Separation Pay Received for Redundancy, Retrenchment, or Cessation of Business, Beyond the Control of Employee is Non-Taxable
Separation pay is mandated to be given to employee who is terminated due to redundancy as set forth under Article 298 of the Labor Code, as amended.
In general, this applies to retrenchment and termination due to cessation or closure of business. There is an exception as held in the cases of North Davao Mining vs. NLRC (G.R. No. 112546, March 13, 1996.) and Reahs Corporation vs. NLRC (G.R. No. 117473, April 15, 1997). (See discussion of said cases on pp. 289, 290, and 294, in Valid Dismissal of Employees Second Edition)
Separation pay received in these instances are non-taxable and are not covered by the withholding rules under RR 2-98. Likewise, the Tax Code provides that it is excluded from gross income.
Hence, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (Section 32, (B), (5), (b), NIRC). (See discussion on pp43-45, Tax Solutions on Employee Compensation and Benefits under TRAIN Law)
Under RR 2-98:
“The following income payments are exempted from the requirement of withholding tax on compensation:
- Remunerations received as an incident of employment,
as follows:
xxx
Any amount received by an official or employee or by his heirs from the employer
due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, such as retrenchment, redundancy, or cessation of business.”
The phrase “for any cause beyond the control of the said official or employee” connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. (Section 2.78.1, (B) (a), RR 2-98; pp. 43-44, Tax Solutions on Employee Compensation & Benefits 2019 under TRAIN Law by Atty. Villanueva)
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For instance:
Scenario A
X, after serving ten (10) years of service as Data Encoder in a company based in NCR receiving the minimum wage was declared redundant due to computerization program of the company. He reports Monday to Friday. His separation pay is as follows:
Daily Rate: PhP537.00
Monthly Equivalent: PhP14,006.75
Computed as follows
PhP537.00 x 313 = PhP168,081.00
PhP168,081.00 / 12 = PhP14,006.75
Separation pay: Monthly Basic Salary x No. of Years of Service
PhP14,006.75 x 10
PhP140,067.50
Taxability: Not Taxable
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Scenario B
X, after serving ten (10) years of service as Data Encoder. He reports Monday to Friday. His company is based in NCR and he was receiving the minimum wage.
X wanted to retire but the company has no retirement plan. Further, he is just 45 years old. He heard though that after six months, the company has plans to declare the position Data Encoder redundant due to computerization program of the company. He found this as a perfect timing and asked HR that he would resign but that it should be considered as “redundant” considering that a redundancy program would be implemented in a few months.
He submitted his resignation letter and HR accepted it. In lieu thereof, and in response to the request of HR, a redundancy letter was issued to him. However, it was found by authorities that he actually resigned. His separation pay is as follows:
Daily Rate: PhP537.00
Monthly Equivalent: PhP14,006.75
Computed as follows
PhP537.00 x 313 = PhP168,081.00
PhP168,081.00 / 12 = PhP14,006.75
Separation pay: Monthly Basic Salary x No. of Years of Service
PhP14,006.75 x 10
PhP140,067.50
Tax: The amount is taxable
Assuming that the applicable rate is 20%:
PhP140,067.50 x 20% = PhP28,013.50
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