If you are an individual whose income is generated from the practice of trade, business, and/or practice of a profession, then you are self-employed. Although it may sound really great because you don’t have a boss to deal, it also comes with its own set of complexities. For starters, you must take care of your own accounting and bookkeeping to ascertain your fiscal health.
On top of that, you need to audit your statements to make sure you pay the correct tax dues to the BIR. Notably, mistakes in calculations and failing to submit supporting documents can result in hefty fines and compounding interest arrears. This also opens you up to a rigorous BIR audit and investigation which can really stress you out. Thus, it is imperative to avoid these potential issues by knowing what all your obligations are.
When you are self-employed, you can legally lower your taxes through deductibles. But you have to carefully document all supporting evidences. When you are self-employed, you are given the choice to elect either Itemized Deductions or Optional Standard Deductions (OSD). Remember that in taxation, ‘one size fit all’ does not apply. It is important to learn about these two as it will help you consider which one of the given choices will fit your situation the most. Let’s learn more about them below:
What is Separation Pay?
All employees who are let go from their positions, whether voluntarily or involuntarily, are eligible to receive separation pay from their employers. Note, however, that individuals who have been let go from their position due to misconduct, violation of company rules, or criminal offenses, are not qualified to receive separation pay, provided that the employer is capable of substantiating these claims.
Separation pay can be described as any amount given to an employee who is separating themselves from the place of work for reasons including, but not limited to, disability, death, sickness, calamities, economic reasons, and other reasons. This separation pay is tax exempt provided that the employee submits the right documents to the BIR.
The taxation on separation pay can be broken down further depending on whether the separation was voluntary or involuntary. See the following:
Involuntary Separation Due to Retrenchment
The Supreme Court of the Philippines strictly defines retrenchment as the termination of employment filed by the employer without fault on the part of the employee. In essence, it is when an employer releases an employee for reasons not pertaining to the employee themselves, but rather external circumstances and occurrences. This includes the following:
- Closure of the business
It also includes the scenario if the employee is found to have a disease wherein the law prohibits their employment or wherein their health is jeopardized. In all cases, the employee is entitled to receive separation pay.
This separation pay, if due to death, physical disability, sickness, or causes due to reasons beyond the employee’s control, is tax-exempt. However, tax exemptions only cover separation pay with a monetary value equal to the total monetized value of 10 unused vacation leaves. Any separation payment exceeding this value is subject to income tax and fringe benefits tax.
In order to claim tax exemptions, the proper procedure must be followed. The employer needs to secure a Certificate of Tax Exemption or CTE from Income and Withholding Tax. The following documents must be submitted to the RDO where the employer is registered:
- Letter of Request from the employee or employer for exemption of separation pay and benefits from income and withholding tax.
- Written notice addressed to the employee and the regional office of DOLE at least 30 days prior to the termination. The address must include the reasons for termination.
- Board resolution or an affidavit executed by the employer stating the following:
- Necessity of the retrenchment to prevent the business from incurring further losses and facing business dissolution
- That losses are real or imminent and properly substantiated by proper supporting evidences
- The retrenchment is made in good faith and not defeat the right of security of tenure
- Selecting people to terminate is done so in a fair and reasonable manner without prejudice towards the employee
It can be quite tedious to process the required documentation. Don’t forget to seek help from your accountant to collate the proper accounting and bookkeeping paperwork to hasten the process.
There are instances where employees voluntarily resign, citing health concerns, relocation, migration, or overall job dissatisfaction. The reasons for such are varied and broad, which is why certain requirements must be met. Usually, voluntary resignation for whatever reason does not entitle an employee to separation pay unless it stipulated in their contracts or written in the CBA or collective bargaining agreement.
Individuals who initiate the termination of their employment are liable to pay the taxes on the final salary. Moreover, for termination due to mental health concerns, the BIR is still yet to clarify the ramifications of such. If you have concerns regarding taxability for resignations, it is best to consult a professional. Call our team for a free 30-minute consultation so you can say goodbye to your employees without worries. We will deal with all the potential BIR problems and solutions on your behalf.