Withholding Taxes in the Philippines — All You Need To Know | eezi

Learn all about withholding taxes, why they are deducted from salaries, what income is taxable, and why they are necessary.

The government is in charge of running and maintaining the whole country. Doing that and doing it right takes a lot of work and money. The government needs steady funding for all the necessary projects to maintain or improve the country and its services, like roads and building constructions.

One of the major sources of the government’s funding comes from the people’s taxes. Taxes come in several forms, one of which is withholding tax.

What is withholding tax?

Withholding tax is the designated amount that employers deduct from their employees’ salaries every month and remit them directly to the government as part of their employees’ income tax.

It is the responsibility of the employers to report their employees’ income to the Bureau of Internal Revenue (BIR) and file their employees’ withholding taxes. Failure to file their employees’ withholding taxes can get the employers in trouble with the law.

Who withholds taxes?

Withholding taxes are generally withheld by agents. Withholding agents are the persons or entities in charge of deducting the correct amount from employees’ salaries and remitting the collected withheld taxes to BIR.

Examples of withholding agents are employers, like individuals engaged in business and non-individual agencies involved in business or not, individuals in the practice of their professions, and the government and its agencies and intermediaries like National Government Agencies (NGAs), Local Government Units (LGUs), and Government Owned or Controlled Corporations (GOCCs).

What are the types of withholding taxes?

Creditable Withholding Tax (CWT)

Creditable withholding tax is a type of withholding tax from the total tax that a taxpayer must remit to the Bureau of Internal Revenue (BIR) every year.

Withholding tax on compensation

Compensation is the amount employees receive as payment for services rendered in the form of salaries or wages. The withholding tax on compensation is the tax that comes strictly from the income of an employee from an employer-employee relationship.

Expanded withholding tax

The expanded withholding tax covers specific income payments. It is credited from the total income tax that the payer must remit to the BIR for the calendar year they earned the income.

Withholding tax on Government Money Payments (GMP) — Percentage Taxes

This type of withholding tax is withheld by NGAs and their instrumentalities. This includes GOCCs and LGUs. The NGAs withhold the tax before paying non-VAT registered taxpayers, suppliers, or payees.

Withholding tax on GMP — VALUE-ADDED Taxes (GVAT)

This tax is withheld by NGAs and their instrumentalities, including GOCCs and LGUs. Such deductions are also paid before VAT-registered taxpayers, suppliers, or payees due to their purchases of products and services.

Final Withholding Tax

The final withholding tax applies to specific income payments. Furthermore, this deduction cannot come from the other income tax due of the payee on other revenues in the applicable year. Lastly, an income that has been subjected to final tax cannot be further subjected to income taxes or capital gains tax.

What are the exemptions to withholding tax?

The law mandates the imposition of withholding taxes. However, the same law allows for several exemptions on where to apply the withholding tax. The following list shows the exemptions that BIR acknowledges:

1. Payment received as an incident of employment as provisioned under R.A. 7641
2. Payment for agricultural labor
3. Payment for domestic services
4. Payment for casual labor done outside the course of the employer’s business or trade
5. Compensation for services conducted by a Filipino citizen for an international organization or foreign government
6. Payment for damages, whether actual, moral, exemplary, or nominal
7. Life insurance
8. Returns of premiums
9. Compensations for sickness or injuries
10. Earnings exempted under a treaty
11. 13th-month pay and other benefits
12. Employee’s share on GSIS/SSS, Medicare, HDMF, PHIC, and others
13. Revenue coming from wages of Minimum Wage Earners (MWEs) working in the private sector and receiving the Statutory Minimum Wage (SMW) as assigned by the Regional Tripartite Wage and Productivity Board (RTWPB) or the National Wages Productivity Commission (NWPC) having control over the place the employee is assigned
14. Income from the compensation of employees working in the public sector and receiving no more than the SMW in the non-agricultural sector as assigned by the RTWPB/NWPC having control over the place the employee is assigned
15. De Minimis benefits (See the de minimis rules in the Philippines)
16. Fringe benefits given to employees that are not rank and file and subjected to Fringe Benefit Tax (FBT)
17. Personnel Economic Relief Allowance (PERA) received by government employees, and
18. Representation and transportation allowance (RATA) given to officers and employees in the public sector under the General Appropriations Act.

How to compute withholding tax on compensation?

With the Philippines’ economy the way it is, every centavo earned matters. That is why correct calculation of taxes is vital. There are a few steps that must be completed in order to determine the correct withholding tax amount.

Computing the withholding tax as they appear in the employee’s BIR Form 2316 starts with determining the taxable income. The taxable income is the remaining balance after subtracting the non-taxable deductions from the gross taxable income.

How to Compute Taxable Income

Taxable Income = Gross Taxable Income — Non-Taxable Deductions

Gross Taxable Income = Monthly Basic Salary + Holiday Pay + Overtime Pay + Night Differential + Other Taxable Allowances

Non-Taxable Deductions = PHIC (Philhealth) Contributions + SSS Contributions + Pag-IBIG (HDMF) Contributions + Unpaid Leaves/Absences + Tardiness Deductions

Sample Case

The next step is to use the taxable income computed to determine the appropriate withholding tax using the BIR’s withholding tax table. To better illustrate this, let us have an example.

An employee named Lisa has a monthly basic salary of Php 18,000. She has earned Php 1,650 as holiday pay and Php 2,080 as overtime pay. Furthermore, Lisa paid a total of Php 1,020 for her SSS, Pag-IBIG, and Philhealth. She has no night differentials earned, other taxable allowances, unpaid leaves or absences, and tardiness deductions.

Sample Computation

We can use the above data in computing Lisa’s withholding tax on compensation as follows:

Lisa’s Taxable Income = (Php 18,000 + Php 1,650 + Php 2,080) — Php 1,020. We can further simplify it to Php 21,730 — Php 1,020, and we get Php 20,710 as Lisa’s taxable income. Using BIR’s withholding tax table for 2022 on a monthly basis, we determine that Lisa’s prescribed withholding tax on compensation amounts to zero.

Conclusion

Lisa’s withholding tax on compensation amounting to zero is due to the provisions of the Tax Reform for Acceleration and Inclusion (TRAIN) Law. Before the TRAIN law, the government required taxpayers to pay taxes at a 5% to 32% rate, depending on their bracket. Details like civil status and the number of dependents also factor in calculating the withholding tax on compensation.

With the Train Law in effect, those with annual taxable income of less than Php 250,000 are exempt from paying income tax. Thus, their compensation does not have deductions. The TRAIN law also lowered the rates of those who still need to pay income tax to 15% to 20%.

Withholding Tax Table for 2022

In accordance with the TRAIN law, BIR released a table for the revised withholding tax on a daily, weekly, semi-monthly, monthly, and annual basis reflecting the changes in the applicable withholding taxes.

Withholding Tax Table for January 1, 2023, and Onwards

The provisions of TRAIN law extend beyond December 31, 2022. BIR also released the following tables to serve as a reference for withholding tax computation at the start of 2023.

Simplify withholding tax calculations

Never miss a deadline and make tax calculations easier with eezi ‘s automated payroll system. Learn how you can make your company more tax compliant.

Originally published at https://www.eezi.com on February 27, 2023.