2022 Guide to Withholding Tax on Compensation in the Philippines

If you’re running a business in the Philippines and have started or are planning on hiring employees, then you’ll need to be familiar with Withholding Tax on Compensation. 

Employed individuals, on the other hand, also need to understand Withholding Tax on Compensation to know where their tax deductions go.

Compensation here refers to the payment for services rendered by an employee under an employer-employee contract. Aside from monthly wages, remunerations like commissions, as well as 13th month pay are subject to Withholding Tax on Compensation. Each amount withheld serves as an advanced payment for the employee’s Income Taxes during the fiscal year.  

Filing these taxes can be intimidating, especially when you’re unsure where to start. So we’ve put together this helpful guide to get you started.

What are Withholding Taxes?

First, let’s zoom in on withholding taxes. 

If you’ve worked or are working for an employer, you’ll know the feeling: You receive your payslip and start buzzing with excitement – only to see that a percentage has gone straight to your taxes. 

The Bureau of Internal Revenue requires employers to take taxes out of the income you earned from them. It’s also the employer’s responsibility to report that income and remit the taxes on your behalf. 

One of the biggest reasons Withholding Tax on Compensation was implemented is to ensure that employees continue to pay the taxes they owe. In other words, it serves as one of the most effective ways for the government to counter tax evasion in the Philippines.

Different types of withholding taxes in the Philippines

There are 3 main types of withholding taxes in the Philippines:

• Expanded Withholding Tax applies to specific income payments that are creditable against the payor’s income tax due. Examples include professional fees, payment to contractors, and property rental used by the business.
  
• Withholding Tax on Compensation is where employers carry out the tax deduction and withhold taxes from their employee’s compensation income.
  
• Final Withholding Tax, like expanded withholding tax, applies to specific payers or income. The only difference is that it does not deduct your overall tax due for the fiscal year.

We dive more into the different withholding taxes in the Philippines here. 

You can bookmark that article for further reading later. For now, let’s explore the filing requirements for Withholding Tax on Compensation. 

Submitting Withholding Tax on Compensation

So, who is required to remit withholding taxes?

Top Withholding Agents, or TWAs, are referred by the BIR as taxpayers whose gross sales or gross purchases fall under the following thresholds:

RDO Group Classification	Gross Sales/Receipts or Gross Purchases
Groups A and B	At least P12,000,000
Groups C, D, and E	At least P5,000,000

BIR changes the criteria for TWAs regularly, so it’s always a good idea to check their website for updates.

BIR Form 1601C and Form 1604C

As an employer, you’re responsible for remitting the Withholding Tax on Compensation to the BIR.

To do this, you’ll need to get the total taxes withheld across all employees and file it monthly under BIR Form 1601C. If filed under the name of a corporation, the form shall be signed and verified by an authorized officer and countersigned by the treasurer or assistant treasurer. This return shall be filed on or before the 10th day of the month following the month in which the taxes were withheld. An exception is made for the month of December, as BIR requires this to be filed on or before January 15 of the following year.

Employers will also need to report the total amount of compensation tax withheld for the year using BIR Form 1604C. This is due on or before January 31 of the succeeding fiscal year.

Non-compliance of Withholding Tax Provisions

Willfully failing to withhold or remit these taxes will subject you to a penalty equal to the total amount of taxes not withheld, accounted, or remitted. If convicted, you’ll also stand to pay a fine of up to P10,000, refusal to pay these fines may also result in imprisonment. So it goes without saying, always stay on top of your taxes!

BIR Form 2316: Certificate of Compensation Payment/Tax Withheld

Taxpayers often confuse BIR Form 2316 with their Annual ITR. These are two completely different tax forms. 

ITR is, as the name implies, a tax return. BIR Form 2316, on the other hand, indicates the employee’s total income and taxes withheld filed by the employer of an individual taxpayer within that taxable year. If you’re an employer, you’ll need to attach Form 2316 to the annual ITR when filing your employee’s income tax.

Once an employer accomplishes Form 2316, they must issue a copy to each employee.

Withholding Tax rules under TRAIN law

Taxpayers often confuse BIR Form 2316 with their Annual ITR. These are two completely different tax forms. 

ITR is, as the name implies, a tax return. BIR Form 2316, on the other hand, indicates the employee’s total income and taxes withheld filed by the employer of an individual taxpayer within that taxable year. If you’re an employer, you’ll need to attach Form 2316 to the annual ITR when filing your employee’s income tax.

Once an employer accomplishes Form 2316, they must issue a copy to each employee.

Withholding Tax rules under TRAIN law

As a taxpayer, you might have heard of  the Tax Reform for Acceleration and Inclusion (TRAIN) Law or Republic Act No 10963.

The TRAIN Law was implemented to simplify and structure tax compliance. It also reduces the taxes paid by employees. To highlight, individuals earning less than P250,000 a year are exempted under the TRAIN law. However, anyone earning more than P8 million a year see their taxes increasing to a maximum of 35%. 

If you happen to be a pure compensation earner, or have employees under this type of contract, you can head to the BIR website and try out the Withholding Tax Calculator. 

You can also view BIR’s official Withholding tax table. Note that the rates indicated on that table are only applicable up to December 31 2022. So make sure you stay updated on the latest Withholding Tax on Compensation rates for 2023 onward. 

Seamlessly manage Withholding Tax on Compensation with Taxumo

Reduce the complexity and hassle of filing your taxes with Taxumo. 

As the country’s go-to tax compliance platform, we ensure that you never miss any annual, quarterly, and monthly tax dues. Our easy-to-use web also helps you fill and generate forms and attachments including BIR Form 1601C and your Quarterly Alphabetical List of Payees (QAP).

Learn more about Taxumo Corp today.