(A practical legal article in Philippine context)

1) The legal framework (what “withholding from salary” really is)

In the Philippines, the income tax withheld from salary is withholding tax on compensation (WTC)—a pay-as-you-earn system where the employer acts as the government’s withholding agent. The withheld amounts are generally treated as advance payments of the employee’s annual income tax.

Key legal sources (core, not exhaustive):

National Internal Revenue Code (NIRC), as amended — especially provisions on income tax, compensation income, and withholding tax
TRAIN Law (restructured personal income tax rates and removed personal exemptions)
BIR withholding regulations (notably the general withholding regulations and subsequent updates aligning payroll withholding with TRAIN and later changes)

Core idea: Your employer computes a taxable compensation base, applies the tax rate schedule, and withholds tax each payroll. At year-end (or upon resignation), the employer “true-ups” through annualization.

2) Who is covered: employees whose pay is “compensation income”

Compensation income generally includes all remuneration for services performed as an employee, including:

basic salary/wages
overtime pay
commissions
hazard pay
allowances (if not exempt)
bonuses (if not exempt)
taxable benefits (cash or in kind)
certain company-provided benefits not treated as “fringe benefits tax” (FBT) items

WTC applies to employees (rank-and-file and managerial/supervisory) on compensation.

Distinguish from related concepts

Professional/contractor income → typically subject to expanded withholding tax (EWT), not WTC.
Fringe benefits tax (FBT) → typically for managerial/supervisory employees on certain benefits; the employer pays FBT, not the employee via WTC, when a benefit is properly classified as a “fringe benefit” subject to FBT.

3) Step-by-step: the legal computation concept (the big picture)

While payroll systems use BIR withholding tables per pay period, the legally correct result is anchored on the annual income tax. The withholding per period is meant to approximate the final annual tax.

Step 1 — Determine gross compensation income

Include salary and all items treated as compensation for tax purposes.

Step 2 — Identify non-taxable/excluded items

Remove from taxable base those that are excluded by law or regulation (examples below).

Step 3 — Deduct allowable deductions from compensation

For most employees, the main recurring deductions are mandatory contributions:

SSS (or GSIS for government employees, as applicable)
PhilHealth
Pag-IBIG (Plus other items allowed as exclusions/deductions under specific rules, e.g., certain union dues in some cases, and other limited items depending on the exact benefit.)

Step 4 — Arrive at taxable compensation income

Taxable compensation = Gross compensation – non-taxable/exempt items – allowed deductions

Step 5 — Apply the graduated income tax rates

Compute annual tax due using the tax brackets applicable for the taxable year.

Step 6 — Compute/withhold per payroll period using the BIR withholding approach

Employers generally use:

BIR-prescribed withholding tables (monthly, semi-monthly, weekly, daily), or
an equivalent cumulative/annualized method that matches the annual tax.

Step 7 — Year-end (or separation) annualization and “true-up”

At year-end, employers reconcile:

total taxable compensation for the year
correct annual income tax due
total tax withheld during the year Then they withhold additional tax or process a refund through payroll, as allowed.

4) The tax rates for individuals (compensation earners)

The Philippines uses graduated income tax rates for individuals (unless a special regime applies). Under TRAIN’s structure, the schedule most people refer to has these brackets starting 2023 onward:

Annual taxable income (individual) → tax due

₱250,000 and below → 0%
Over ₱250,000 to ₱400,000 → 15% of excess over ₱250,000
Over ₱400,000 to ₱800,000 → ₱22,500 + 20% of excess over ₱400,000
Over ₱800,000 to ₱2,000,000 → ₱102,500 + 25% of excess over ₱800,000
Over ₱2,000,000 to ₱8,000,000 → ₱402,500 + 30% of excess over ₱2,000,000
Over ₱8,000,000 → ₱2,202,500 + 35% of excess over ₱8,000,000

Important practical note: Payroll withholding typically uses BIR withholding tables per pay period, which are derived from the annual brackets.

5) What counts as non-taxable (common exclusions employees should know)

A) Statutory exclusions (highly relevant in payroll)

13th month pay and other benefits up to ₱90,000 (annual cap)
- Amount up to ₱90,000 is generally non-taxable
- Any excess is typically taxable compensation
De minimis benefits (within prescribed ceilings and conditions) These are small benefits considered non-taxable if within limits. Common examples in practice include certain:

rice subsidy
uniform/clothing allowance
laundry allowance
medical cash allowance to dependents
employee achievement awards (under conditions)
gifts during Christmas/major anniversary (subject to limits)
daily meal allowance for overtime/night shift (subject to limits)
and other items the BIR recognizes as de minimis Excess over allowed ceilings tends to become taxable (often added to “other benefits” and evaluated with the ₱90,000 cap where applicable, depending on classification).

Mandatory SSS/GSIS, PhilHealth, Pag-IBIG contributions These are generally deducted in arriving at taxable compensation.
Compensation of Minimum Wage Earners (MWE) Minimum wage earners may enjoy income tax exemption on certain compensation components, subject to strict conditions. Typically:

statutory minimum wage, and
certain holiday pay, overtime pay, night shift differential, and hazard pay may be exempt for MWEs, under the rules. Once an employee is no longer an MWE (e.g., due to higher basic pay), normal taxation generally applies.

B) Reimbursements and business-related payments

Reimbursements for business expenses can be non-taxable if properly substantiated and the employee is not benefiting personally.
Allowances can be tricky: if given as a fixed cash allowance without required liquidation, it is often treated as taxable, unless it falls under a recognized exclusion or qualifies as de minimis within limits.

6) Fringe Benefits Tax (FBT) vs WTC (why classification matters)

Some benefits given to managerial/supervisory employees may be subject to FBT instead of being included in taxable compensation, such as certain:

housing
vehicle of any kind
household personnel
expense accounts
educational assistance (subject to conditions)
membership fees
etc.

If subject to FBT: the employer pays a final tax on the “grossed-up monetary value,” and the employee typically does not pay this through WTC. If not subject to FBT or employee is rank-and-file: benefits are more likely treated as part of compensation and may be subject to WTC (unless excluded).

7) The payroll mechanics: withholding per period (how employers actually do it)

A) The “cumulative/annualized” approach (conceptually clean)

Many payroll systems compute tax as:

Year-to-date taxable compensation (including current period)
Compute estimated annual tax due based on YTD/forecast
Subtract tax previously withheld
Withhold the difference for the current period

This reduces big surprises at year-end and handles mid-year changes better.

B) The “withholding table” approach

The BIR publishes withholding tax tables by pay frequency (monthly/semi-monthly/weekly/daily). Employers match the employee’s taxable compensation for the period (net of required deductions/exclusions) to the table and withhold accordingly.

Either way, the legal end-point is still annual tax correctness, reconciled through annualization.

8) Annualization: year-end adjustment and when it happens

Annualization is the process of recomputing the employee’s annual taxable compensation and annual income tax due, then comparing it to the amount already withheld.

It typically occurs:

at year-end, or
upon termination/separation from employment during the year (final pay)

What gets annualized

taxable salary and wages
taxable allowances
taxable bonuses and incentives
taxable portion of 13th month/other benefits (excess over ₱90,000)
other taxable compensation items paid during the year

What annualization does

If underwithheld → employer withholds additional tax (often from December payroll or final pay)
If overwithheld → employer may refund through payroll within allowed administrative rules (commonly before year-end closing or within a permitted period, depending on the employer’s policy and practical constraints)

9) BIR Form 2316 and substituted filing (why many employees don’t file)

A) Form 2316

BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) is the employee’s key tax document. It summarizes:

total compensation
taxable and non-taxable portions
tax withheld
employer information

Employers are required to provide it to employees and submit required copies/alphalists to the BIR under the withholding system.

B) Substituted filing

Many employees qualify for substituted filing, meaning the employer’s filing and the employee’s 2316 serve as the employee’s income tax filing compliance—the employee no longer files an annual ITR—provided conditions are met, commonly including:

purely compensation income
only one employer for the year (or proper consolidation with new employer in certain cases)
correct withholding

If you do not qualify, you may need to file:

BIR Form 1700 (individual purely compensation, not qualified for substituted filing), or
BIR Form 1701 (mixed income / business/professional plus compensation), as applicable.

10) Special and tricky scenarios

A) Two employers in the same year

If you changed jobs mid-year:

Your new employer should request details of prior compensation and tax withheld (often via prior employer’s 2316) to correctly annualize.
If annualization isn’t properly done, you may end up underwithheld and required to file and pay.

B) Mixed income (employee + sideline business/profession)

If you earn compensation and you have business/professional income:

withholding from salary will not automatically settle your total annual tax
you generally must file an annual return and consolidate income, subject to the rules.

C) Nonresident aliens / special tax regimes

Tax treatment may differ depending on:

residency status
whether engaged in trade/business in the Philippines
treaty relief (if applicable and properly availed)
special employment arrangements These cases often require careful classification and may involve different rates or rules.

D) Minimum wage earners (MWE) who receive increases/extra pay

An employee can move in/out of MWE status depending on pay structure. Employers must be careful:

once pay exceeds thresholds and the employee is no longer MWE, normal taxation usually applies to taxable compensation.

E) Benefits that look “non-taxable” but become taxable due to ceilings

Common pitfall: de minimis or “other benefits” exceed ceilings/caps → excess becomes taxable and increases withholding.

11) Worked examples (illustrative)

Example 1 — Simple annual tax computation (2023-onward brackets)

Assume annual taxable compensation = ₱500,000.

Bracket: Over ₱400,000 to ₱800,000 Tax = ₱22,500 + 20% of (₱500,000 − ₱400,000) = ₱22,500 + 20% of ₱100,000 = ₱22,500 + ₱20,000 = ₱42,500 annual income tax

Your payroll withholding across the year should roughly total ₱42,500, subject to timing and annualization.

Example 2 — 13th month pay effect

Assume:

annual basic and other taxable comp totals already computed
you receive 13th month pay/other benefits of ₱120,000

Non-taxable cap: ₱90,000 Taxable excess: ₱120,000 − ₱90,000 = ₱30,000

That ₱30,000 gets added to taxable compensation, increasing your tax bracket computation and potentially causing a higher withholding in December due to annualization.

12) Employer compliance: what the law expects from employers

Employers must generally:

withhold correct tax on compensation
remit withheld amounts within prescribed deadlines
file withholding tax returns and submit required alphalists
issue Form 2316 to employees
perform annualization/true-up

Failure can result in:

deficiencies (basic tax, interest, surcharges)
disallowance of expense deductions for compensation (in some circumstances)
penalties for withholding and remittance violations In withholding tax, the employer’s role as withholding agent is legally serious: the BIR can pursue the employer for underwithholding/remittance failures, subject to defenses and factual context.

13) Employee rights and practical safeguards

Employees should:

review payslips for the taxable vs non-taxable breakdown
keep copies of Form 2316 annually
ensure that prior employer’s 2316 is provided to the new employer (if changing jobs mid-year)
track whether bonuses/benefits exceeded caps (₱90,000 for 13th month/other benefits; de minimis ceilings)
confirm whether they qualify for substituted filing

If overwithheld:

request employer payroll adjustment/refund (subject to timing/administrative feasibility)
keep documentation to support any claim or reconciliation

If underwithheld:

expect year-end catch-up withholding, or
if not corrected, prepare to file and pay any deficiency through the annual return (when required).

14) A concise checklist: what payroll must compute correctly

Identify all compensation items paid
Classify benefits correctly (taxable compensation vs de minimis vs other benefits vs fringe benefits)
Apply ₱90,000 cap to 13th month/other benefits (tax excess)
Deduct mandatory contributions (SSS/GSIS, PhilHealth, Pag-IBIG)
Compute taxable compensation and apply correct brackets
Use proper withholding tables/method per pay frequency
Annualize at year-end or upon separation
Issue Form 2316 and comply with remittance/filing requirements

15) Practical closing notes (legal realism)

Withholding is not the tax itself; it’s the collection mechanism. The true measure is the annual income tax on annual taxable compensation.
Most disputes and surprises come from misclassification of benefits, multiple employers, and bonus season annualization.
For edge cases (expats, tax treaty relief, stock compensation plans, separation pay nuances, special regimes), a tailored review of facts and the governing issuances is often necessary.

If you want, I can also provide:

a plain-language “payslip decoding” guide (what each line item usually means for tax), or
a structured template employers use to classify benefits (taxable vs non-taxable vs fringe benefits).