Withholding Tax is mandatory requirement of the government in computing your business payroll in the Philippines. This deduction is part of the program embedded into the Philippine Payroll Software (Payroll Pro).
Lifting from the Bureau of Internal Revenue’s (BIR) official website (www.bir.gov.ph), withholding tax on compensation income is defined as “tax withheld from income payments to individuals receiving purely compensation income arising from an employer-employee relationship.”
There are different kinds of compensation subject to tax namely:
1. Living quarters or meals – if provided not for the convenience of the employer; if given otherwise then this should not form part of the compensation income.
2. Tips and Gratuities – since such are not accounted for by the employees to the employer, it should form part of the taxable income but is not subject to withholding tax.
3. Pension, Retirement, and Separation Pay – unless exempted, these are deemed compensation and are subject to withholding tax.
4. Transportation, Representation, Other Allowances – if received in addition to regular compensation, these are subject to withholding tax. But if given to an employee to cover expenses incurred in the performance of duties, it is not taxable provided:
- Used in the pursuit of business, trade, or profession
- Employee is required to file liquidations and excess is returned to the employer
5. Vacation and Sick Leave Allowances – the Labor Code provides for the leave entitlements of employees although it still gives employers the discretion to implement their individual policies.
Most common type of leave benefits being implemented, though not specifically mentioned by law, is as follows:
- 10 to 15 days Vacation Leave in a year
- 10 to 15 days Sick Leave in a year
Some establishments provide, in addition to above:
- 3 to 5 days Emergency or Calamity Leave
- Birthday Leaves
- Other Leaves specified by the employer or the company’s management
One has to take note also that Maternity Leaves and Paternity Leaves, as mandated, are distinct and separate from Vacation Leaves and Sick Leaves.
As a general practice, Sick Leaves and/or Vacation Leaves unused at the end of the year are being converted to cash.
The monetary value of unused vacation leaves for ten (10) days or less is not subject to withholding tax.
Needless to say, please refer to your company’s policies and procedures regarding employee leaves and benefits.
There are also various Withholding Tax Exemptions which you need to compute and include in your payroll. For easy management, the Philippine Payroll Software already incorporated it in the payroll software. These exemptions include but are not limited to:
- Retirement benefits of those employed in the private sector;
- Amounts received by the employee or given by the employer due to death, sickness, or other physical disability
- Benefits from SSS, GSIS, PHILHEALTH, and PAG-IBIG
Personal Exemptions – covers the following:
- Single or legally separated with no dependents – P20,000.00
- Legally married – P32,000.00
- Head of the family – P25,000.00
- Each dependent of the married individual or head of the family – P8,000.00 provided it will not exceed four (4).
– In case of married individuals, only one (1) of the spouse may claim the exemption
– For Head of the Family, dependents should be:
- Brother, sister, or children not more than 21 years old and not gainfully employed
- Above 21 years old but is incapable of self- support due to mental or physical defect
- Parent must be at least 60-years old, retired, or earning less than P60,000.00 per annum.
Required to File – every withholding agent/payor who is either an individual or non-individual required to deduct and withhold taxes on compensation paid to employees.
Filing must be done on or before the 10th day of the month following the previous taxable month.
The filing of individual tax returns for the previous year in the Philippines is currently being done on the 4th month (April) of the year.
VALIDATE tax requirements, exemptions, and procedures from BIR branches or revenue district offices (RDO). Information is also available at the back of appropriate BIR Forms, published references, and the official website www.bir.gov.ph.
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