How can employees claim their income tax refund? If you are an employee, you may notice that your employer is deducting and withholding a tax amount on your compensation income on a monthly basis. Your employer is just actually complying with the Bureau of Internal Revenue (BIR).
Employers as withholding agents
In the Philippines, employers are required by the National Internal Revenue Code to deduct and withhold income tax from the compensation of their employees with some exemptions (SEC. 79.A, NIRC, as amended), and then remit them to the BIR by filing the monthly BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation). At the end of the year and before January 31 following that year, employers also file the annual BIR Form 1604-CF (Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes) to report all the withholding taxes on compensation they have remitted to the BIR based on the BIR Form 1601-C they have filed for the entire calendar year.
In a simple explanation, here’s how it goes: employees earn salary or compensation income – compensation income is taxable and should be paid with the BIR. But instead of requiring the employees to file and pay their income tax directly to the BIR, employers are the ones who are deducting, collecting, withholding, and, remitting their income tax to the BIR. In other words, employers serve as withholding agents for the employees’ income tax dues to the BIR. This is also called substitute filing because the employers are the ones who are filing the BIR forms to the BIR instead of the employees.
Employers compute each of their employee’s income tax payable for the month using methods and withholding tax tables prescribed by the BIR. Those computed amounts are what they remit to the BIR.
The excess of tax withheld over tax due of the employee
Now, at the end or before the end of the calendar year prior to the payment of the last payroll, employers compute the total income tax due from the compensation of each employee for the entire taxable year. During the computation, differences may arise between the “tax due from the employee for the entire year” and the “sum of taxes the employer has withheld from January to November”.
Sometimes, the “tax withheld by an employer on the compensation of the employee from January to November” exceeds the “actual income tax due from the compensation of the employee for the calendar year”. This excess is to be refunded by the employer to the employee.
Reasons why tax refunds exist
Over withholding or remittances of employees’ income tax on compensation usually happens when errors in computations occur or when an employee adds a dependent child before the closing of the year causing this to increase the amount of his or her additional exemption, which also reduce his or her income tax due.
An example of this event is when an employee gives birth to a child just before the year ends and claims him or her as an additional dependent for the taxable year.
How to claim your income tax refund
Your tax refund will usually be computed by your employer on or before the end of the calendar year but prior to the payment of the compensation for the last payroll period to determine year-end adjustments. However, when an employee changes status, he or she should file with the employer a new or updated withholding exemption certificate reflecting the change within 10 days from such change (SEC. 79.D.2, NIRC, as amended). This is why when your status changes, you should notify your employer immediately to reflect the change. The withholding exemption certificate you file with your employer is used by him in the determination of the amount of taxes to be withheld.
Once it is determined that the tax withheld from the employee’s compensation has exceeded his or her tax due for the entire year or that he has an overpayment of income tax, the employer is required to give the tax refund to such employee not later than January 25 of the succeeding year (SEC. 79.H, NIRC, as amended).
Take note that employers who will fail or refuse to refund excess withholding tax to employees are liable to a penalty, as imposed by the NIRC (SEC. 252, NIRC, as amended).
Therefore, if it is determined that you have a refundable tax from your compensation, you will ask it from your employer.
However, you need to make sure that you will provide your employer with your accurate and most updated withholding exemption certificate. This is because if you fail or refuse to file the withholding exemption certificate or if you commit fraud by willfully supplying false or inaccurate information in it, you will not be refunded and it will be forfeited in favor of the Government (SEC. 80.B, NIRC, as amended).
Reference: National Internal Revenue Code, as amended, BIR Form 1601-C, BIR Form 1604-CF
Disclaimer: New and subsequent tax rulings, issuances and or laws in the future may render the whole or part of the article obsolete or inaccurate. This article was published for informational use only and is not provided to serve as legal, tax, or investment advice. Hence, we do not guarantee and is not liable for the accuracy or completeness of any information provided herein or in any outcome as a result for using this information.