A practical legal guide for employers, HR, and payroll teams

1) Why “taxpayer type” matters

When you onboard a new hire in the Philippines, the “taxpayer type” you select (or cause to be recorded with the Bureau of Internal Revenue or BIR) determines:

whether the person is treated as purely compensation earner, self-employed, or mixed-income
which BIR registration form is appropriate (and whether a new TIN is issued)
whether the employee can use substituted filing (i.e., no need to file an annual ITR if qualified)
how you compute and report withholding tax on compensation
what compliance documents must be issued (especially BIR Form 2316)

Getting this wrong can create downstream problems: incorrect withholding, incorrect annualization, inability to substitute-file, failed TIN validation, penalties on the employer as withholding agent, and headaches for the employee (especially if they later discover they were “mixed-income” all along).

2) The legal framework you are operating under

In PH practice, taxpayer-type onboarding sits at the intersection of:

the National Internal Revenue Code (NIRC), as amended (income tax, withholding, filing obligations)
BIR rules on TIN issuance/registration, and employer duties as withholding agents
post-TRAIN mechanics: removal of personal exemptions; updated tax brackets; increased 13th-month/benefits exclusion threshold; adjusted rules that affect payroll
special regimes that may apply to certain hires (e.g., minimum wage earners, fringe benefits tax for managerial/supervisory, special treatment for some nonresident aliens, etc.)

You do not need to memorize every issuance to onboard correctly; you need a defensible classification method and correct documentation.

3) The core classifications used in onboarding

From an employer/HR perspective, “choosing taxpayer type” for a new employee usually boils down to determining whether the individual is:

A. Purely Compensation Income Earner (Employee)

The person’s taxable income consists solely of compensation from employment (salary, wages, taxable allowances, bonuses beyond exempt thresholds, etc.).

Consequences:

Employer withholds tax using the withholding tax on compensation rules (graduated rates).
Employee may qualify for substituted filing, if all conditions are met.
Registration/maintenance is typically via employee-focused BIR processes (including TIN application if none exists).

B. Self-Employed / Professional

The person earns from trade/business or practice of profession (sole proprietor, freelancer, professional, contractor). This is not a typical “employee taxpayer type” for payroll onboarding—unless you are misclassifying what is actually an independent contractor relationship. If they are truly an employee, you generally should not register them as “self-employed” based on your employment alone.

Consequences:

They must be registered with BIR as self-employed/professional; file their own business/professional returns; may be subject to percentage tax or VAT (depending on circumstances) and income tax rules applicable to business/professional income.

C. Mixed-Income Earner

The person earns both:

compensation income as an employee, and
income from business/profession on the side (freelancing, online selling as a registered business, consultancy, etc.)

Consequences (critical):

They cannot rely on substituted filing (in general).
Employer still withholds tax on compensation, but the employee must file an annual ITR (commonly the return for mixed income) and reconcile taxes.
Their “taxpayer type” in BIR registration is not merely “employee”; it reflects that they have an additional income source that triggers separate filing obligations.

D. Special/One-Time/Other Categories (less common for “new employees”)

Examples: EO 98/one-time transaction registrants, purely passive income earners, etc. These are typically not used for ordinary employment onboarding.

4) The first decision: Is the person truly an employee?

Before you even talk taxpayer type, confirm the relationship: employee vs independent contractor. In PH practice, employment generally involves control over both the result and the means, integration into the business, set working hours, tools provided, discipline, etc. If you treat someone as an employee but classify them like a contractor (or vice versa), you create tax, labor, and benefits exposure.

Assuming the person is a bona fide employee, proceed to taxpayer-type classification for payroll and BIR compliance.

5) The onboarding classification test (what HR/payroll should ask)

You can safely classify most hires by asking the following:

Step 1 — Do they already have a TIN?

Yes: you should not apply for a new one. Multiple TINs are prohibited and create serious compliance issues.
No: employer typically facilitates TIN application for employees (process depends on BIR channel and employer practice).

Step 2 — Will they have only compensation income during the year?

Ask explicitly and document the answer:

“Do you have an existing registered business or professional practice with BIR?”
“Do you issue official receipts/invoices as a freelancer/consultant?”
“Do you file business tax returns (percentage tax/VAT) or have a Certificate of Registration?”
“Do you have other income from a second employer?”

If “No” to all: treat as Purely Compensation. If “Yes” to any: treat as potentially Mixed-Income (or multiple employers), and do not assume substituted filing will apply.

Step 3 — Will they have multiple employers within the year?

Even if purely compensation, having two or more employers in a calendar year often disqualifies substituted filing and requires proper annualization coordination.

Step 4 — Are they a minimum wage earner (MWE)?

MWEs may be exempt from income tax on compensation (subject to conditions), but the classification still remains “employee.” The practical impact is on withholding and year-end documentation.

Step 5 — Are they a foreign national, and what is their tax residency status?

For foreigners, classification may affect tax rates and whether they are taxed as:

resident alien (generally taxed like resident citizens on PH-sourced income), or
nonresident alien engaged/not engaged in trade/business (may be subject to different tax treatment), depending on facts (length of stay, nature of work, etc.)

This is where employers should coordinate with counsel/tax advisors if the case is not straightforward.

6) What “taxpayer type” typically means in BIR paperwork

In practice, you will encounter “taxpayer type” in three overlapping ways:

BIR registration category (employee vs self-employed vs mixed-income)
Withholding classification (compensation subject to withholding; fringe benefits subject to final tax; etc.)
Filing mode (qualified for substituted filing vs required to file annual ITR)

Employers most commonly need to ensure the employee is registered/recorded as an employee (and not mistakenly as something else), and that your payroll treatment matches their real-world situation (especially for mixed-income earners).

7) Common scenarios and the correct taxpayer type choice

Scenario A: Fresh graduate, first job, no side gigs

Type: Purely Compensation Income Earner Employer action: facilitate TIN (if none), withhold tax on compensation (likely zero at low income), issue Form 2316.

Scenario B: Employee with an existing freelancer registration (BIR COR) doing side consulting

Type: Mixed-Income Earner Employer action: withhold compensation tax as usual; do not treat them as substituted filing; remind them they must file annual ITR and reconcile.

Scenario C: Employee who sells online casually (not registered)

This is a gray zone: casual selling could still be taxable; but “taxpayer type” for BIR registration depends on whether they are actually registered as a business/professional and required to file business taxes.

Practical approach:

If they are not registered and have no business filings, you can onboard as Purely Compensation, but it is prudent to advise them (as a policy note, not legal advice) to seek proper registration if the activity is continuous and income-producing.
If they are already registered or required to register: treat as Mixed-Income.

Scenario D: Employee had a previous employer earlier this year

Type: Purely compensation, but with multiple employers in the calendar year Employer action: secure prior employment income and withholding details for year-end annualization; substituted filing may not apply depending on circumstances; coordinate issuance of 2316 and correct annualization.

Scenario E: Managerial/supervisory employee receiving fringe benefits

Type: Still an employee for taxpayer type Tax treatment: certain fringe benefits may be subject to fringe benefits tax (final tax) if the rules apply. This affects payroll tax computation and reporting, not whether they are “self-employed.”

Scenario F: Foreign national hired locally

Type: Employee, but confirm residency and engagement status Employer action: treat as employee; determine proper withholding based on their status; ensure correct registration and documentation. Complex cases warrant specific review.

8) The substituted filing trap (where employers often slip)

Substituted filing is a convenience rule that allows certain employees not to file an annual ITR because the employer’s year-end certificate (Form 2316) effectively substitutes for it.

Generally, an employee may be qualified for substituted filing if:

they earn purely compensation income, and
they have only one employer for the year (or otherwise meet the rules for proper annualization), and
the employer has correctly withheld and remitted taxes, and
the employee is not required to file for other reasons.

Employees who commonly do not qualify:

mixed-income earners (compensation + business/professional)
employees with multiple employers in the same taxable year (depending on annualization and compliance facts)
employees with other filing triggers (certain special cases)

Practical rule: If the employee is mixed-income, treat substituted filing as not available unless a competent review says otherwise.

9) Registration and documentation: what HR/payroll should actually do

A. If the employee has no TIN

Employers commonly assist using the applicable employee TIN application/registration process. In many setups, the employee is registered as an employee under the employer’s withholding agent context. Keep the employee’s onboarding file complete and consistent.

Minimum compliance mindset:

collect accurate personal data
ensure one TIN only
maintain proof of application/confirmation
ensure your payroll master data matches the BIR registration data (name format, birthdate, address)

B. If the employee already has a TIN

Validate the TIN and ensure no mismatch in name/birthdate.
Do not “re-apply” for a new TIN.
Use the TIN for payroll and year-end reporting.

C. Always plan for year-end documentation

Regardless of taxpayer type, employers must typically issue BIR Form 2316 to employees, reflecting compensation and tax withheld for the year (or for the period of employment).

10) Payroll consequences that flow from correct classification

A. Withholding tax on compensation (regular employees)

Withholding is computed using the applicable compensation withholding tables/rules (graduated rates). After TRAIN, the system is primarily bracket-based without personal exemptions in the old sense, making accurate compensation and taxable benefit classification more important than “exemptions.”

B. 13th month pay and other benefits (exclusion threshold)

A portion of 13th month pay and certain other benefits is excluded from tax up to a statutory threshold; any excess is taxable compensation and should be included in year-end annualization.

C. De minimis benefits vs taxable allowances

Certain small benefits may be treated as de minimis (non-taxable within limits); other allowances are taxable compensation unless specifically excluded.

D. Minimum wage earners (MWE)

MWEs may be exempt from income tax on compensation (subject to conditions), but still require proper payroll documentation and year-end certificates.

E. Fringe benefits tax (FBT)

If a managerial or supervisory employee receives fringe benefits covered by FBT rules, the employer may have to pay a final tax on those benefits (grossed-up), separate from compensation withholding. This is often missed when onboarding high-level hires.

11) Risk management: what to document on Day 1

Because mixed-income and multiple-employer situations create most disputes, employers should implement a short onboarding declaration such as:

TIN declaration (existing TIN / none)
statement whether the employee is purely compensation or has business/professional income
statement whether the employee had another employer in the same calendar year
acknowledgement that inaccurate disclosure can affect withholding, substituted filing, and year-end reporting

This is not about forcing employees to divulge everything; it is about giving payroll a defensible basis for classification and preventing silent noncompliance.

12) Common mistakes (and how to avoid them)

Applying for a second TIN Avoid by requiring TIN declaration and basic validation steps.
Treating a mixed-income earner as substituted filing Avoid by asking the right questions and flagging mixed-income at onboarding.
Misclassifying contractors as employees or vice versa Avoid by aligning contracts, actual work arrangements, and payroll tax treatment.
Ignoring prior employment in the same year Avoid by collecting prior 2316/withholding information where applicable and handling annualization properly.
Forgetting fringe benefits tax for managerial hires Avoid by having a checklist for executive/managerial compensation packages.

13) A practical employer decision tree (summary)

For a new hire who is a bona fide employee:

Do they have a TIN?

If yes → use it
If no → facilitate employee TIN registration

Do they have business/professional income (registered or actively filed)?

If yes → classify as Mixed-Income for compliance expectations (no substituted filing; employee still has compensation withholding)
If no → Purely Compensation

Did they have another employer this calendar year?

If yes → flag for year-end annualization and likely non-substituted filing depending on facts
If no → substituted filing may be possible (if all conditions satisfied)

Any special case?

MWE, foreign national residency issues, executive fringe benefits → apply the relevant special payroll tax handling

14) Bottom line

For ordinary employee onboarding, “taxpayer type” is not a menu of dozens of choices. It is mainly about identifying whether the new hire is:

Purely compensation (most employees), or
Mixed-income (employee + business/professional), or
a special case (multiple employers in the year, MWE, foreign national residency, fringe benefits tax situations)

If you build your onboarding process around those distinctions—plus strict TIN hygiene and clean year-end documentation—you will get the classification right in the overwhelming majority of cases and avoid the compliance pitfalls that trigger penalties and employee disputes.