WITHHOLDING TAX SYSTEM

The withholding tax system

has been regarded as a tool in the collection of taxes. It has been widely accepted and practiced not only in the Philippines but also in many countries for revenue collection enhancement.

In the Philippines, the Withholding Tax System was adopted in 1951 by virtue of RA 690. It was in 1977 when the system was made to apply on the payment of interest on Philippine Currency Bank Deposit and Deposit Substitutes. Then in 1978, the system was expanded to cover other kinds of specific income and provided for the additional requirement of deductibility for the income payment (expense) from the gross income of the payer by requiring proof of remittance of the tax withheld from such income payment. For the last ten years, there has been vigorous expansion of the withholding tax system whereby nearly all taxpayers have been embraced by the withholding tax either as withholding agents or recipient of income subject to withholding or in both capacities.

ANNUALIZED WITHHOLDING TAX

(Year-End Adjustment)

Step 1. Determine the taxable regular and supplementary compensation paid to the employee for the entire calendar year.

TAXABLE COMPENSATION INCOME ( RR No. 2-98 ) I. REGULAR COMPENSATION Basic Salary Representation Allowance Transportation Allowance Other remuneration paid regularly per payroll period II. SUPPLEMENTARY COMPENSATION Fees, including directors fees Overtime pay Taxable Retirement / Separation Pay Taxable fringe benefits of rank and file employees Taxable monetized unused vacation and sick leave Other supplementary compensation

NON - TAXABLE COMPENSATION INCOME ( RR 2-98 )

GSIS, SSS, PHIC, Pag-ibig contributions and union dues Personal Economic Relief Allowance (PERA) Representation and Transportation Allowance (RATA) which constitute reimbursement for expenses incurred in the performance of official duties

NON - TAXABLE COMPENSATION INCOME ( RR 2-98 )

13th month pay and other benefits up to P30,000:

a. b. c. d. e.

f.
g.

13th month pay equivalent to one month basic salary Christmas bonus Additional Compensation Allowance (ACA) Productivity incentives Loyalty award Gifts in cash or in kind Other benefits of similar nature

De Minimis Benefits (RR 10-2000) These are benefits that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.

NON - TAXABLE COMPENSATION INCOME ( RR 8-2000, RR 10-2000 ) De Minimis Benefits includes:

a. b. c. d. e.

f. g. h.

i. j. k.

Monetized unused vacation leave credits paid to government officials and employees; Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year; Medical cash allowance to dependents of employees not exceeding P125.00 per month; Rice subsidy of P1,000 or one (1) sack of rice of 50-kg per month; Uniform and clothing allowance not exceeding P3,000; Actual yearly medical benefits not exceeding P10,000 per annum; Laundry allowance not exceeding P300 per month; Employees Achievement Awards in tangible personal property other than cash or gift certificates with monetary value of not exceeding P10,000 per annum; Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 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.

De Minimis Benefits

Excess

13th Month Pay and Other Benefits up to P30,000.00

Excess

Taxable Compensation Income

ANNUALIZED WITHHOLDING TAX

(Year-End Adjustment)

Step 2. If the employee has previous employment/s within the year, add the amount of the taxable regular and supplementary compensation paid to the employee by the previous employer doing the annualized computation to the taxable compensation income received from previous employer/s during the calendar year.

ANNUALIZED WITHHOLDING TAX

(Year-End Adjustment)

Step 3. Deduct from the aggregate amount of compensation computed in Step 2 the amount of the total personal and additional exemptions of the employee. Step 4. Deduct the amount of premium payments on Health and/or Hospitalization Insurance

DEDUCTIONS FROM GROSS COMPENSATION INCOME

( RR No. 2-98 )

1. PERSONAL & ADDITIONAL EXEMPTIONS

Single P 20,000 Head of the Family 25,000 Married 32,000 For each Dependent Child not exceeding four (4) 8,000

DEDUCTIONS FROM GROSS COMPENSATION INCOME

( RR No. 2-98 )

1. PERSONAL & ADDITIONAL EXEMPTIONS

Tax Exemptions of Benefactors of Senior Citizens RR 4-2006; Sec. 7 (3): The benefactor shall be ENTITLED to the BASIC PERSONAL EXEMPTION equivalent to P25,000.00 as allowed under the Tax Code for HEAD OF THE FAMILY. The benefactor of a senior citizen shall NOT, however, be entitled to claim the additional exemption of P8,000.00 per dependent allowable only to married individual or head of family with qualified dependent child/children under Sec. 35(B) of the Tax Code.

DEDUCTIONS FROM GROSS COMPENSATION INCOME

( RR No. 2-98 )

2. Premium payment on Health and/or Hospitalization Insurance of an individual taxpayer, including his family, in the amount of P2,400.00 per year.
Provided: The taxpayer, including his family, has a gross income not exceeding P250,000.00 for the taxable year. In case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

ANNUALIZED WITHHOLDING TAX

(Year-End Adjustment)

Step 5. Compute the amount of tax on the difference arrived in Step 4, in accordance with the schedule provided in Sec. 24 (A) of the Tax Code

Annualized Withholding Tax Formula:

Gross Compensation Income (present and previous employer) Less: Non-Taxable/Exempt Compensation Income a) 13th month pay & other benefits P XXX b) Other Non-Taxable benefits XXX c) SSS, GSIS, PHIC, Pag-ibig cont., union dues (employees share only) XXX Less: Deductions from gross compensation income a) Personal & Additional Exemptions b) Health/Hospitalization Premium Payment P XXX

XXX

P XXX XXX

XXX

Taxable Compensation Income

Tax Due

P XXX
P XXX

Schedule of Income Tax Rates:

Sec. 24 (A) of the Tax Code Over But Not Amount Rate
Not over 10,000 30,000 70,000 140,000 250,000 500,000 Over 10,000 30,000 70,000 140,000 250,000 500,000 over 5% 500 +10% 2,500 + 15% 8,500 + 20% 22,500 + 25% 50,000 + 30% 125,000 + 32% Of Excess Over 10,000 30,000 70,000 140,000 250,000 500,000

ANNUALIZED WITHHOLDING TAX

(Year-End Adjustment)

Step 6. Determine the deficiency or excess, if any, of the tax computed in Step 5 over the cumulative tax already deducted and withheld since the beginning of the current > Tax Withheld (Jan.Deficiency tax (Collectible) = Tax Due calendar year.
Nov.)

Excess tax (Refund) Break Even =

Tax Due < Tax Withheld (Jan.-Nov.)

Tax Due = Tax Withheld (Jan.-Nov.)

Sample Problem 1: (Use of annualized computation when employer-employee relationship was terminated before December) Mr. Dexter, head of the family with a qualified dependent brother receives P8,000.00 (net of SSS, Philhealth, HDMF) as monthly regular compensation starting January 1, 2002. He files his resignation effective June 30, 2002. The tax withheld from January to May was P2,900.00.

COMPUTATION: (To be done before payment of the last compensation June 2002): Total taxable compensation received from January 1 to May 31, 2002 P40,000.00 Add: Compensation to be received in June __ 8,000.00 Gross Compensation Jan-June P48,000.00 Less: Personal Exemption - Head of the Family _ 25,000.00 Net Taxable Compensation P23,000.00

Tax Due * Less: Tax Withheld from Jan to May To be refunded to Employee Mr. Dexter by the employer upon the payment of the last compensation during the year

P 1,800.00 _2,900.00 (P 1,100.00)

* Tax on P10,000.00 Tax on excess (P13,000.00 x 10%) Tax on P23,000.00

P 500.00 __ 1,300.00 P _1,800.00

Sample Problem 2: Mr. Jacobson, married with 2 qualified dependent children receives P10,000 monthly compensation (net of SSS, Philhealth, HDMF, employee contribution)

COMPUTATION: Total compensation Jan. Nov. (P10,000.00 x 11 mos. ) P 110,000.00 Add: Compensation to be received in December 10,000.00 Gross Compensation P 120,000.00 Less: Personal Exemption married P 32,000.00 Additional Exemption 2 QDC x P8,000.00 16,000.00 48,000.00 Taxable Compensation P 72,000.00

Tax Due * Less: Tax withheld from Jan. to Nov. Collectible, withholding tax for December Salary * Tax on 70,000 Tax on excess (P2,000 x 20%) Tax on P23,000.00 P 8,500.00 400.00 P 8,900.00

P P

8,900.00 8,158.00 742.00

Deadlines:

Employees withholding statements (BIR Form 2316) should be furnished by the employer to his employees on or before January 31 of the succeeding calendar year or in case of terminated employees, it shall be the day on which the last payment of compensation is made. Failure to furnish the same shall be a ground for mandatory audit of payors income tax liabilities (including withholding tax) upon verified complaint of the payee.

Annual information return (BIR Form 1604CF) w/ alphalist of the employees deadline is January 31 of the succeeding year.
Monthly Remittance Return of Income Taxes Withheld on Compensation (BIR Form 1601C): e-filing staggered filing (RR 26-2002) e-payment on or before January 20 of the succeeding year (RR 12-2001)