BIR Form 2316 for an Employee on Approved Leave Without Pay: How a Mid-Year Gap Affects Annualized Withholding
An employee who takes an approved Leave Without Pay (LWOP) for part of the year doesn’t get excused from the year-end annualized withholding computation — the employer still runs the same mandatory calculation under RR No. 2-98 Section 2.79(B)(5)(b) for every employee still on the payroll at year-end, using whatever compensation was actually paid. Because withholding tables assume steady monthly pay, an employee with an unpaid gap typically ends up with less tax due on the full year’s (smaller) actual income than was withheld during the months they were paid — which usually means a refund in December, not a problem.
This guide applies the general year-end adjustment mechanics covered in Year-End Withholding Tax Adjustment on Compensation to the specific case of an employee with an unpaid gap mid-year. For the related case of mid-year departure instead of a return from leave, see BIR Form 2316 for Resigned or Separated Employees.
Generate a BIR Form 2316 With an LWOP Gap FREE →Why does LWOP not exempt an employee from annualization? #
The annualization rule applies by reference to who’s an employee at year-end, not by reference to how continuously they were paid during the year — an LWOP period is simply a stretch of the year with no taxable compensation, which the computation already accommodates by definition. The operative provision, already verified and applied elsewhere on this site, states the computation directly:
“On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.”
— RR No. 2-98, Section 2.79(B)(5)(b)
An employee who took two unpaid months of LWOP simply has ten months of taxable compensation instead of twelve feeding into that “entire taxable year” figure — the mechanism itself doesn’t change, only the number going into it.
Why does an LWOP gap usually produce a refund rather than additional tax due? #
Monthly withholding tables are built assuming a steady, repeating monthly salary, so the months an employee actually worked and got paid around an LWOP gap get withheld as if that pay rate continued all year — annualizing the real, lower full-year total afterward typically reveals that too much was withheld during the paid months relative to what the whole year’s smaller income actually owes.
| Scenario | Months paid | Full-year taxable compensation | Tax due (annualized) | Tax withheld Jan–Nov (at monthly rate) | Year-end result |
|---|---|---|---|---|---|
| Employee with no LWOP | 12 | Full annual salary | Computed on full amount | Matches the full-year rate | Typically near zero (small refund or balance) |
| Employee with 2 months LWOP | 10 | Full annual salary minus 2 months’ pay | Computed on the smaller amount | Withheld at the normal monthly rate during the 10 paid months, as if the full year continued at that pace | Usually a refund, since tax due on the smaller annual total is less than the sum withheld during the paid months |
The employer still processes this refund (or, in rarer cases, additional withholding) through the same December mechanism used for every other employee — LWOP doesn’t create a separate refund process, it just changes which direction, and how large, that December adjustment runs.
Worked example: an employee with a two-month unpaid leave #
Teresa Ongpin earns ₱35,000 monthly at Harborview Logistics Corp. and takes an approved two-month Leave Without Pay in June and July to care for a family member, returning to work in August.
| Item | Without LWOP (12 months) | With 2-month LWOP (10 months paid) |
|---|---|---|
| Full-year taxable compensation | ₱420,000.00 | ₱350,000.00 |
| Tax withheld Jan–Nov, at the standard monthly rate for ₱35,000 | Based on 11 months’ withholding | Based on only the 9 paid months within Jan–Nov (June and July had none) |
| Annualized tax due (Section 24(A), on the actual full-year total) | Computed on ₱420,000.00 | Computed on ₱350,000.00 |
Because Teresa’s employer withheld at the standard monthly rate during every paid month assuming a full ₱420,000 year, but her actual annual compensation came in at ₱350,000 once the two unpaid months are factored in, the annualized tax due on ₱350,000 comes out lower than the cumulative amount already withheld — Harborview refunds the difference to Teresa with her December pay, and her BIR Form 2316 reflects the full year’s actual ₱350,000 compensation and the correspondingly lower tax due.
Frequently asked questions #
Does an employee on Leave Without Pay skip the year-end annualization computation? #
No. Every employee still on the payroll as of the last payroll period of the year goes through the same mandatory annualization computation under RR No. 2-98 Section 2.79(B)(5)(b), regardless of how many unpaid months they had during the year. The computation simply runs on whatever taxable compensation was actually paid.
Does a Leave Without Pay period usually result in a tax refund or additional tax due at year-end? #
Typically a refund, since withholding tables assume steady monthly pay, and months with no pay at all mean no withholding happened during the gap — once the full year’s actual (lower) taxable compensation is annualized, the tax due on that smaller total is often less than what was withheld during the paid months, producing a refund rather than additional tax due.
Is the LWOP period itself reported anywhere on BIR Form 2316? #
Not as a separate line item — BIR Form 2316 reports total compensation actually paid and tax actually withheld for the year, not a month-by-month attendance record. An unpaid LWOP month simply shows up as a month with no compensation and no withholding, folded into the annual totals.
What if the employee takes LWOP and then resigns before year-end instead of returning? #
Then the employer runs the year-end-equivalent computation at separation instead of waiting for December, the same substituted-filing mechanics covered in this site’s guide on resigned employees, using whatever compensation and withholding actually accrued up to the separation date — the LWOP gap is simply part of that shorter earnings period.
Does LWOP affect the ₱90,000 13th month pay exemption ceiling? #
No. The ₱90,000 ceiling under NIRC Section 32(B)(7)(e) is a flat annual figure with no proration mechanism built into the statute itself — it applies in full regardless of how many unpaid months the employee had, the same way it applies in full to a resigned employee’s prorated 13th month pay.
Summary #
Leave Without Pay doesn’t remove an employee from the year-end annualized withholding computation under RR No. 2-98 Section 2.79(B)(5)(b) — it just means fewer months of taxable compensation feed into that computation, which typically produces a December refund since the full year’s actual income comes in lower than what the standard monthly withholding tables assumed during the paid months.