Crash Course on Compensation Withholding Taxes and Annualization

Monthly Withholding Tax Computation 1. In computing your monthly withholding tax, you need to know which incomes are taxable and which expenses are deductible. In most employees case, the taxable income is the gross salary and the deductible expenses are the SSS, Philhealth and Pag-IBIG deductions. Please note that SSS, Philhealth and Pag-IBIG deductions are based on a graduated scale. Illustration: Employee A has a gross salary of Php30,000 per month. Thus, per the graduated scale, his SSS, Philhealth and Pag-IBIG deductions will be Php500, Php375 and Php100, respectively. So, his monthly taxable income will be Php29,025:

Gross pay per month Less:

30,000.00 SSS PHIC HDMF 500.00 375.00 100.00

(975.00) 29,025.00

Taxable income

2. The taxable income will become the basis in computing your monthly withholding tax, but taking into consideration the employees tax status. Withholding tax from monthly compensation is derived from a tax table prescribed by the BIR. The tax status is among the following: a. Zero exemption b. Single c. Married with no dependents d. Married or Single with 1 dependent e. Married or Single with 2 dependents f. Married or Single with 3 dependents g. Married or Single with 4 dependents (this is the maximum allowed by law) The present withholding tax table prescribed by the BIR is as follows (effective until further notice from the BIR):

Monthly Tax Status Tax on floor Tax on excess of floor 1 - Zero exemption 2 - Single 3 - Married - no dependents 4 - Married/Single - 1 dependent 5 - Married/Single - 2 dependents 6 - Married/Single - 3 dependents 7 - Married/Single - 4 dependents Exemption 1 0% 50,000.00 50,000.00 75,000.00 100,000.00 125,000.00 150,000.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 2 5% 4,167.00 4,167.00 6,250.00 8,333.00 10,417.00 12,500.00 3 41.67 10% 833.00 5,000.00 5,000.00 7,083.00 9,167.00 11,250.00 13,333.00 4 208.33 15% 2,500.00 6,667.00 6,667.00 8,750.00 10,833.00 12,917.00 15,000.00 5 708.33 20% 5,833.00 10,000.00 10,000.00 12,083.00 14,167.00 16,250.00 18,333.00 6 1,875.00 25% 11,667.00 15,833.00 15,833.00 17,917.00 20,000.00 22,083.00 24,167.00 7 4,166.67 30% 20,833.00 25,000.00 25,000.00 27,083.00 29,167.00 31,250.00 33,333.00 8 10,416.67 32% 41,667.00 45,833.00 45,833.00 47,917.00 50,000.00 52,083.00 54,167.00

Illustration: Assuming this Employee A is Married with 2 Dependents. Given his taxable income is Php29,025, his withholding tax basis will fall under Bracket 6 under the Married/Single 2 Dependents line. He cannot fall under Bracket 7 because the tax on excess of floor is greater than his taxable income (Bracket 7 is Php29,167, which is greater than his taxable income of Php29,025). Also, he cannot fall under Bracket 5 simply because Bracket 6 can still fit into his taxable income:
Monthly Tax Status Tax on floor Tax on excess of floor 1 - Zero exemption 2 - Single 3 - Married - no dependents 4 - Married/Single - 1 dependent 5 - Married/Single - 2 dependents 6 - Married/Single - 3 dependents 7 - Married/Single - 4 dependents Exemption 1 0% 50,000.00 50,000.00 75,000.00 100,000.00 125,000.00 150,000.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 2 5% 4,167.00 4,167.00 6,250.00 8,333.00 10,417.00 12,500.00 3 41.67 10% 833.00 5,000.00 5,000.00 7,083.00 9,167.00 11,250.00 13,333.00 4 208.33 15% 2,500.00 6,667.00 6,667.00 8,750.00 10,833.00 12,917.00 15,000.00 5 708.33 20% 5,833.00 10,000.00 10,000.00 12,083.00 14,167.00 16,250.00 18,333.00 6 1,875.00 25% 11,667.00 15,833.00 15,833.00 17,917.00 20,000.00 22,083.00 24,167.00 7 4,166.67 30% 20,833.00 25,000.00 25,000.00 27,083.00 29,167.00 31,250.00 33,333.00 8 10,416.67 32% 41,667.00 45,833.00 45,833.00 47,917.00 50,000.00 52,083.00 54,167.00

The portions highlighted in yellow are the ones relevant to the computation of his monthly withholding tax.

3. To compute for the monthly withholding tax, one should determine the base tax, that is the tax on floor, and the tax in excess of floor. The tax on floor is a fixed rate, while the tax in excess of floor is the variable rate, depending on the taxable income of the employee. Illustration: Employee As tax on floor is Php1,875. His tax in excess of floor is computed by getting the difference between his taxable income of Php29,025 and the floor amount of Php20,000 and multiplying that difference by 25%. Thus, the formula here is (Php29,025 Php20,000) x 0.25, which amounts to Php2,256.25. You add the tax on floor and the tax in excess of floor, and youll get his monthly withholding tax of Php4,131.25.

4. To determine the employees net pay, you need to deduct the following from the Gross Compensation: a. SSS, Philhealth and Pag-IBIG b. Monthly withholding tax

This assumes the employee DO NOT have any other forms of deductions such as SSS loans, PagIBIG loans, etc. Illustration: Employee As net pay is Php24,893.75, which is computed as follows:
Gross pay per month Less: 30,000.00 SSS PHIC HDMF 500.00 375.00 100.00

(975.00) 29,025.00

Taxable income Tax bracket (see below) Tax status (see below) Withholding: Tax on floor Tax in excess of floor Floor amount Withholding tax: Tax on floor Tax in excess of floor Net pay per month 6 5 - Married/Single - 2 dependents

1,875.00 25% 20,000.00

1,875.00 2,256.25

(4,131.25) 24,893.75

Annualization 1. According our tax law, the monthly withholding tax deducted from the employee is just the temporary withholding tax. That is, it will only become final once the compensation tax is computed on an annual basis taking into consideration, of course, the tax already withheld from the employee every month. 2. To make things much more complicated for us, the BIR prescribed a different tax table in computing the annual compensation tax due from each employee, to wit:

On taxable income of: Not over Php10,000 Over Php10,000 but not over Php30,000 Over 30,000 but not over 70,000 Over 70,000 but not over 140,000 Over 140,000 but not over 250,000 Over 250,000 but not over 500,000 Over 500,000

Tax on floor PHP PHP PHP PHP PHP PHP PHP 500 2,500 8,500 22,500 50,000 125,000

Tax in excess of floor 5% 10% of excess over Php10,000 15% of excess over 30,000 20% of excess over 70,000 25% of excess over 140,000 30% of excess over 250,000 32% of excess over 500,000

Please note that the taxable income in the table above refers to annual taxable income.

3. The gross compensation income of an employee comprise commonly of the following: a. Gross salary b. Overtime pay c. 13th month pay d. Performance bonuses e. Other forms of bonuses f. Monetized leave benefits g. Fringe benefits in excess of prescribed ceilings h. Etc. Illustration: Employee A has a gross salary of Php30,000 per month. Aside from that, he also received his 13th month pay, 1 month performance bonus, rice subsidy of Php20,000 per year, clothing allowance of Php5,000 per year. Computation of his gross compensation income for the year is as follows:

Gross compensation (Php30,000 x 12 months) 13th month pay Performance bonus Rice subsidy (Php20,000 less 18,000 ceiling) Clothing allowance (Php5,000 less 4,000 ceiling) Gross compensation income

PHP

360,000 30,000 30,000 2,000 1,000 423,000

PHP

The ceilings on rice subsidy and clothing allowance are prescribed by the law. 4. Personal exemptions per annum are as follows: a. Zero exemption Nil b. Single Php50,000

c. d. e. f. g.

Married with no dependents Php50,000 Married/Single with 1 dependent Php75,000 Married/Single with 2 dependents Php100,000 Married/Single with 3 dependents Php125,000 Married/Single with 4 dependents Php150,000

Illustration: Since Employee A is Married with 2 dependents, his annual personal exemption is Php100,000

5. The annual taxable income of an employee is computed as follows: a. Gross compensation income b. LESS: SSS, Philhealth, Pag-IBIG contributions c. LESS: Exclusion from gross income related to benefits, but not exceeding Php30,000. Benefits include 13th month pay, bonuses, allowances, allowable fringe benefits, etc. d. LESS: Personal exemptions Illustration: Employee As taxable income is computed as follows. The SSS, Philhealth and PagIBIG contributions are the deductions made from his gross salary every month:

Gross compensation income Less: SSS, PHIC, Pag-IBIG contributions Less: Exclusion from gross income related to benefits Less: Personal exemption Net taxable income

PHP

423,000 (11,700) (30,000) (100,000) 281,300

PHP

6. The net taxable income will now become the basis in computing the employees annual compensation tax due, which is derived from the graduated tax table in item 2 above. Illustration: In the case of Employee A, he will have a tax on floor of Php50,000, plus 30% in excess over Php250,000 of his net taxable income:

On taxable income of: Not over Php10,000 Over Php10,000 but not over Php30,000 Over 30,000 but not over 70,000 Over 70,000 but not over 140,000 Over 140,000 but not over 250,000 Over 250,000 but not over 500,000 Over 500,000

Tax on floor PHP PHP PHP PHP PHP PHP PHP 500 2,500 8,500 22,500 50,000 125,000

Tax in excess of floor 5% 10% of excess over Php10,000 15% of excess over 30,000 20% of excess over 70,000 25% of excess over 140,000 30% of excess over 250,000 32% of excess over 500,000

His annual tax due is computed as follows:

Tax on floor Tax in excess of floor: Net taxable income Floor Excess Rate Annual tax due

PHP PHP PHP 281,300 250,000 31,300 30% PHP

50,000

9,390 59,390

7. The tax annualization adjustment will take effect on the employees payroll in December, to take up the difference between his monthly withholding tax balance as of November 30 and the annual tax due. Illustration: Employee A has a monthly withholding tax of Php4,131.25. Thus as of November, his total withholding tax for the year amounted to Php45,443.75 (Php4,131.25 x 11 months). However, his annual compensation tax due should be Php59,390, which means Employee As tax is UNDER-withheld for the past 11 months. Thus, the correction of withholding tax is made on December, which amounts to Php13,946.25.
Jan Employee A 4,131.25 Feb 4,131.25 Mar 4,131.25 Apr 4,131.25 May 4,131.25 Jun 4,131.25 Jul 4,131.25 Aug 4,131.25 Sep 4,131.25 Oct 4,131.25 Nov 4,131.25 Dec 13,946.25

8. If an employee was employed during the previous tax year(s), points 1 to 7 above apply to him.

9. If an employee was employed during the current tax year, we need to take into consideration the withholding tax made by the previous employer of the employee, if any. Illustration: Employee B was hired by the Company last April 1. He was employed by a different company prior to April 1. Employee B is Single without dependents. The total compensations he received from and the total withholding taxes deducted by the two companies are as follows:

Previous Employer Jan to Mar Gross salary 13th month pay Performance bonus Rice subsidy Clothing allowance Gross compensation income Tax withheld by employer Monthly withholding tax PHP

Current Employer Apr to Dec

Annualized 330,000 27,500 15,000 24,000 3,500 400,000 41,163

60,000 PHP 5,000 15,000 6,000

270,000 PHP 22,500 18,000 3,500 314,000 PHP 33,050 4,131

PHP

86,000 PHP 8,113 2,704

To compute for Employee Bs annual compensation tax due together with the catch-up withholding to be done in December, please refer to the computation below:
Gross salary 13th month pay Performance bonus Rice subsidy (Php24,000 less 18,000 ceiling) Clothing allowance (Php3,500 is within Php4,000 ceiling) Gross compensation income Less: SSS, PHIC, Pag-IBIG contributions Less: Exclusion from gross income related to benefits Less: Personal exemption Net taxable income Tax on floor Tax in excess of floor: Net taxable income Floor Excess Rate Annual tax due Catch-up withholding tax in December PHP 330,000 27,500 15,000 6,000 378,500 (11,325) (30,000) (50,000) 287,175 50,000

PHP

PHP PHP

PHP PHP

287,175 250,000 37,175 30% PHP PHP

11,153 61,153 19,990

Thus, Employee Bs annual compensation tax is Php61,153 and the withholding tax in December increases to Php19,990 to catch up and correct the annual withholding tax due. The catch up withholding tax is computed by getting the difference between the annual tax due of Php61,153 and the amount already withheld, that is Php41,163. Withholding tax of Employee B per month is as follows: