Introduction

In the Philippines, the taxation of wages is governed primarily by Republic Act No. 8424, as amended, known as the National Internal Revenue Code (NIRC) of 1997, and further modified by subsequent laws such as Republic Act No. 10963 (TRAIN Law) and Republic Act No. 11534 (CREATE Law). Income tax withholding on wages serves as a mechanism for the government to collect taxes at the source, ensuring compliance and easing the burden on individual taxpayers. This article focuses specifically on the withholding of income tax from wages that exceed the statutory minimum wage, as minimum wage earners enjoy certain exemptions. Understanding this process is crucial for employers, employees, and tax practitioners to avoid penalties and ensure accurate tax remittances.

The Bureau of Internal Revenue (BIR) administers these rules through various revenue regulations, such as Revenue Regulations No. 2-98 (as amended) and more recent issuances like Revenue Regulations No. 11-2018 and No. 8-2021, which provide detailed guidelines on withholding tax computations, exemptions, and reporting requirements.

Legal Basis and Framework

The withholding tax on wages is mandated under Section 79 of the NIRC, which requires employers to deduct and withhold a tax on compensation income paid to employees. This is distinct from other forms of income tax, such as those on business income or passive income. The key principle is that withholding acts as a creditable tax against the employee's annual income tax liability.

Exemption for Minimum Wage Earners

To contextualize wages above the minimum, it is essential to note the exemptions for those at or below the minimum wage threshold. Under Section 2 of Republic Act No. 9504, minimum wage earners (MWEs) are exempt from income tax on their minimum wage earnings, holiday pay, overtime pay, night shift differential pay, and hazard pay. This exemption stems from social welfare considerations to protect low-income workers.

Definition of MWE: An MWE is an employee who receives the statutory minimum wage as fixed by the Regional Tripartite Wages and Productivity Boards (RTWPBs) under the Wage Rationalization Act (Republic Act No. 6727). The minimum wage varies by region and industry; for example, as of recent adjustments, the daily minimum wage in the National Capital Region (NCR) for non-agriculture is around PHP 610, while in other regions it may be lower, such as PHP 450 in some areas.
Scope of Exemption: The exemption applies only to the minimum wage and related benefits. Any income exceeding the minimum wage, or from sources other than employment (e.g., business income), is taxable.

For wages above the minimum, no such blanket exemption exists, and withholding tax must be applied progressively based on the employee's total taxable compensation.

Computation of Withholding Tax on Wages Above Minimum Wage

When an employee's wages exceed the minimum wage, the entire compensation income becomes subject to withholding tax, but with adjustments for personal exemptions and other allowable deductions. The TRAIN Law introduced a revised income tax table effective from January 1, 2018, which shifted to a more progressive structure with lower rates for middle-income earners.

Steps in Computation

Determine Taxable Compensation Income:
- Taxable compensation includes basic salary, allowances, bonuses, commissions, and other benefits, minus non-taxable items like de minimis benefits (up to PHP 90,000 annually), 13th-month pay and other benefits (up to PHP 90,000), and contributions to SSS, GSIS, PhilHealth, Pag-IBIG, and union dues.
- For employees earning above minimum wage, all compensation is potentially taxable unless specifically exempt.
Apply Personal and Additional Exemptions:
- Basic personal exemption: PHP 50,000 for all individuals (but phased out under TRAIN for higher earners).
- Additional exemption: PHP 25,000 per qualified dependent child (up to four dependents).
- Note: Under the TRAIN Law, these exemptions are integrated into the tax brackets, and a standard deduction is not available for compensation income; instead, the tax tables account for them.

Use the Withholding Tax Table:

The BIR provides withholding tax tables (daily, weekly, semi-monthly, monthly) based on the revised income tax rates under Section 24(A) of the NIRC.

Current tax brackets (as of 2023 onward, post-TRAIN adjustments):

Annual Taxable Income (PHP)	Tax Rate
0 - 250,000	0%
250,001 - 400,000	15% of excess over 250,000
400,001 - 800,000	20,000 + 20% of excess over 400,000
800,001 - 2,000,000	100,000 + 25% of excess over 800,000
2,000,001 - 8,000,000	400,000 + 30% of excess over 2,000,000
Over 8,000,000	2,200,000 + 35% of excess over 8,000,000

For withholding purposes, these are prorated based on the pay period. For example, for a monthly payer:
- If monthly taxable income is PHP 20,833 (equivalent to annual 250,000), tax is 0%.
- Adjustments are made for employees with multiple employers or mixed income.

Special Rules for Mixed Income Earners:
- If an employee has business income in addition to wages, they are considered mixed-income individuals. Withholding on wages still applies, but they must file an annual return to consolidate incomes.
- MWEs who receive additional income lose their exemption status and become subject to tax on all income.

Example Calculation

Suppose an employee in NCR earns PHP 20,000 monthly basic salary (above the minimum of PHP 18,300 for a 30-day month at PHP 610 daily).

Assume semi-monthly pay: PHP 10,000 per period.
Taxable amount after exemptions: Use the semi-monthly table.
If after deductions, taxable is PHP 9,375 (prorated zero bracket), tax = 0.
If taxable is PHP 15,000: Tax = (15,000 - 10,417) * 15% + 0 = PHP 687.45 (approximate, based on tables).

Employers must use BIR-prescribed tables or software for precision.

Employer Obligations

Employers are withholding agents under Section 78 of the NIRC and must:

Register with BIR: Obtain a Withholding Agent Certificate.
Deduct and Remit Tax: Monthly remittance via BIR Form 1601-C, due by the 10th/15th of the following month (depending on eFPS or manual filing).
Issue Certificates: Provide BIR Form 2316 to employees by January 31 of the following year, certifying withheld taxes.
File Annual Returns: Submit alphalist of employees and withheld taxes via BIR Form 1604-C by January 31.
Maintain Records: Keep payroll records for audit.

Failure to withhold or remit can result in penalties: 25% surcharge, 12% interest per annum, and possible criminal liability under Section 255 of the NIRC.

Employee Rights and Responsibilities

Employees earning above minimum wage must:

Provide accurate information via BIR Form 1905 (registration/update) and Form 2305 (exemption certificate).
File annual income tax return (BIR Form 1700 or 1701) if necessary, e.g., for refunds or additional taxes.
Claim tax credits for withheld amounts.

Over-withholding can be refunded via annual filing or administrative claims.

Special Considerations

Bonuses and 13th-Month Pay

13th-month pay and other benefits up to PHP 90,000 are exempt.
Excess is added to taxable compensation and subject to withholding.

Fringe Benefits

Fringe benefits (e.g., housing, vehicles) are subject to fringe benefit tax (FBT) at 35% on grossed-up value, paid by the employer, not withheld from wages.

Non-Resident Aliens

Non-resident aliens engaged in trade/business: 25% final withholding on gross compensation.
Not engaged: 15% if from countries with tax treaties.

Adjustments for Inflation and Wage Changes

RTWPBs periodically adjust minimum wages, affecting the threshold. For instance, recent wage hikes in 2023-2024 in various regions require employers to recalibrate withholding for employees crossing the minimum threshold.

Impact of CREATE Law

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law reduced corporate tax rates but maintained individual withholding rules, with minor adjustments to incentives for employees in ecozones.

Penalties and Compliance Issues

Underwithholding: Employer liable for deficiency plus penalties.
Overwithholding: Employee can claim refund; employer may face complaints.
Audits: BIR conducts regular audits; discrepancies can lead to assessments.
Common pitfalls: Misclassifying MWEs, incorrect use of tax tables, failure to update for law changes.

Recent Developments and Reforms

Ongoing discussions in Congress aim to further simplify withholding through proposals like expanding exemptions or adjusting brackets for inflation. However, as of now, the framework remains as outlined.

Conclusion

Income tax withholding on wages above the minimum wage in the Philippines is a critical component of the tax system, balancing revenue collection with taxpayer equity. Employers must diligently apply the rules to avoid liabilities, while employees should monitor their withholdings for accuracy. Consulting with tax professionals or the BIR is recommended for complex scenarios to ensure full compliance with the evolving legal landscape.