Income Taxation of Employees in the Philippines
By: Tax and Accounting Center Philippines
In this article, let us share you an overview on how to compute basic income taxation of employees in the Philippines. For all we know, withholding tax on compensation is made every after payroll throughout the employment but this may not completely pay the income tax liability at the end of the calendar year. Here is how income tax of pure compensation works.
Income tax exemptions of Minimum Wage Earners
To preserve the minimum living standard of the Filipinos, employees paid minimum wage based on the minimum wage set by the DOLE – Regional Tripartite Wages and Productivity Board (RTWPB) of their location are being exempted from income tax on their compensation income. This covers the following:
- Basic salary at minimum wage
- Holiday pays for regular and special holiday pays in the Philippines
- Hazard pay
- Overtime pay for work beyond eight hours
- Night shift differential at 10% increment for work done from 10:00 PM to 6:00 AM
Minimum wage earners in the Philippines are not subject to withholding tax and are not required to file income tax returns at the end of the year for obviously, they, will not be any tax due under such exemption. However, should there be other taxable income that they shall ear from the employer or from other sources, then, they will lose their tax-exempt status and will be taxable. In such case, their compensation shall be withheld and they might be required to filed income tax return in the Philippines.
Taxable Compensation in the Philippines
As a rule, any amount that the employer gives his employees are taxable compensation, unless otherwise exempted by express provision of laws, rules, and regulations (e.g. de minimis benefits, minimum wage, separation fees, etc.), or that other tax types apply such as fringe benefits subject to fringe benefits tax in the Philippines. The designation of allowances (attendance bonus, travel allowance, food allowance, representation allowance) and other provision is not controlling as to the taxability. To claim non-taxable compensation would be to prove that a provision of law, rule or regulation expressly provides such exemption.
Your gross pay is not the amount subject to withholding using the 2009 withholding tax table. Certain items are deductible from such amount and certain tax-exempt provisions might have been included so they will have to be deducted to arrive at the taxable amount for withholding tax on compensation.
Exemptions of SSS, PHIC, HDMF & Union Dues. This refers to the share of the contribution of the employees to Social Security System (SSS), Philippine Health Insurance Corporation (PHIC or PhilHealth), Home Development Mutual Fund (HDMF of Pag-ibig), and Union Dues for their membership in a legitimate labor organizations or labor unions. SSS and PHIC have their corresponding table of deductions that you need to use, HDMF allowed contribution shall not exceed P100, while union dues is dependent upon the required amount under their union’s policy. Contributing more that the mandatory contributions on SSS, PHIC, and HDMF is not allowed as deductions as it is only limited to the mandatory amount.
Health and Hospitalization Insurance Premium. This applies to employees who secured health and hospitalization insurance in the Philippines, with family gross income of not more than P250,000. They are allowed a deduction of actual premium pair or P200 a month (P2,400 a year), whichever is lower.
Personal Exemptions of Employees. Every is allowed a basic personal exemption (BPE) of P50,000, and its every qualified dependent child ( not more than 21 years old, unmarried, dependent for chief support, and living with the employee) up to four (4) is entitled P25,000 each of additional personal exemption (APE) or up to P100,000. Alas! personal exemptions for employee with four qualified dependents is P150,000 in a calendar year. This amount is intended to cover the personal living expenses of the employee and its qualified dependents. In the 2009 withholding tax taxable, the personal exemptions and additional personal exemptions are already included.
Other tax-exempt provisions. This may refer to other employee provisions not subject to tax or covered by other tax types. Example is the de minimis benefits exempted from tax (e.g. rice allowance, monetized unused vacation leave credits, etc.). Another example is the fringe benefits covered by fringe benefits tax for managerial and supervisory employees (e.g. housing, car plan, etc.).
Employer’s withholding every payroll
Every payday, the employer will compute the withholding tax on compensation. It will remit the withholding taxes on compensation in the Philippines using BIR Form No. 1601-C not later than the 10th day of the month following the applicable payroll month. During January after the end of the year, the employer will make annual computations of compensation paid during the calendar year. Based on payroll details and tax status of employee, it will make annual computations of income tax using the tax table for 5-32%. It shall file BIR Form No. 1604 CF and will provide BIR Alphalist of Employees as an attachment. Employer will then provide each employee a Certificate of Withholding Taxes on Compensation or BIR Form No. 2316. Here is how the annual income tax on compensation of employees are computed:
Gross Compensation, excluding tax-exempt salaries
Less: SSS, PHIC, HDMF
Equals Taxable Net Income before Personal Exemptions
Basic Personal Exemptions
Additional Personal Exemptions
Health & Hospitalization Insurance Premium
Equals Taxable Compensation Income
Multiplied by tax table rate 5-32%
equals: Tax Due
less: WithholdingTax Credits covered by BIR Form No. 2316
less Tax Due and Payable.
Annual Income Tax Returns of Employees
The common question is – As an employee, am I required to file annual income tax return in the Philippines?
Employees earning pure compensation income from a single employer who withheld correct withholding tax on compensation is no longer required to file annual income tax return. The certificate of withholding tax on compensation or BIR Form No. 2316 would be equivalent to such annual income tax return and we call this as “substituted filing”. Minimum wage earners are likewise not required to file income tax returns.
Under Section 51(a)2(b) of the Philippines Tax Code, employees deriving compensation concurrently from two or more employees at any time during the year shall file an annual income tax return in the Philippines using BIR Form No. 1700 not later then April 15 of the following year. Likewise, employees with other taxable income outside employment subject to 5-32% is also required to file annual income tax return. Employees who are at the same time engaged in trade or business are required to file income tax return using BIR Form No. 1701 not later than April 15 of the following year.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at email@example.com.
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