Introduction

In the Philippine tax system, income from employment is subject to withholding tax at source, ensuring that taxes are collected efficiently throughout the year. However, when an individual earns additional income beyond their regular salary—such as from bonuses, overtime pay, secondary employment, business ventures, or investments—this can alter their overall tax liability. Overwithholding may occur if the taxes deducted from salary exceed the final computed tax due after accounting for all income sources, deductions, and credits. This article explores the comprehensive framework for refunding excess taxes withheld on salary in the context of additional income, drawing from the National Internal Revenue Code (NIRC) of 1997, as amended, and relevant revenue regulations issued by the Bureau of Internal Revenue (BIR). It covers legal foundations, procedural requirements, common pitfalls, and practical considerations to guide taxpayers in navigating refunds.

Legal Basis

The refund of excess withholding taxes is governed primarily by Section 78 of the NIRC, which mandates withholding on compensation income, and Section 79, which outlines the computation and remittance of such taxes. Revenue Regulations (RR) No. 2-98, as amended by subsequent issuances like RR No. 11-2018 and RR No. 16-2020 under the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, provide detailed guidelines on withholding tax tables, adjustments for additional income, and refund mechanisms.

Under Section 204(C) of the NIRC, the BIR Commissioner is authorized to refund or credit any tax where there has been an overpayment. This includes instances where withholding on salary results in excess payments due to the integration of additional income in the annual tax return. The Supreme Court has affirmed in cases like Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation (G.R. No. 66838, December 2, 1991) that refunds must be based on clear evidence of overpayment, emphasizing the taxpayer's burden of proof.

Key amendments from the TRAIN Law (Republic Act No. 10963) adjusted personal exemptions and tax brackets, potentially increasing refund opportunities for lower-income earners with additional income, while the CREATE Act (Republic Act No. 11534) further refined corporate and individual tax rules, indirectly affecting mixed-income earners.

Withholding Tax on Compensation Income

Compensation income, including salaries, wages, and other remunerations from an employer-employee relationship, is subject to creditable withholding tax under a progressive rate schedule. Employers use the Revised Withholding Tax Table (effective from 2018 under RR No. 11-2018), which considers daily, weekly, semi-monthly, or monthly pay periods. The tax withheld is computed based on gross compensation minus non-taxable items like the statutory minimum wage (for minimum wage earners), holiday pay, overtime pay up to certain limits, night shift differential, hazard pay, and de minimis benefits.

For pure compensation income earners with a single employer, the withholding tax is designed to approximate the final tax liability. If the annual tax withheld equals the tax due, substituted filing applies via BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld), relieving the employee from filing an Annual Income Tax Return (ITR). However, this changes when additional income enters the picture, as it may push the taxpayer into a higher bracket or require separate withholding considerations.

Defining Additional Income

Additional income refers to earnings beyond regular salary from the principal employer. This includes:

Supplementary Compensation: Bonuses, 13th-month pay (tax-exempt up to PHP 90,000 as per RR No. 11-2018), profit-sharing, and other fringe benefits. Excess over the exemption threshold is taxable and withheld accordingly.
Income from Secondary Employment: If an individual has multiple employers, they must designate one as the principal employer for standard withholding. Taxes on compensation from additional employers are withheld at a flat rate of 5% if gross income from all sources does not exceed PHP 3 million annually (under RR No. 8-2018); otherwise, the progressive rates apply.
Mixed Income Sources: Business or professional income (e.g., from freelancing, rentals, or investments like dividends, interest, or capital gains). These are not subject to withholding on compensation but may require quarterly payments via BIR Form 1701Q and are integrated into the annual ITR.
Passive Income: Subject to final withholding taxes (e.g., 20% on interest from bank deposits, 10% on dividends from domestic corporations), which are not creditable against compensation tax but affect total income for bracket determination.

Additional income can either increase tax liability (reducing potential refunds) or, in rare cases, qualify for deductions that lower it (e.g., business expenses under the optional standard deduction of 40% for gross sales/receipts).

Impact of Additional Income on Tax Liability and Refunds

When additional income is present, the taxpayer's total taxable income is aggregated in the ITR, applying the progressive tax rates (0% to 35% as of 2023 onward under TRAIN Law amendments):

0% on annual taxable income up to PHP 250,000.
15% on excess over PHP 250,000 up to PHP 400,000.
Higher brackets up to 35% over PHP 8 million.

If taxes withheld on salary exceed the recomputed tax due after including additional income and allowable deductions (e.g., personal exemption of PHP 50,000 per dependent, health premiums up to PHP 2,400), a refund is due. Conversely, if additional income increases the tax due beyond withholdings, the taxpayer owes the difference.

For example, an employee with PHP 600,000 salary (withheld tax: approximately PHP 82,500) who earns PHP 200,000 from a side business might see their total tax due rise to PHP 110,000, requiring payment of the shortfall. But if business expenses reduce net additional income, or if overwithholding occurred due to non-adjustment for de minimis benefits, a refund could result.

Minimum wage earners are exempt from income tax on their minimum wage, holiday pay, etc., but additional income from non-compensation sources may still trigger tax liability, potentially allowing refunds if salary withholdings were erroneous.

Procedure for Claiming Refunds

To claim a refund for excess taxes withheld on salary influenced by additional income, follow these steps:

Determine Filing Requirement: Pure compensation earners with one employer qualify for substituted filing, but additional income mandates filing BIR Form 1701 (for mixed income) by April 15 of the following year.
Compute Tax: Use the ITR to sum all income, subtract deductions/credits, and apply rates. Compare against total creditable withholding taxes (from BIR Form 2316 and 2307 for other withholdings).
File ITR: Submit electronically via eBIRForms or EFPS. If refundable amount exceeds PHP 10,000, attach supporting documents like Alphalist of Payees, proof of additional income, and expense receipts.
Claim Refund: If the ITR shows overpayment, elect "To be refunded" on the form. The BIR processes claims within 180 days (Section 229, NIRC), though delays occur. For amounts over PHP 1 million, a Tax Clearance Certificate may be required.
Administrative or Judicial Claim: File a written claim with the BIR within two years from payment (Section 229, NIRC). If denied, appeal to the Court of Tax Appeals within 30 days.

Refunds are issued via Tax Refund Checks, direct bank deposit (for e-filed returns), or tax credit certificates usable against future liabilities.

Required Documentation

BIR Form 2316 from employer(s).
BIR Form 2307 for withholding on additional income if applicable.
Proof of additional income: Invoices, official receipts, bank statements.
Deduction proofs: Expense receipts, donation certificates.
For mixed earners: Books of accounts or audited financial statements if gross sales exceed PHP 3 million.

Failure to substantiate claims can lead to denial, with penalties under Section 248 (civil) or 255 (criminal) of the NIRC for underdeclaration.

Common Scenarios and Pitfalls

Multiple Employers: Non-designation of principal employer leads to overwithholding at flat rates, increasing refund likelihood upon ITR filing.
Year-End Adjustments: Employers perform annualized computations under RR No. 3-2015, but additional non-compensation income isn't factored, necessitating ITR for refunds.
Expatriates and Non-Residents: Resident aliens follow similar rules, but non-resident aliens engaged in trade face 25% final tax on gross income, limiting refunds.
Pandemic-Related Adjustments: Under BAYANIHAN Acts and RR No. 4-2021, certain bonuses were exempt, potentially creating overwithholdings refundable via ITR.

Pitfalls include missing the two-year prescription period, incomplete documentation, or erroneous self-assessment, which can result in assessments plus 20% interest and 25% surcharge.

Tax Planning Considerations

To minimize overwithholding, employees can request withholding adjustments via BIR Form 1905. Mixed-income earners should track quarterly payments to avoid year-end surprises. Consulting a Registered Tax Agent or using BIR's Tax Whiz app can aid compliance.

Conclusion

Refunding excess taxes withheld on salary amid additional income underscores the Philippine tax system's emphasis on equity and self-assessment. By integrating all income sources in the ITR, taxpayers ensure accurate liability computation, claiming refunds where due. Timely filing, meticulous record-keeping, and awareness of evolving regulations are essential to avoid penalties and maximize entitlements. This mechanism not only rectifies overpayments but also promotes voluntary compliance in a progressive tax regime.