Terminating an employee is a delicate and complex process that involves various considerations, and one often overlooked aspect is the tax implications for both the employer and the employee. Understanding the tax consequences is crucial for both parties to ensure compliance with local regulations and make informed financial decisions. This article explores the multifaceted landscape of tax implications associated with employee termination, covering aspects such as severance pay, final paychecks, retirement plans, stock options, tax credits, employer payroll taxes, legal settlements, and fringe benefits.

In Thailand, terminating an employee’s contract is a significant event for both employers and employees. It carries various legal and financial implications that demand attention. Depending on the situation, certain payments must be made to the employee. Furthermore, these payments may be subject to tax.

In this article, we look at the tax implications for terminating an employee in Thailand.

Key points

• In Thailand, an employer can terminate an employee’s employment at its discretion.
• Should the dismissal be made without a statutory cause, the company could be liable for a statutory payment to be made to the employee
• Certain payments are subject to tax
• Exemptions are available for severance pay of up to 10 months or 300,000 THB
• One-time payments of the tax owed are eligible for deductions.

WHAT ARE THE STATUTORY CAUSES FOR THE DISMISSAL OF AN EMPLOYEE IN THAILAND?

Thai law sets out several statutory causes a company can rely upon when dismissing an employee, for example:

• wilfully disobeys or habitually neglects the lawful commands of the employer, 
• absents himself of services, 
• guilty of gross misconduct, 
• or otherwise acts incompatible with the due and faithful discharge of the employee’s duty.

 

In addition, Section 119 of the Labour Protection Act also stipulates the statutory causes as follows:

• performing the duty dishonestly or intentionally committing a criminal offense against the employer; 
• wilful acts were done to cause damages to the employer; 
• committing negligent acts causing serious damage to the employer;
• violating work regulations, regulations or orders of the employer which is lawful and just for which the employer has already issued the employee a written warning, except in a serious instance for which the employer is not required to give a warning;
• absenting from duty without justifiable reason for three (3) consecutive working days whether or not they are separated by holiday and; 
• being sentenced to imprisonment by a final court judgment.

Should the employer terminate an employee using a statutory cause, the employer is required by the law to notify the reason for the termination by issuing a letter of termination of employment. Alternatively,  a company may inform the reason for termination to the employee at the time of the termination. Failure to do so will mean that the employer cannot claim such statutory cause against the employee’s termination.

 

What are the required statutory payments for firing an employee?

 

• Severance Pay:

Severance pay is subject to income tax. However, under the following conditions, can be exempt from tax in Thailand. Employees terminated without grounds are entitled to severance pay, up to THB 300,000 or 10 months tax-free. Any amount exceeding this is subject to income tax. 

Employees who have worked for the same employer for 5 years or more may qualify for a special deduction. However, voluntary redundancy does not qualify for tax exemption, but a special deduction may still apply if the employee has worked for the employer for 5 years or more.

 

• Deductions for one-time payments

Suppose an employee has worked continuously for one employer for 5 years or more before termination (whether voluntary or compulsory). In that case, they qualify for a special deduction for a lump-sum payment (e.g., gratuity, severance pay, or provident fund payout). 

When calculating the employer’s withholding of personal income tax, two additional deductions from the employee’s income are applied:

• Deduct expenses equal THB 7,000 multiplied by the years of employment, capped at the income amount.
• Allow further expenses at a rate of 50% of the remaining amount.

• Final Paycheck:

The final paycheck is a critical component of employee termination. It encompasses any remaining wages, accrued vacation, or unused leave. Employers must ensure that the final paycheck aligns with local wage and hour laws. The income tax, Social Security, and Medicare taxes that applied to regular paychecks also extend to the final paycheck, making it essential for employers to accurately calculate and withhold the appropriate amounts.

• Unemployment Compensation:

Employees who face termination may be eligible for unemployment compensation. While these benefits are designed to provide financial support during periods of unemployment, they are subject to income tax. Individuals receiving unemployment benefits should be aware of the potential tax implications and consider setting aside a portion of their benefits for tax obligations.

• Tax Credits:

Certain jurisdictions offer tax credits or incentives to employers for specific types of terminations, particularly those linked to job training or reemployment programs. Employers should explore available tax credits to optimize their financial position during a workforce transition. Understanding the eligibility criteria and application process is essential for employers looking to leverage these potential benefits.

• Employer Payroll Taxes:

Employee termination impacts employer payroll taxes, including Social Security and Medicare taxes. As the workforce size changes, employers must adjust their payroll tax obligations accordingly. Staying compliant with tax regulations and promptly updating payroll systems is essential to avoid potential penalties or legal issues.

• Legal Settlements:

In cases where legal issues arise from an employee termination, such as wrongful termination claims, settlements may be reached. The tax treatment of settlement payments can vary, depending on the nature of the settlement. It’s crucial for both parties to consult tax professionals to understand the tax implications associated with any legal resolution.

• Fringe Benefits:

Employee termination may affect the tax treatment of fringe benefits, such as health insurance or other employee benefits. Employers should communicate changes in benefit coverage and tax implications to departing employees to ensure transparency and avoid potential misunderstandings.

 

Conclusion:

Navigating the tax implications of employee termination requires a comprehensive understanding of various factors, including severance pay, final paychecks, retirement plans, stock options, tax credits, employer payroll taxes, legal settlements, and fringe benefits. Employers and employees alike should seek professional advice to ensure compliance with tax laws, make informed financial decisions, and mitigate potential risks associated with termination. By addressing tax considerations proactively, both parties can navigate the termination process more smoothly and minimize the likelihood of unexpected financial challenges.