Taxation of Separation Pay

Due to the on-going community quarantine, most businesses have to stop their operations thereby incurring losses.
Some enterprises permanently closed down businesses while the others reduced their manpower in order to mitigate
losses.

As this may seem relevant during this time, we are sharing with you important facts related to the amount received
by employees upon involuntary employment termination.

Separation pay is the amount given to an employee who has been terminated from service for authorized causes,
which could be due to business closure, retrenchment, redundancy (Article 283, Labor Code) or disease contracted
by the employee that could be prejudicial to their health as well as the health of their co-workers (Article 284, Labor
Code).

You may confuse this with back wages and last pay. Note that back wages pertain to compensation amount
(compensation from dismissal to reinstatement) received by a regular employee who was illegally terminated,
whereas, last pay relates to the earned wages, salaries or other benefits which were not claimed by an employee at
the time of severance from his or her work.

The amount of separation pay given to the employee depends on the specific authorized cause for their termination:

1) Redundancy - equivalent of at least 1 month pay or 1 month for every year of service, whichever is higher
2) Retrenchment or Closure of Business - equivalent of at least 1 month pay or 1/2 month pay for every
year of service, whichever is higher
3) Incurable Disease - equivalent of at 1 month pay or 1/2 month pay for every year of service, whichever is
greater

The Tax Code provides that the above-mentioned separation pay is exempt from income tax. However, to confirm
eligibility for the exemption, employers must comply with the documentary requirements under Revenue
Memorandum Order (RMO) No. 26-2011, as amended by RMO No. 36-2011 and RMO No. 66-2016.

We hope this enlightens everyone of what, how much and the taxability of Separation Pay is. During difficult times,
it is important to know what the law provides.

#TaxBreak with #VPA