How to compute withholding tax on compensation and wages in the Philippines? If you have seen a Monthly Remittance Return of Income Taxes Withheld on Compensation or BIR Form No. 1601-C, you will only see totals of compensation and tax withheld on compensation of the taxpayer’s employees. You will not have an idea on the computation of the tax withheld on compensation for each of those employees. In this article, we will tackle how a withholding tax is computed for each of them. So let’s proceed.
Requirement of Withholding
According to Section 79 of the National Internal Revenue Code (Republic Act No. 8424), as further amended by RA 9504, “except in the case of a minimum wage earner as defined in Sec. 22(HH) of this code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.” This means that employees and workers who earn minimum wages are not subject to withholding tax. The summary of the current regional minimum wage rates can be viewed at the Department of Labor and Employment (DOLE) official website.
Methods of computing tax withheld on compensation
1. Use of withholding tax table. In general, every employer making payment of compensation shall deduct and withhold from such compensation a tax determined in accordance with the prescribed Revised Withholding Tax Tables (Annex C) which shall be used starting January 1, 2009. Below are the four withholding tax tables prescribed in these regulations:
a. Monthly tax table – to be used by employers using the monthly payroll period;
b. Semi-monthly tax table – to be used by employers using the semi-monthly payroll period;
c. Weekly tax table – to be used by employers using the weekly payroll period;
d. Daily tax table – to be used by employers using the daily payroll period.
1;2;3;4- Number of qualified dependent children
S/ME = P50,000 Each Working employee
Qualified Dependent Child = P25,000 each but not exceeding four (4) children
USE TABLE A FOR SINGLE/MARRIED EMPLOYEES WITH NO QUALIFIED DEPENDENT
1. Married Employee (Husband or Wife) whose spouse is unemployed.
2. Married Employee (Husband or Wife) whose spouse is non-resident citizen receiving income from foreign sources.
3. Married Employee (Husband or Wife) whose spouse is engaged in business.
4. Single with dependent father/mother/brother/sister/senior citizen.
6. Zero Exemption for Employees with multiple employers for the 2nd,3rd…employers (main employer claims personal & additional exemption)
7. Zero Exemption for those who failed to file Application for Registration
USE TABLE B FOR THE FOLLOWING SINGLE/MARRIED EMPLOYEES WITH QUALIFIED DEPENDENT CHILDREN
1. Employed husband and husband claims exemptions of children
2. Employed wife whose husband is also employed or engaged in business; husband waived claim for dependent children in favor of the employed wife.
3. Single with qualified dependent children.
If the compensation is paid other than daily, weekly, semi-monthly or monthly, the tax to be withheld shall be computed as follows.
a. Annually – use the annualized computation (see no. 3 below).
b. Quarterly and semi-annually – divide the compensation by three (3) or six (6) respectively, to determine the average monthly compensation. Use the monthly withholding tax table to compute the tax, and the tax so computed shall be multiplied by three (3) or six (6) accordingly.
2. Cumulative average method. This method is used if (a) in respect of a particular employee, the regular compensation is exempt from withholding tax because the amount thereof is below the compensation level, but supplementary compensation is paid during the calendar year or the supplementary compensation is equal to or more than the regular compensation to be paid; or (b) the employee was newly hired and had a previous employer/s within the calendar year, other than the present employer doing this cumulative computation.
3. Annualized withholding tax method. This method is used (a) when the employer-employee relationship is terminated before the end of the calendar year; and (b) when computing for the year-end adjustment (the employer shall determine the amount to be withheld from the compensation on the last month of employment or in December of the current calendar year).
Steps in computing amount of tax to be withheld
Step1. Determine the total monetary and non-monetary compensation paid to an employee for the payroll period, segregating gross benefits which include 13th month pay, productivity incentives, Christmas bonus, other benefits, received by the employee per payroll period, and employees’ contribution (employees’ contribution only and not the employers’ contribution) to SSS, GSIS, HDMF, PHIC, and union dues. Gross benefits which are received by officials and employees of both public and private entities in the amount of P30,000 or less shall be exempted from income and withholding taxes.
You may read our article about How to compute 13th Month Pay in the Philippines.
Step2. Segregate the taxable from the non-taxable compensation income paid to the employee for the payroll period. The taxable income refers to all remuneration paid to an employee not otherwise exempted by law from income tax and consequently from withholding tax. The non-taxable income are those which are specifically exempted from income tax by the Code or by other special laws as listed in Sec.2.78.1(B) hereof (e.g. benefits not exceeding P30,000, non-taxable retirement benefits and separation pay).
You may read our article titled “How to Compute Separation Pay in the Philippines”.
Step3. Segregate the taxable compensation income as determined in Step 2 into regular taxable compensation income and supplementary compensation income. Regular compensation includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation includes payments to an employee in addition to the regular compensation such as commission, overtime pay, taxable retirement pay, taxable bonus and other taxable benefit, with or without regard to a payroll period.
You may read our article on “How to Compute Overtime Pay in the Philippines”.
Representation and Transportation Allowance (RATA) granted to public officers and employees under the General Appropriations Act and the Personnel Economic Relief Allowance (PERA) which essentially constitute reimbursement for expenses incurred in the performance of government personnel’s official duties shall not be subject to income tax and consequently to withholding tax.
Step 4. Use the appropriate tables mentioned under Section 2.79 (B)(1) for the payroll period: monthly, semi-monthly, weekly or daily, as the case may be.
Step 5. Fix the compensation level as follows:
(a) Determine the line (horizontal) corresponding to the status and number of qualified dependent children using the appropriate symbol for the taxpayer’s status.
(b) Determine the column to be used by taking into account only the total amount of taxable regular compensation income. The compensation level is the amount indicated in the line and column to which the regular compensation income is equal to or in excess, but not to exceed the amount in the next column of the same line.
Step 6. Compute the withholding tax due by adding the tax predetermined in the compensation level indicated at the top of the column, to the tax on the excess of the total regular and supplementary compensation over the compensation level, which is computed by multiplying the excess by the rate also indicated at the top of the same column/compensation level.
Sample Computations Using the Withholding Tax Tables
The following are sample computations of Withholding tax on compensation using the withholding tax tables:
Example 1: Single with no dependent receiving monthly compensation
Juan Santos, single with no dependent, receives P18,000 (net of SSS/GSIS,PHIC,HDMF employee share only) as monthly regular compensation and P 7,000 as supplementary compensation for January 2011 or a total of P25,000. How much is the withholding tax for January 2011 for Juan?
By using the monthly withholding tax table, the withholding tax for January 2011 is computed by referring to Table A line 2 S (single) of column 6 (fix compensation level taking into account only the regular compensation income of P18,000 which shows a tax of P1,875 on P15,833 plus 25% of the excess of P 2,167 (P18,000-15,833) plus P7,000 supplementary compensation.
Regular compensation: P 18,000
Less: compensation level
(line A-2 column 6) 15,833
Excess P 2,167
Add: Supplementary compensation 7,000
Total P 9,167
Tax on P15,833 P 1,875.00
Tax on excess (P9,167 x 25%) 2,291.75
Withholding tax for January 2011 P 4,166.75
Example 2: Married with qualified dependent children receiving semi-monthly compensation
Jose Cruz, married with three (4) qualified dependent children receives P14,000 (net of SSS/GSIS,PHIC,HDMF employee share only) as regular semi-monthly compensation. His wife is also employed but he did not waive his right in favor of the wife to claim for the additional exemptions.
Computation: Using the semi-monthly withholding tax tables, the withholding tax due is computed by referring to Table B line 4 ME4 of column 6 which shows a tax of P937.5 on P12,083 plus 25% of the excess (P 14,000 – 12,083 = P1,917).
Total taxable compensation P 14,000
Less: compensation level
(line B-4 Column 6) 12,083
Excess P 1,917
Tax on P12,083 P 937.50
Tax on excess (P1,917 x 25%) 479.25
Semi-monthly withholding tax P1,416.75
For more samples of computations, such as computations using the cumulative average method, and annualized withholding tax method for computing year-end adjustments and when the employer-employee relationship is terminated before the end of the calendar year, please read the BIR issued Revenue Regulations No. 10-2008, which you can download the full text at the following links:
Revenue Regulations No. 10-2008 PDF file from BIR Website or
Revenue Regulations No. 10-2008 PDF file from our website, in case the BIR link won’t work
You can also view/download the following:
Revised Withholding Tax tables
BIR form 1601-C -Monthly Remittance Return of Income Taxes Withheld on Compensation
BIR Form 1604C -Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes
Summary of current regional daily minimum wag rates (Department of Labor and Employment)
New and subsequent BIR rulings, issuances and or laws may render the whole or part of the article obsolete or inaccurate. For more information, please inquire or consult with the BIR.