Withholding Tax on Compensation in the Philippines

Tax is the bread and butter of our nation. That is why our government, legislators and the Bureau of Internal Revenue (BIR), strive to improve our tax system for better internal revenue collection. Withholding taxes, such as withholding tax on compensation, expanded withholding tax, final withholding tax, withholding tax on government money payments (VAT and Percentage taxes), are implemented to make sure that income and business taxes are remitted to the government. The following are the common questions and answers you need to know about withholding tax on compensation.

What is Withholding tax on Compensation?
Withholding tax on compensation is the tax withheld from income payments to individuals arising from an employer-employee relationship.

What is Monthly Remittance Return of Income Taxes Withheld on Compensation?
This is the return required to be filed by every Withholding Agent (WA)/payor who is either an individual or non-individual, required to deduct and withhold taxes on compensation paid to employees. The BIR form used to file this return is BIR Form No. 1601-C.

What is compensation?
Compensation is any remuneration received for services performed by an employee from his employer under an employee-employer relationship.

Who is an employee?
The term ’employee’ refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term “employee” also includes an officer of a corporation.

Who is an employer?
The term “employer” means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that:

(1)  If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term “employer” (except for the purpose of Subsection A of section 78 of National Internal Revenue Code, NIRC ) means the person having control of the payment of such wages; and
(2)  In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term “employer” (except for the purpose of Subsection A of section 78, NIRC) means such person.

What are the different kinds of compensation?
The following are the different kinds of compensation:

1) Regular compensation – includes basic salary, fixed allowances for representation, transportation and others paid to an employee
2) Supplemental compensation – includes payments to an employee in addition to the regular compensation such as but not limited to the following:
a. Overtime Pay
b. Fees, including director’s fees
c. Commission
d. Profit Sharing
e. Monetized Vacation and Sick Leave
f. Fringe benefits received by rank & file employees
g. Hazard Pay
h. Taxable 13th month pay and other benefits
i. Other remunerations received from an employee-employer relationship

What are exempted from withholding tax on compensation?

The following are considered exempted from withholding tax on compensation:

1. Remuneration as an incident of employment, such as follows:
a. Retirement benefits received under RA 7641
b. Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee such as retrenchment, redundancy or cessation of business
c. Social security benefits, retirement gratuities, pensions and other similar benefits
d. Payment of benefits due or to become due to any person residing in the Philippines under the law of the US administered US Veterans Administration
e. Payment of benefits made under the SSS Act of 1954, as amended
f.  Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by the government employee

2. Remuneration paid for agricultural labor
3. Remuneration for domestic services
4. Remuneration for casual labor not in the course of an employer’s trade or business
5. Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization
6. Payment for damages
7. Proceeds of Life Insurance
8. Amount received by the insured as a return of premium
9. Compensation for injuries or sickness
10. Income exempt under Treaty
11. Thirteenth (13th) month pay and other benefits (not to exceed P 30,000)
12. GSIS, SSS, Medicare and other contributions
13. Compensation Income of Minimum Wage Earners (MWEs) with respect to their Statutory Minimum Wage (SMW) as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wage and Productivity Commission (NWPC), including overtime pay, holiday pay, night shift differential and hazard pay, applicable to the place where he/she is assigned.
14. Compensation Income of employees in the public sector if the same is equivalent to or not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, including overtime pay, holiday pay, night shift differential and hazard pay, applicable to the place where he/she is assigned.

What are De Minimis Benefits?
These are facilities and privileges of relatively small value and are offered or furnished by the employer to his employees merely as means of promoting their health, goodwill, contentment or efficiency. The following shall be considered De Minimis benefits not subject to income tax, hence not subject to withholding tax on compensation income of both managerial and rank and file employees:

–  Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees.
–  Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 per month.
–  Rice subsidy of P1,500 or one sack of 50 kg. rice per month amounting to not more than P1,500
–  Uniform and clothing allowance not exceeding P4,000 per annum
–  Actual yearly medical benefits not exceeding P10,000 per annum
–  Laundry allowance not exceeding P300.00 per month
–  Employees achievement awards not exceeding P10,000
–  Gifts given during Christmas and major anniversary celebration not  exceeding P5,000.00 per annum
–  Flowers, fruits, books, or similar items given to employees under special circumstances
–  Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage

What is substituted Filing of income tax returns (ITR)?
Substituted Filing of ITR is the manner by which declaration of income of person receiving purely compensation income which have been withheld by their employer the correct tax due, are no longer required to file their individual ITR (BIR Form 1700). Instead, the employer’s annual information return (BIR Form No. 1604-CF) duly stamped received by the BIR may be considered as the “substitute” Income Tax Return (ITR) of the employee inasmuch as the information provided therein are exactly the same information required to be provided in his income tax return (BIR Form No. 1700).

Who are qualified to avail the substituted filing?
Employees who satisfies all of the following conditions:

a. Receiving purely compensation income regardless of amount;
b. Working for only one employer in the Philippines for the calendar year;
c. Withholding tax has been withheld correctly by the employer (tax due equals tax withheld);
d. The employee’s spouse also complies with all three (3) conditions stated above.
e. The employer files the annual information return (BIR Form No. 1604-CF)
f. The employer issues BIR Form 2316 to each employee.

How to compute withholding tax on compensation?
To learn about the computation of withholding tax on compensation, please read our article titled “How to compute Withholding Tax on Compensation in the Philippines“.

Resources:
BIR tax information
Section 78-83 of the National Internal Revenue Code (NIRC) – Republic Act No. 8424