Income tax—it’s something you hear about all the time, yet you still don’t fully understand how it works. Whether you’re employed, self-employed, managing a business, or simply curious, having a clear grasp of income tax—even just the basics—is more important than you might think.

Who is required to pay income tax? What are the current tax rates? How is it computed? And most importantly, how does it affect my take-home pay? These are the common questions that often go unanswered. 

In this blog, we’ll walk you through the essentials of withholding tax on compensation in the Philippines. Tailored especially for employers and employees, this complete guide will help you navigate the tax rules, rates, and responsibilities. So, read on, and feel free to ask questions or share your thoughts in the comments. 

Income Tax

Let’s start with income tax itself. What really is an income tax? As defined by the Bureau of Internal Revenue (BIR), income tax is a tax on a person’s income derived from the practice of a profession, engagement in trade or business, or on the pertinent items of gross income specified in Title II, Section 31 of the Tax Code of 1997.

Taxable Income

Which incomes are taxable, and which are not? Taxable income, in Section 31 of the Tax Code, refers to the pertinent items of gross income specified, less the deductions, if any, authorized for such types of income by the law. Gross income, furthermore, means all income derived from whatever source, including (but not limited to) compensation for services in whatever form paid, but not limited to fees, salaries, wages, commissions, and similar items.

For compensation income earners (i.e., those employed), those excluded from the gross income and exempted from taxation are compensations for injuries or sickness, 13th month pay and other related benefits, statutory contributions (SSS, PhilHealth, Pag–IBIG Fund), and other de minimis benefits.

De minimis benefits, in particular, are non-taxable benefits, allowances, or perks, usually of relatively small value or amount, given by employers to employees, such as:

  • Monetized unused vacation leave credits not exceeding ten (10) days during the year; 
  • Monetized vacation and sick leave credits paid to government officials and employees; 
  • Medical cash allowance to dependents of employees, not exceeding PHP 1,500.00 per semester or PHP 250 per month; 
  • Rice subsidy of PHP 2,000 or one sack of 50-kilogram rice per month amounting to not more than PHP 2,000; 
  • Uniform and clothing allowance not exceeding PHP 7,000 per annum; 
  • Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding PHP 10,000 per annum; 
  • Laundry allowance not exceeding PHP 300 per month; 
  • Employee’s achievement awards, e.g., for length of service or safety achievement, in any form, whether in cash, gift certificate, or any tangible personal property, with an annual monetary value not exceeding PHP 10,000; 
  • Gifts given during Christmas and major anniversary celebrations not exceeding PHP 5,000 per annum; 
  • Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage; and
  • Benefits received by an employee by virtue of a collective bargaining agreement and productivity incentive schemes, provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed PHP 10,000 per taxable year. 

Tax Reform and Inclusion (TRAIN) Law

According to R.A. 10963, or the Tax Reform and Inclusion (TRAIN) Law, those with no income, minimum wage earners (those earning less than or equal to the DOLE-mandated daily minimum wage), and those whose annual taxable income does not exceed Two Hundred Fifty Thousand Pesos PHP 250,000 shall be exempted from personal income tax. 

Equally important, the civil status and presence of dependents no longer matter when it comes to exemptions for income tax purposes. The law further exempts 13th-month pay and other benefits amounting to Ninety Thousand Pesos (PHP 90,000) or less.

What is Withholding Tax on Compensation? 

In the Philippines, a Withholding Tax on Compensation is an income tax deducted by an employer from an employee’s salary or wages (i.e., including other forms of compensation, such as bonuses and allowances) before payment is made. Month by month, the employer, as the legally mandated withholding agent, sends small portions of the tax to the Bureau of Internal Revenue (BIR). 

Employers use BIR Form 1601-C, or the Monthly Remittance Return of Income Taxes Withheld on Compensation, to report and remit these withheld taxes. 

At the end of each year, the employee’s total income tax is finalized through BIR Form 1701, or Annual Income Tax Return. This involves tax annualization (year-end adjustment), which is a process of determining an employee’s annual income tax liability based on the year-to-date earnings and other relevant factors such as bonuses, allowances, and deductions. It ensures that an individual’s income tax dues are correctly calculated and paid in compliance with the country’s tax laws.

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How to Compute Withholding Tax on Compensation (Step-By-Step Guide) 

Computing withholding tax on compensation is typically the payroll officer’s responsibility, but as an employee, it’s important for you to understand the process to ensure accurate payroll deductions and share in tax compliance. Here’s a step-by-step guide for your reference:

1. Start with the Gross Taxable Salary. 

If you are an employee, your gross taxable salary generally includes the basic salary, any adjustments due to absences and tardiness, taxable allowances and bonuses, and overtime pay. When combined with any non-taxable income or benefits, this forms your total gross pay.

Example: Suppose your monthly basic salary is PHP 30,000. It is the fixed amount that you receive each month before any deductions, bonuses, or allowances. To compute your gross taxable salary:  

Gross Taxable Salary = Basic Monthly Salary + Other Taxable Pay (e.g., Overtime, Holiday Pay, Taxable Bonuses, etc.) – Other Adjustments (i.e., for Absences and Tardiness)

= PHP 30,000 + PHP 295.89 (Overtime Pay) – PHP 986.30 (1-Day Leave Without Pay)       

= PHP 29,309.59 

2. Calculate and Deduct the Statutory Contributions.

After determining your gross taxable salary, the next step is to calculate your monthly statutory contributions — the mandatory deductions for your SSS, PhilHealth, and Pag-IBIG Fund premium contributions. 

For SSS premium contributions, refer to the latest SSS Table of Contributions to determine your employee (EE) regular monthly and WISP contributions, which are based on your Monthly Salary Credit (MSC). For consistency, use your basic monthly salary as the basis for the applicable compensation range. 

For a basic monthly salary of PHP 30,000, the SSS monthly contribution is PHP 1,000, and the SSS Mandatory Provident Fund (WISP) contribution is PHP 500, bringing the total to PHP 1,500.  

For PhilHealth premium contributions, five percent (5%) of the basic salary is shared equally by the employee and employer, subject to an income floor of PHP 10,000.00 and an income ceiling of PHP 100,000.00.

For a basic monthly salary of PHP 30,000, the PhilHealth premium contribution (i.e., multiplied by 0.025 or 2.5%) is PHP 750.   

For Pag-IBIG Fund premium contributions, the mandated maximum contribution per month is capped at PHP 400, shared equally by the employee and employer. 

Thus, for a basic monthly salary of PHP 30,000, the Pag-IBIG Fund premium contribution is PHP 200 (employee share). 

Total Statutory Contributions = SSS + PhilHealth + Pag-IBIG Fund Premium Contributions (+ SSS/Pag-IBIG Loans, if any)

= PHP 1,500 + PHP 750 + PHP 200

= PHP 2,450 

After determining the sum of all the statutory contributions, get the net taxable income by deducting the total from the gross taxable salary.

Net Taxable Income = Gross Taxable Salary  – Statutory Contributions

= PHP 29,309.59 – PHP 2,450

= PHP 26,859.59

3. Apply the Withholding Tax Table and Compute the Tax. 

Based on the previous steps, your income tax rate is determined based on your net taxable income (taxable salary less statutory contributions). Now, to compute your withholding tax, refer to the BIR Revised Withholding Tax Table (e.g., monthly, effective January 1, 2023, and onwards).

BIR Revised Withholding Tax Table (e.g., monthly, effective January 1, 2023, and onwards)
BIR Revised Withholding Tax Table (effective January 1, 2023, and onwards)

For a net taxable income of PHP 26,859.59, the applicable compensation range is PHP 20,833 – PHP 33,332, and the prescribed withholding tax is 0.00 + 15% over PHP 20,833. To compute:

Withholding Tax = (0.00 + 15% over PHP 20, 833)

= 0.00 + 15% (PHP 26,859.59 – PHP 20, 833)

= 0.00 + 15% (PHP 6,026.59)

= PHP 903.99

4. Deduct the Withholding Tax.

So, your withholding tax on compensation is PHP 903.99 — and this is the amount you pay to the government. But let’s continue with the computation to give you a clearer picture of how withholding tax impacts your net or take-home pay. To compute the net pay, simply subtract the gross deductions from the gross income. Add the gross non-taxable income (e.g., de minimis benefits), if any. 

Net Pay  =  Gross Pay – Gross Deductions (Statutory Contributions + Withholding Tax)

= PHP 29,309.59 – (PHP 2,450  + PHP 903.99)

= PHP 29, 309.59 – PHP 3,353.99

= PHP 25,955.6

How to Compute Withholding Tax on Compensation (Sample Computation)
Sample Computation – Withholding Tax on Compensation

5. File the BIR Return and Remit the Withholding Tax.

If you are an employee, there is no need to worry about the BIR filing. Your employer is the one responsible for filing BIR Form 1601-C, or the Monthly Remittance Return of Income Taxes Withheld on Compensation, and remitting the tax withheld on or before the 10th day of the month following the month in which withholding was made, except for December’s taxes, which must be filed and paid on or before January 15 of the succeeding year.

Your employer must also issue you a BIR Form 2316, or the Certificate of Compensation Payment/Tax Withheld, by January 31 of the following year, detailing your total annual compensation and taxes withheld. Additionally, they must file the Annual Information Return (BIR Form 1604-C) by January 31 to report a summary of all compensation-related taxes withheld for the previous year.

Understanding Withholding Tax on Compensation: Why It Matters to Both Employees and Employers

Having a clear understanding of withholding tax on compensation is important—not just for tax and legal compliance, but also for promoting fairness and transparency in payroll processing. 

As a compensation income earner or an employee, knowing how your withholding tax on compensation is computed is key to understanding how your net pay or take-home pay is determined. Thus, it prevents confusion, avoids disputes, and ensures that you are neither overtaxed nor undertaxed.

As an employer, you are legally obligated to compute, deduct, and remit the correct amount of withholding tax on a monthly basis. Understanding how withholding tax on compensation is calculated helps you avoid costly penalties, interest charges, or audits from the BIR. Just as importantly, it ensures that you are running an accurate, compliant, and transparent payroll for your employees. 

Need help understanding your withholding tax or managing payroll? 

FilePino is here for you! If you’re an employee looking to understand further how your withholding tax on compensation is calculated, deducted, and reported to the BIR, our HR and payroll specialists can provide the clarity you need. 

For business owners, we offer expert payroll and accounting services designed to streamline your operations, ensure compliance, and reduce administrative stress. Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.