final pay)
1) Compute gross compensation received
Salary: ₱40,000 × 6 = ₱240,000
Bonus: ₱20,000
Total gross received: ₱260,000
2) Identify exemptions/non-taxable portions
If the bonus is part of “13th month and other benefits,” it may be exempt up to the cap. Here the bonus is ₱20,000 and is within the usual ₱90,000 cap → non-taxable (subject to the employer’s classification and aggregation with other benefits).
Employee mandatory contributions: ₱9,000 → reduces tax base in payroll practice.
So non-taxable:
- Bonus (assumed exempt): ₱20,000
- Contributions: ₱9,000
3) Taxable compensation
Taxable = ₱260,000 − ₱20,000 − ₱9,000 = ₱231,000
4) Income tax due (using bracket where ≤ ₱250,000)
If taxable income is ₱231,000, tax due = ₱0
5) Refund
Total withheld YTD: ₱25,000
Correct tax due: ₱0
Refund: ₱25,000
This is exactly the pattern you see when an employee’s taxable income ends up below the zero-tax threshold after exemptions and contributions—but withholding during the year had still occurred due to payroll timing and estimates.
VI. Final pay items and their tax treatment (what usually changes the computation)
Your resignation “final pay” (often called back pay) typically includes some combination of:
- Unpaid salary up to last day worked
- Pro-rated 13th month pay
- Bonuses/incentives (if due)
- Cash conversion of unused leave credits
- Separation pay (only if applicable by contract, company policy, or law in specific termination scenarios)
- Retirement pay (if applicable)
- Refunds/deductions (including tax refund or tax deficiency)
Here are the tricky parts:
A. Pro-rated 13th month pay and bonuses
- Aggregate them under “13th month pay and other benefits”.
- Exempt up to the cap.
- Excess over the cap → taxable compensation.
B. Monetized leave credits (leave conversions)
Common payroll tax handling in PH practice:
- Sick leave monetization is often treated as non-taxable (as it is considered a contingency benefit in many payroll interpretations).
- Vacation leave monetization may be non-taxable up to a limited number of days (commonly referenced as up to 10 days), with the excess treated as taxable.
Actual treatment depends on the nature of the leave policy and the employer’s payroll tax basis. When in doubt, check how your employer classified it in Form 2316.
C. Separation pay
This is one of the most misunderstood areas.
- Voluntary resignation: “separation pay” is generally not legally required unless provided by contract/company policy/CBA. If paid, it is often taxable, unless it falls under an exemption category.
- Involuntary separation due to causes recognized as exempt under the Tax Code (e.g., certain separations due to redundancy, retrenchment, disability, sickness, or other qualifying causes): may be tax-exempt, subject to meeting the statutory requirements and proper documentation.
- Amounts not covered by exemption → taxable.
D. Retirement benefits
Retirement benefits may be tax-exempt if they satisfy Tax Code conditions (e.g., minimum age/service, one-time availment rules, and qualified plan/conditions). Otherwise, they may be taxable in whole or in part.
VII. Multiple employers in the same year (big impact on refunds)
A common resignation scenario is: you resign from Employer A and join Employer B within the same calendar year.
What usually happens
- Employer A computes withholding/annualization based only on what you earned from Employer A.
- Employer B withholds tax based on your earnings with Employer B, and may request your Form 2316 from Employer A to properly factor prior income.
Substituted filing eligibility
Employees who are qualified for substituted filing generally do not need to file an annual ITR—the employer’s Form 2316 substitutes for the return.
However, having two or more employers in the same taxable year is a common reason you may not qualify for substituted filing, meaning you may need to file your annual income tax return and reconcile total tax due vs total withheld across employers.
Refund implications
- You might receive a refund from Employer A at separation.
- But after combining income from Employer B, your final annual tax due may be higher, and you could end up owing upon filing (or having less refund overall).
- The “true” final result is determined when all compensation for the year is aggregated under the annual tax computation.
VIII. How the refund is typically released (practical process)
A. Employer payroll adjustment at final pay
The cleanest method is:
- Employer recomputes tax due based on taxable comp to date;
- Employer offsets excess withholding by reducing the final remittance to the BIR for that payroll period (or otherwise adjusting within the period allowed);
- Refund is paid to you as part of your final pay.
B. If excess withholding was already remitted
In some cases (timing/processing delays), the employer may have already remitted the withholding tax and may be less able to “net it out” internally. The employer may still be able to adjust within the same year depending on timing and payroll practice; otherwise, the refund becomes more procedural and may require formal claim mechanisms.
For employees, the more realistic route in multi-employer or complicated cases is often:
- reconcile through the annual return (if required) and claim the overpayment there, subject to BIR processes and timelines.
IX. Timing: when you should expect the refund
In labor practice, final pay is commonly released within a reasonable period after separation, and DOLE guidance is often referenced as within 30 days unless company policy/CBA provides a shorter period or a justified longer processing time (e.g., clearance, accountabilities, final computation).
If your computation shows a refund, it typically appears as a line item in your final pay breakdown (e.g., “Tax Refund – Annualization”).
X. Disputes and remedies (when the numbers don’t match)
A. Common causes of disagreement
- Employer treated an item as taxable that you believe is exempt (e.g., bonus cap, leave conversion classification)
- Employer did not include employee contributions properly
- Employer did not annualize/adjust at separation, leading to no refund
- Employer withheld deficiency tax from final pay without showing the computation
- Multiple-employer year causing confusion (refund from A but payable after B is included)
B. What to request first (documentation)
- Detailed final pay computation
- Year-to-date payslips or payroll summary
- BIR Form 2316
- Breakdown of 13th month and other benefits and how the exemption cap was applied
- Treatment of leave conversions and separation/retirement amounts
C. Where disputes go
- If the issue is non-release of final pay/refund or withholding without explanation: typically handled first as a labor standards issue (company HR → then DOLE if needed).
- If the issue is tax characterization (is an item taxable/exempt): it’s ultimately governed by tax rules; employers should align with BIR regulations, and employees may need tax advice for filing/reconciling if not substituted.
XI. Quick checklist: compute your expected refund in minutes
- Total withholding tax deducted YTD (sum from payslips)
- Total taxable compensation YTD (salary + taxable benefits + taxable portions)
- Subtract non-taxable items/exemptions (bonus cap, de minimis, exempt leave, exempt separation/retirement, etc.)
- Subtract employee mandatory contributions (as applied in payroll tax base)
- Apply graduated tax table for the year
- Refund = withheld − tax due
XII. Practical notes and FAQs
1) “If I resign before year-end, do I automatically get a refund?”
No. You only get a refund if your withheld tax exceeds the tax actually due based on your taxable compensation and exemptions.
2) “Is the refund always included in final pay?”
Usually, yes—because annualization/adjustment is commonly done at the last payroll. But timing depends on the employer’s final pay processing.
3) “If I had two employers, can I still rely on my refund from the first one?”
Treat it as provisional. Your final annual tax position depends on total income from both employers and total tax withheld.
4) “Is separation pay always tax-free?”
No. Tax exemption depends on why the separation pay was given and whether it fits statutory exemption conditions. Voluntary resignation payments are commonly taxable unless they qualify under specific exemptions.
5) “Can an employer withhold tax from my final pay even after I resigned?”
Yes, if the recomputation shows a deficiency. What matters is that the employer should provide the computation and reflect it in Form 2316.
XIII. Bottom line formula (the whole topic in one line)
Employee tax refund upon resignation = (Total withholding tax deducted by the employer for the year-to-date) − (Income tax due on year-to-date taxable compensation after applying exemptions, exclusions, and proper annualization/adjustment under Philippine tax rules).