If you own or manage a business with employees in the Philippines, you are likely to be familiar with Withholding Tax on Compensation.
Most employers will be aware, in general, that Withholding Tax on Compensation is a tax to be applied by employers on their employee salaries. In this article, however, we go much deeper! Why is withholding tax payable? What is the method for filing? What are the relevant BIR forms? How is Withholding Tax on Compensation computed?
Employers – here’s what you should know about Withholding Tax on Compensation in the Philippines!
What is Withholding Tax on Compensation?
Withholding Tax on Compensation is a tax on an employee’s income. Generally speaking, it requires employers to deduct and retain a certain percentage of an employee’s salary each cut-off date and then remit this retained amount to the Bureau of Internal Revenue, or BIR.
Withholding Tax on Compensation will be applicable, in general, where there exists an employer-employee relationship.
What is the rationale for Withholding Tax on Compensation?
The Philippines tax framework provides for a taxation system that encourages and requires taxpayers to retain monies and remit taxes at the earliest opportunity. Withholding tax aims to ensure that taxes are remitted by businesses on a timely basis and also to reduce the cost and resources required for tax collection by the BIR.
As such, different kinds of withholding taxes are imposed on various types of payments and transactions in the Philippines, including the tax discussed in this article – Withholding Tax on Compensation.
For more information on the withholding tax system in the Philippines, check out our previous article, Withholding Tax – Are you Aware of Your Obligations?
The Compliance Burden v The Economic Burden
In the employer-employee relationship, it is the employer who acts as the withholding agent. A withholding agent, in the Philippines, is the entity that is in control of a particular payment which is subject to withholding tax.
Employed individuals who are purely compensation income earners and providing their services in the Philippines will generally have withholding tax on compensation deducted from their monthly or bi-monthly salary.
While the onus is on the employer to deduct, file and remit withholding tax on compensation to the BIR, it is the employee who bears the economic or financial burden of Withholding Tax on Compensation (i.e. employees have the tax deducted from their salary).
Withholding Tax on Compensation Tax Rates
Withholding Tax on Compensation is based on graduated withholding tax rates ranging from 0% to 35% on net taxable compensation.
The BIR has developed and issued a Withholding Tax table which is available on the BIR website. For ease of reference, we have included the BIR’s Withholding Tax table (from the BIR website) below.
|REVISED WITHHOLDING TAX TABLE|
|Effective January 1, 2018 to December 31, 2022|
|Compensation Range||P685 and below||P685 -P1,095||P1,096 – P2,191||P2,192 – P5,478||P5,479 – P21,917||P21,918 and above|
|Prescribed Withholding Tax||0.00||0.00 +20% over P685||P82.19 +25% over P1,096||P356.16 +30% over P2,192||P1,342.47 +32% over P5,479||P6,602.74 +35% over P21,918|
|Compensation Range||P4,808 and below||P4,808 – P7,691||P7,692 – P15,384||P15,385 – P38,461||P38,462 – P153,845||P153,846 and above|
|Prescribed Withholding Tax||0.00||0.00 +20% over P4,808||P576.92 +25% over p7,692||P2,500.00 +30% over p15,385||P9,423.08 +32% over P38,462||P46,346.15 +35% over P153,846|
|Compensation Range||P10,417 and below||P10,417 – P16,666||P16,667 – P33,332||P33,333 – P83,332||P83,333 – P333,332||P333,333 and above|
|Prescribed Withholding Tax||0.00||0.00 +20% over P10,417||P1,250.00 +25% over P16,667||P5,416.67 +30% over P33,333||P20,416.67 +32% over P83,333||P100,416.67 +35% over P333,333|
|Compensation Range||P20,833 and below||P20,833 – P33,332||P33,333 – P66,666||P66,667 – P166,666||P166,667 – P666,666||P666,667 and above|
|Prescribed Withholding Tax||0.00||0.00 +20% over P20,833||P2,500.00 +25% over 33,333||P10,833.33 +30% over P66,667||P40,833.33 +32% over P166,667||P200,833.33 +35% over P666,667|
For those proactive employers out there, the graduated Withholding Tax table that will be effective from January 1, 2023 has already been released by the BIR. You can check it out here.
How to compute Withholding Tax on Compensation?
First, determine the total compensation payable to the employee. This will generally be contained in the employee’s contract of employment or within the company’s 201 File.
For the purposes of withholding tax, “compensation” or “wages” refer to all (or gross) remuneration for services performed by an employee for their employer, unless certain items are specifically exempted by the National Internal Revenue Code of 1997, otherwise known as the Tax Code of the Philippines.
Taxable compensation for the purposes of Withholding Tax on Compensation can be classified into two categories:
- Regular Compensation – this includes the basic salary and other fixed allowances such as transportation allowances.
- Supplementary Compensation – this includes commission, overtime pay, fees, profit sharing, monetized vacation leave in excess of ten days, sick leave pay, hazard pay, taxable 13th month pay and other benefits, and other remuneration received within the employer-employer relationship.
To arrive at the taxable compensation amount, identify and deduct the non-taxable and exempt/excluded compensation income. This might include non-taxable 13th month pay and other non-taxable benefits, de minimis benefits, SSS and other such contributions, fringe benefits (which may be subject to fringe benefit tax), PAG-IBIG contributions, productivity incentives, and any other non-taxable/exempt compensation income. Remember – in the Philippines, employees are entitled to an exemption from income tax for benefits/allowances up to a total of Ninety Thousand Pesos (₱90,000.00) each year.
Finally, use the graduated withholding tax table from the BIR (referred to above) to identify the relevant withholding tax % on the net taxable compensation.
Adjustments at Calendar Year-End
Employers in the Philippines must make sure that the Withholding Tax on Compensation due and payable for the year matches the amount of tax withheld for that year for each employee.
Employers need to ensure that the correct amount of Withholding Tax on Compensation has been applied during the year. Sometimes employees might have to be reimbursed for over-taxation. This can happen sometimes when an employee joins a company during a tax year (i.e. the employee does not work the full tax year but is in fact taxed as if they were employed for the entire year).
If the tax payable to the BIR and the tax withheld from an employee’s salary do not align, the employer will have to review why this is the case and ensure that the difference is rectified. The table below outlines what steps an employer can take in each scenario:
|Tax due > tax withheld||Collect the correct amount before payment of last compensation in the year|
|Tax due < tax withheld||Refund the surplus amount to the employee not later than the 25th day January the following year, or the last payment of compensation|
|Tax due = tax withheld||Withholding amount is correct|
Filing requirements for Withholding Tax on Compensation
As mentioned above, employers are responsible for the withholding and remittance of the Withholding Tax on Compensation on behalf of their employees. Withholding Tax on Compensation must be withheld and remitted monthly to the BIR using BIR Form 1601-C.
The Monthly Remittance Return of Income Taxes Withheld on Compensation is due within 10 days after the close of each month if filing manually. However, the withholding tax for the month of December is due not later than January 15 of the following year.
If the employer or withholding agent is enrolled under the BIR’s Electronic Filing and Payment System, known as eFPS, the deadline ranges from on or before the 11th to the 15th day of the following month, depending on the category of employee (see HERE).
Employers are required to report the amount of total compensation tax withheld for the entire year using BIR Form 1604-C or the Annual Information Return of Income Tax Withheld on Compensation. This has to be filed with the BIR on or before January 31 of the following taxable year.
Form No. 2316 – Certificate of Compensation Payment/Tax Withheld or BIR
BIR Form 2316, or to give it its full name, the Certificate of Compensation Payment/Tax Withheld, is a form that employers in the Philippines must file with the Bureau of Internal Revenue for every calendar year.
BIR Form 2316 is also completed and issued to each employee that receives a salary, wage or any other form of remuneration from the employer. The Certificate identifies the total amount of compensation paid to, and the total taxes withheld from, each employee during the previous calendar year.
Check out our recent article to find out all you need to know about BIR Form 2316.
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