Do you own or manage a business in the Philippines? Does that business have employees? If so, are you familiar with your payroll compliance obligations when it comes to Withholding Tax on Compensation!
By reading this article, you will gain a much better understanding of the Withholding Tax on Compensation framework in the Philippines, including detailed answers to the following questions:
Why is Withholding Tax on Compensation payable?
Who is responsible for computing and filing Withholding Tax on Compensation?
How is Withholding Tax on Compensation computed?
What is the mechanism for filing?
What are the relevant BIR Forms for filing Withholding Tax on Compensation?
In short, for PH Employers – here’s all you need to know about Withholding Tax on Compensation in the Philippines!
What is Withholding Tax on Compensation?
In its most simple form, Withholding Tax on Compensation is a tax on the salary earned by an employee in the Philippines.
Under the withholding tax framework in the Philippines, employers are required to deduct and retain a certain percentage of an employee’s salary before each salary payment and then remit this retained amount to the BIR every month.
PH employers should therefore be aware that where there exists an employer-employee relationship, Withholding Tax on Compensation will usually (unless certain exemptions apply) be applicable, deductable and payable to the BIR!
Importantly, it is the employer who is responsible to ensure compliance with the Withholding Tax on Compensation framework here in the Philippines!
What’s the Purpose of Withholding Tax on Compensation?
The Philippines tax framework provides for a taxation system that encourages and requires taxpayers to retain a designated percentage on certain expenses or disbursements made by the company. The company is then required to remit such payments to the BIR, in the form of taxes, at the earliest opportunity in accordance with the BIR’s tax calendar.
The Withholding Tax regime in the Philippines aims to ensure that taxes are remitted by businesses on a timely and consistent basis throughout the calendar year.
It is also designed to reduce the cost and resources required for tax collection by the BIR by placing the onus on the employer or company to ensure that the correct amount of withholding tax is applied and remitted to the BIR.
Under the Withholding Tax framework, there are many different kinds of withholding taxes that must be applied by PH companies depending on the nature of a particular financial transaction.
Payment of employee salaries is just one of the types of transactions in the Philippines that falls under the Withholding Tax framework. Payment of employee salaries gives rise to Withholding Tax on Compensation – it is effectively an income tax applied by an employer to an employee’s salary prior to payment.
For more information on the withholding tax system in the Philippines, feel free to check out – Withholding Tax – Are you Aware of Your Obligations?
The Compliance Burden v The Economic Burden
It is first important to understand that a withholding agent, in the Philippines, refers to the company or entity that is required to manage and remit withholding tax to the BIR in relation to a financial transaction that has taken place and which is deemed, under the Tax Code of the Philippines, to be subject to withholding tax.
It is also important to be aware that, within the employer-employee relationship, it is the employer who acts as the withholding agent – not the employee.
This means that it is the employer who is required to deduct the withholding tax from an employee’s salary and it is the employer who is required to remit the withheld tax to the BIR.
In short, the burden of compliance in the Philippines, from the perspective of Withholding Tax on Compensation, falls on the employer.
Employed individuals who are purely compensation income earners and perform their employment duties and responsibilities within the Philippines will have Withholding Tax on Compensation deducted from their salaries in advance of each payroll cycle.
In the Philippines, it is standard for employees to be paid on a bi-monthly basis – meaning that Withholding Tax on Compensation is deducted from an employee’s salary two times each month.
So, when an employee is considering what their actual take home pay will be (i.e. money they actually receive into their bank account), they should always consider this figure after Withholding Tax on Compensation (and any other deductions) have already been applied and deducted!
To summarize – while the onus is on the employer in the Philippines to deduct, file and remit Withholding Tax on Compensation to the BIR, it is the employee who bears the economic or financial burden of having the Withholding Tax on Compensation deducted from their salary before each salary pay-out.
Withholding Tax on Compensation Tax Rates
Withholding Tax on Compensation is based on graduated withholding tax rates ranging from 0% to 35% and will be based on or dependant on net taxable compensation of a particular employee.
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|
It is important to note that these Withholding Tax rates are applicable up until 31 December, 2022 – the end of this current year! So, as we approach the end of 2022, employers should ensure to check back on the Withholding Tax on Compensation rates in 2023 and going forward.
Helpfully, and for those proactive employers who want to start preparing their budgets and confirming their compliance obligations into 2023, 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!
Computing Withholding Tax on Compensation in the Philippines
Here’s a simple guide for employers when Computing Withholding Tax on Compensation for your employees.
First off, it’s necessary to determine the total compensation payable to each employee. This will generally be contained in the employee’s contract of employment or within the company’s 201 File. The 201 File is effectively the record of company employees together with their relevant employment and personal details.
To note, 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 (PHP90,000.00) each year!
Finally, employers can then use the graduated withholding tax table and rates provided by the BIR (see Table above) to identify the relevant withholding tax percentage on the net taxable compensation and apply it accordingly prior to paying out the employee salary.
Payroll Annualization in the Philippines
Employers in the Philippines must make sure that the Withholding Tax on Compensation due and payable at the end of each year matches the total amount of tax withheld during each year for each employee.
Every December/January, employers must commence the exercise of ensuring that the correct amount of Withholding Tax on Compensation has been applied to every single employee during the year previous calendar 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.
Here’s a handy table below that provides a simple clarification on what steps a PH employer can take depending on the status of their Withholding Tax on Compensation payments during the previous calendar year:
|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 both the withholding and remittance of the Withholding Tax on Compensation on behalf of their employees.
After Withholding Tax on Compensation has been withheld by the employer, it is then totaled across all employees 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.
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.
BIR Form 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 and Annualization in the Philippines.
CloudCfo – Payroll Services for Small Businesses, Startups and SMEs in Manila and the Philippines
By engaging CloudCfo, you can be confident that when the times come to compute your Withholding Tax on Compensation, the information will be ready, accessible and most important, accurate!
Visit us at www.cloudcfo.ph or contact us at firstname.lastname@example.org for more information about how we can help your business grow!