Income tax refund refers to the return of excess taxes withheld from the employees. This situation may occur when the total amount of withheld taxes for the year is more than the employee’s annual income tax for the year. Therefore, the employer will refund the excess withheld amount back to the employee. And here’s how to compute the income tax refund in the Philippines.

What You Will Learn

  • What is income tax refund?
  • When is tax refund given in the Philippines?
  • How to compute income tax refund for resigned employees?
  • Income Tax Refund Computation

Income Tax Refund in the Philippines

Income tax refund refers to the return of the excess withholding tax that the employer withheld from the employee. The employer is also authorized to withhold any shortfall income tax from the employee’s salary in December in the current year to be remitted to BIR.

At the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall perform a reconciliation process also known as annualization to determine each employee’s income tax based on the employee’s actual annual compensation.

The employer shall then withhold the shortfall or refund the excess through the employee’s salary in December of the current calendar year, not later than January 25 of the succeeding year. Separated employees shall have the shortfall withheld or excess refund to them in the final pay.

When is tax refund given in the Philippines?

Employers shall provide a tax refund upon employee’s separation from employment or not later than January 25 of the succeeding year. There will be a tax refund only when excess withholding tax is withheld. This may be due to one or more of following reasons:

  • Changes in taxation and related regulations;
  • Changes in the tax exemption amount due to change in employee’s status;
  • Shift in tax salary bracket due to situations such as absences without pay or additional compensation;
  • Employee who joined or separated from the company in the calendar year; or
  • Other similar reasons that may affect the employee’s taxable income or tax rate.

How to compute income tax refund for resigned employees?

The employer shall compute the income tax refund for the resigned employee upon the employee’s separation from the company. In fact, the tax refund computation for the resigned employee is the same as the rest of the employees. The only difference is the time when the tax refund will be computed and returned to the employee.

Income Tax Refund Computation

The employer shall compute the total compensation paid to the employee to determine the employee’s actual income tax. The shortfall or excess between the actual income tax and the tax withheld from the employee is the amount to be either deducted from the employee’s salary or returned to the employee.

Illustration

An employee started working on 1st of July with no compensation earned from 1st January to 30th June. He is married with 1 dependent, earns P16,000 basic salary without any additional compensation.

Item Computation Amount
Basic Salary   P16,000.00
SSS Contribution   P581.30
Philhealth Contribution   P200.00
Pag Ibig Contribution   P100.00
Taxable Income P16,000 – P881.30 = P15,118.70

Based on employee’s information, use the MONTHLY table B item (1) – ME1/ S1. As the employee’s taxable income is P15,118.70, the corresponding withholding tax amount shall be:

P708.33 + [(P15,118.70 – P12,083) x 20%] = P1,315.47

Month Salary Earned Tax Withheld
July P15,118.70 P1,315.47
August P15,118.70 P1,315.47
September P15,118.70 P1,315.47
October P15,118.70 P1,315.47
November P15,118.70 P1,315.47
December P15,118.70  
Total P90,712.20 P6,577.35

*Total tax withheld is P6,577.35

Actual Taxable Amount = P90,712.20 – P75,000 = P15,712.20
Actual Income Tax = P500 + [(P15,712.20 – P10,000) x 10%] = P1,071.22
Excess Withholding Tax to be returned = P6,577.35 – P1,071.22 = P5,506.13

For more information on taxation issues, please refer to the tax code of the Philippines.