Monthly Application of Tax Deductions in Employment (Philippine Context)
This article consolidates the key principles, rules, and practical considerations on Philippine monthly withholding tax on compensation. It is written for general guidance and should not be taken as a substitute for professional advice or for the official text of Bureau of Internal Revenue (BIR) issuances.
1. Introduction
Under the Philippine “pay‑as‑you‑earn” system, the employer is the government’s withholding agent. Every payday, the employer must compute, deduct, and remit the correct amount of income tax from each employee’s compensation. Monthly compliance is crucial because failure to withhold or remit on time exposes the employer to the tax, plus penalties, while depriving employees of accurate credit for the tax they owe overall.
2. Legal Framework
| Source | Key Provisions |
|---|---|
| National Internal Revenue Code (NIRC) of 1997 (as amended) | • § 24(A) – Graduated income‑tax rates for individuals • § 78–§ 83 – Withholding of tax at source, employer duties, employee remedies |
| TRAIN Law (Republic Act 10963, effective 1 Jan 2018) | • Lowered individual rates and revamped withholding tables • Introduced non-taxability of benefits ≤ ₱90 000 |
| Revenue Regulations (RR) | • RR 11‑2018 – Consolidated policies on withholding tax on compensation (WTC) • RR 8‑2018 – Prescribed revised Withholding Tax Tables • Subsequent RRs and RMCs that tweak forms, eFPS deadlines, and penalties |
| Labor Code (for wage protections) | Indirectly relevant (ensures net‑of‑withholding pay is delivered) |
3. Scope and Coverage
3.1 Employers
All persons or entities paying salaries, wages, allowances, fees or any remuneration for services performed within the Philippines must withhold, whether or not organized under Philippine laws, and regardless of asset size.
3.2 Employees
| Category | Withholding Rule |
|---|---|
| Resident citizen, resident alien, non‑resident alien engaged in trade/business | Subject to WTC using Philippine rates |
| Non‑resident alien not engaged in trade/business | Subject to final 25 % tax; not covered by monthly WTC tables |
| Minimum‑wage earners (MWEs) | Fully exempt from income tax on basic pay and holiday/night‑shift differentials; but taxable on non‑exempt allowances |
| Mixed‑income earners (salary + business) | Employer withholds on salary; individual files own ITR for other income |
| Employees of Regional/Area HQs or offshore banking units | Subject to 15 % preferential rate; withheld monthly |
Employees rendering services abroad and paid from the home payroll stay taxable if they’re resident citizens; but if compensated by a foreign branch and absent the entire taxable year, withholding is not required.
4. Monthly Withholding Tax System
4.1 Concept
The BIR uses graduated withholding tables designed so that, if applied consistently each payroll period, the employee’s eventual annual tax liability will be closely matched—reducing year‑end discrepancies.
4.2 Two Approaches
| Method | When Used | How It Works |
|---|---|---|
| Wage‑Bracket Table | Employees with fixed pay each period (hourly/daily/ monthly) | Employer finds the bracket corresponding to Taxable Compensation and withholds the exact amount shown |
| Cumulative Average Method | Employees with variable pay (overtime, commissions, sporadic bonuses) | At every payday, employer totals Year‑to‑Date (YTD) taxable compensation, divides by # pay periods elapsed, applies the table, then multiplies back by periods, subtracts YTD tax already withheld, and withholds the difference |
4.3 Current Monthly Tables (TRAIN)
- Effective 1 Jan 2023‑2027: ₱0 tax on annualized compensation ≤ ₱250 000 (≈ ₱20 833 monthly).
- Marginal rates run from 15 % to 35 %.
- Tables are issued in Annex “C” of RR 8‑2018.
5. Determining Taxable Compensation Income
Add:
- Basic salary/wages, hazard pay (if non‑MWEs), honoraria
- Overtime, night‑shift differential (NSD) of non‑MWEs
- Commissions, fees, taxable allowances, fringe benefits not subject to FBT
Less Exemptions & Exclusions:
- SSS, PhilHealth, Pag‑IBIG employee contributions
- Union dues (if provided in CBA)
- De minimis benefits within BIR monetary ceilings (e.g., meal allowance ≤ ₱2 000 / month)
- 13ᵗʰ‑month pay & other benefits up to ₱90 000 per year
- MWEs’ basic pay and prescribed differentials
The result is Taxable Compensation Income, to which the table or cumulative method is applied.
6. Step‑by‑Step Computation Example
Scenario: Rank‑and‑file employee, monthly basic ₱35 000, SSS ₱581.30, PhilHealth ₱525, Pag‑IBIG ₱100, no other benefits.
- Gross Pay ....................... ₱35 000
- Less mandatory contributions SSS (581.30) + PhilHealth (525) + Pag‑IBIG (100) = ₱1 206.30
- Taxable Comp. ................ ₱33 793.70
Using the 2023 Monthly Table:
| Monthly Compensation Range | Withheld Tax |
|---|---|
| > ₱20 833 – ₱33 333 | 20 % of excess over ₱20 833 |
Tax = 20 % × (₱33 793.70 – ₱20 833) Tax = ₱2 592.14 (rounded to nearest peso: ₱2 592)
Employer remits ₱2 592 on or before the due date (see § 7).
7. Employer Compliance Timetable
| Obligation | Form | Deadline* |
|---|---|---|
| Monthly remittance of tax withheld | BIR Form 1601‑C (hardcopy/ eBIR) | On or before the 10ᵗʰ day of the following month (15ᵗʰ for eFPS “large” taxpayers) |
| Quarterly Return (if required by subsequent regulations) | (Superseded by 1601‑C in RR 11‑2018) | — |
| Annual Information Return & Alphalist | BIR Form 1604‑C | 31 January of the following year |
| Certificate to Employee | BIR Form 2316 | Furnish to employee on or before 31 January; submit to BIR (via DATF) by 28 February (or 15 March for eFPS) |
*If the statutory due date falls on a weekend/holiday, the deadline moves to the next working day.
8. Year‑End Adjustment (“Annualization”)
Between Dec 1 and Jan 31 the employer must:
Recompute the employee’s total taxable compensation for the calendar year.
Apply the annual tax table (TRAIN) to get the Actual Annual Tax Due.
Compare with YTD taxes already withheld.
- Deficiency → Withhold the shortfall from December pay, or collect separately.
- Excess (over‑withheld) → Refund through December payroll or earlier.
Employees whose income consists solely of compensation and who receive BIR Form 2316 showing taxes fully withheld are under substituted filing—they need not file an individual ITR.
9. Penalties for Non‑Compliance
| Violation | Penalties* |
|---|---|
| Failure to withhold/ remit | Employer assessed for unpaid tax plus: • 25 % surcharge • 12 % annual interest (double rate prior to TRAIN) • Compromise or graduated penalties |
| Late filing of returns | Surcharge + interest + compromise |
| Failure to issue 2316 | ₱1 000 per certificate; cap ₱25 000 / year |
| Willful neglect or fraud | Up to 50 % surcharge; criminal prosecution possible |
*Penalties under NIRC §§ 248‑249; amounts periodically updated by BIR issuances.
10. Employee Remedies & Special Cases
Tax Refund Claim
- If over‑withheld and not refunded by employer, employee may file ITR (BIR 1700/1701A) by 15 April and claim refund or apply the excess as tax credit.
Change of Employer within the Year
- New employer must obtain previous BIR 2316 and apply cumulative tax method.
- If unavailable, employee may be taxed as if starting anew; year‑end may create over‑/under‑withholding.
Mixed Income or Self‑Employed Option
- If employee also earns business income, he files 1701 and pays any residual tax. The 8 % optional rate (TRAIN) does not apply to compensation income.
Non‑Resident Aliens
- Engaged in trade/business – Withheld via normal tables.
- Not engaged – Subject to final 25 % tax on gross; no deductions, reported via Form 1604‑C but excluded from annualization.
11. Interaction with Other Statutory Deductions
While SSS, PhilHealth, and Pag‑IBIG are not taxes, deducting them correctly is vital because they are fully excludible, reducing the taxable base every payday. Conversely, loans (SSS salary loan, Pag‑IBIG housing) and non‑mandatory deductions (canteen, uniforms) do not reduce taxable income.
12. Record‑Keeping & Audit Trail
- Maintain payroll registers, schedules of withholding per employee, proof of eFPS/ eBIR filing, bank/GCash/PayMaya payment confirmations.
- Preserve records for 10 years (NIRC § 203 as amended by the Ease of Paying Taxes Act).
- Payroll software must align with latest BIR tables; manual overrides should be documented.
13. Recent Developments
| Year | Update | Practical Impact |
|---|---|---|
| 2023 | BIR e‑Forms sunset; transition to eBIR Form 1601‑C v2018 and online payment channels | Automated calculation embedded; stricter validation of Alphalist |
| 2024 | Electronically‑filed DATF system for 2316/1604‑C pilot | Fewer hard‑copy submissions; real‑time matching against 1601‑C |
| 2025 (proposed) | House Bill #___ to increase 13ᵗʰ‑month tax‑free cap to ₱120 000 | If enacted, employers must adjust taxable benefits cap right away |
14. Compliance Best Practices
- Map pay codes: differentiate taxable vs exempt allowances in HRIS.
- Automate cumulative average for variable earners (sales, production incentive schemes).
- Cut‑off management: ensure commissions/bonuses are tagged to the correct payroll period to avoid YTD distortions.
- Reconcile monthly between 1601‑C, GL liability account, and actual remittances.
- Hold mid‑December dry‑run of annualization to surface shortfalls early.
- Stay current: subscribe to BIR e‑mail/RMC feeds; update tables whenever TRAIN’s second‑tier rates shift (2028 slated reduction).
15. Conclusion
Monthly withholding on compensation is a shared responsibility: the employer must be meticulous in computation and timely in remittance, while the employee should verify payslips and year‑end certificates. Mastery of the legal framework, correct classification of pay elements, and updated payroll systems ensure compliance, avoid penalties, and support employees’ tax equity.
16. Primary References
NIRC of 1997, §§ 24, 78‑83, 248‑249.
Republic Act 10963 (“TRAIN”), Title II and transition rules.
Revenue Regulations:
- RR 8‑2018 – Withholding tax tables post‑TRAIN.
- RR 11‑2018 – Implementing guidelines for compensation withholding.
Revenue Memorandum Circulars (selected):
- RMC 50‑2018 – Clarifications on compensation withholding.
- RMC 121‑2019 – eFPS deadlines for Forms 1601‑C & 1604‑C.
Labor Code of the Philippines, as amended.
Always consult the latest BIR issuance or seek professional tax counsel when doubt arises.