The mechanics of withholding of income tax

The employer is required to withhold or deduct income tax from the payment of compensation and other benefits to its employee. Income tax rates vary among different types of employees. For a foreign executive employed by an Offshore Banking Unit, a Petroleum Service Contractor and Subcontractor, or a Regional Operating Headquarter (ROHQ) in the Philippines, the tax rate is 15 percent. This tax rate is also enjoyed by certain Filipino employees of a ROHQ. For a nonresident foreign employee, the tax rate is 25 percent. For the majority of employees, the regular income tax rates between five to 32 percent apply. And for withholding of regular income tax, the Bureau of Internal Revenue (BIR) has set clear-cut rules and different mechanics. 

The BIR prescribes the periodic withholding of regular income tax by means of Withholding Tax Tables, with progressive tax rates (five to 32 percent) based on income bracket. The Revised Withholding Tax Tables under Revenue Regulations No. 10-2008 are effective to date. There are four types of withholding tax tables under these regulations: Daily Tax Table, Weekly Tax Table, Semi-Monthly Tax Table and Monthly Tax Table. These tax tables translate the annual taxable income bracket and personal deductions of the employee into corresponding table values for the payroll periods during the year. With the use of appropriate tax tables, the approximate annual income tax due on the regular pay of the employee is withheld during the year.

At year-end, the employer is required to compute for the final annual income tax due of the employee using the Annualized Withholding Tax Method. Under this method, the annual income tax rates are applied to the total accumulated income of the employee for the year to arrive at his/her final annual income tax due. This amount is then reconciled with the total accumulated withholding taxes of the said employee during the same year. The resulting difference shall be the additional withholding tax due from the employee (in case his/her final annual income tax due is greater than his/her accumulated withholding taxes for the year) or the amount refundable to the employee (in case his/her final annual income tax due is less than his/her accumulated withholding taxes for the year). 

The employer incidentally is required to submit to the BIR the following: 1) The final adjustment return or BIR Form 1601C (Monthly Remittance Return of Income Taxes Withheld on Compensation) for December not later Jan. 15. 2) BIR Form 1604CF (Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes) together with the Alphabetical List (AlphaList) of Employees from whom taxes were withheld during the year not later than Jan. 31. In addition, the employer is required to refund any excess withholding taxes to the employee in the December payroll or at the latest by Jan. 25 and furnish the BIR Form No. 2316 (Certificate of Income Tax Withheld on Compensation) by the end of February.

With the mechanics of withholding of income tax, an employee can expect surprises on his/her withholding tax liability at year-end. More so, his/her employer expects tax adjustments and even more submissions to the BIR at the close of the year; hence, the extra work and rush during the first few weeks of the New Year.

(Karen Jane S. Vergara-Manese is a senior manager for Tax  of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected]  or kvergara @kpmg.com)