WITHHOLDING TAX ON HOTEL SERVICE CHARGES

Philippine Legal, Tax & Labor Perspectives (updated to 16 June 2025)

I. What Is a “Service Charge” in Hotels and Similar Establishments?

Statutory definition. Article 96 of the Labor Code, as amended by Republic Act No. 11360 (7 Aug 2019), calls “service charge” any amount added to the bill for work or service rendered by hotel, restaurant and similar employers and collected by the establishment rather than given directly as a tip.
Mandatory distribution.
- 100 % to covered employees, shared equally, regardless of position or tenure, except managerial employees (RA 11360, §1).
- Distribution must be not less than once every two weeks (DOLE Department Order No. 206-19).
Employer’s role. The hotel merely holds the money in trust until pay-out, acting as statutory withholding agent both for labor and tax purposes.

II. Tax Characterisation of the Service Charge

Party that ultimately receives the money	Classification under the National Internal Revenue Code (NIRC)	Consequence
Employees (100 % share since 2019)	Compensation income (NIRC §32 (A)(1); BIR RR No. 2-98, §2.78.1)	Subject to Withholding Tax on Compensation (WTC)
Hotel itself (only pre-RA 11360 situations where management kept a share)	Gross income / VATable receipts	Subject to corporate income tax, VAT & local business tax

Key takeaway: Because the entire service charge is legally destined for employees after RA 11360, it no longer forms part of the hotel’s gross receipts and is not itself subject to VAT, percentage tax or corporate income tax, but it is part of the employees’ taxable wage.

III. Mechanics of Withholding Tax on Compensation (WTC)

When to withhold. Section 79(A), NIRC – at the time of actual or constructive payment (i.e., on each distribution date mandated by DOLE).
How much to withhold. Apply the TRAIN-era graduated rates (RR No. 8-2018; latest rate table in RR No. 13-2023).
- ₱250,000 annual exemption still applies.
- Minimum-wage earners remain income-tax-exempt on basic wage, holiday, OT and night-differential pay; service charges are treated as part of “wage” and likewise enjoy the exemption only if the employee is a statutory MWE (BIR Ruling DA-233-20).
Forms & deadlines.

Form	Purpose	Regular deadline*
BIR Form 1601-C	Monthly remittance of WTC	On or before the 10th day following the close of the month (eFPS users: 15th/20th/25th depending on group)
BIR Form 1604-C & Alphabetical List	Annual reconciliation	31 January of the following year
BIR Form 2316	Individual certificate of tax withheld	Give to employee 31 January and substitute-file with BIR 28 February

* Deadlines that fall on a weekend/holiday move to the next working day (Sec. 56, Tax Code).

Accounting entry example (per distribution):

Dr  Service Charge Payable        100,000
      Cr  Cash (to employees)          92,500
      Cr  Withholding Taxes Payable     7,500

IV. Interaction with Other Payroll Statutes

Contribution	Is the service charge part of the computation base?	Authority
SSS	Yes – treated as “regular salary”	SSS Circular 2019-010
PhilHealth	Yes	PhilHealth CIRC 2020-0005
Pag-IBIG	Yes	HDMF Memo No. 363

V. VAT, Percentage Tax & Local Business Tax (LBT)

VAT / Percentage Tax. Revenue Memorandum Circular (RMC) No. 71-2012 clarifies that if the entire service charge is remitted to employees, it acts merely as a reimbursable trust fund; therefore it does not form part of the VAT base under NIRC §108(A). (If management had retained a share prior to RA 11360, only that retained portion was VATable.)
Local Business Tax. DOF Opinion 07-2013 adopts the same “trust fund” view for LBT purposes: amounts not retained by the hotel are excluded from “gross receipts” in computing city or municipal taxes.

VI. Common Compliance Issues & Pitfalls

Issue	Typical Misstep	Correct Treatment
Treating service charge as “allowance” to avoid tax	Booking it as non-taxable benefit	It is taxable compensation; misclassification = deficiency WTC, 25 % surcharge + 12 % interest
No withholding because workers are MWEs	Assuming total exemption	MWE exemption covers service charges only if employee’s basic daily wage ≤ applicable statutory minimum and the entire package (including service charge) does not exceed the yearly ₱250k TRAIN threshold
Late remittance	Cash-flowing the tax for operating expenses	Penalties under NIRC §§248-249: 25 % surcharge plus interest
Failure to incorporate service charge in SSS/PhilHealth base	Computing contributions on basic pay alone	May trigger SSS & PhilHealth assessments, plus penalty interest

VII. Illustrative Numerical Example (CY 2025)

Particulars	Juan (Rank-and-file)	Ana (Supervisor – still non-managerial)
Basic monthly salary	₱18,000	₱32,000
Service charge share (May 2025)	5,000	8,000
Taxable gross for the month	23,000	40,000
Less: TRAIN cumulative exemption available	—*	—
WTC for May (approx.)	₱0 (falls below tax-due threshold)	₱3,500 (per 2025 table)

* Assuming Juan is a minimum-wage earner in NCR at ₱610/day; his entire wage package including service charge remains tax-exempt.

VIII. Fringe Benefits Tax? – Not applicable

Because service charges are earned by employees through work actually performed, they are not “fringe benefits” furnished by the employer and therefore outside the scope of the 35 % Fringe Benefits Tax (NIRC §33).

IX. Special Situations

Scenario	Tax Outcome
Electronic gratuity apps that pool digital “tips” and route them through payroll	If voluntarily given by guests and not mandated or itemised as “service charge”, BIR currently treats them analogous to tip income; still compensation if routed through employer, hence subject to WTC.
Managed hotels where service charge is collected by a management company	The entity acting as statutory employer/withholding agent (often the hotel-owner corporation) keeps the withholding obligation, regardless of who actually prints the receipt.
CBA-negotiated sharing formula (e.g., 80 % employees / 20 % management for breakages) agreed before RA 11360 became effective	Void pro tanto; the statute prevails. Any retained 20 % would be hotel income and VATable and must not be charged as “service charge” on the invoice.

X. Penalties for Non-Compliance

Violation	Statutory basis	Sanctions
Failure to withhold or remit	NIRC §255	Fine ₱10k-₱20k plus imprisonment 1-10 years
Late filing/remittance	NIRC §248	25 % surcharge
Interest	NIRC §249	12 % p.a. (floating BSP rate may revise)
DOLE violation – failure to distribute	Art. 302, Labor Code	₱50,000-₱300,000 fine; stoppage order; closure in repeated violations

XI. Best-Practice Checklist for Hotel Finance/HR

Segregated “Service Charge Payable” ledger to reinforce trust-fund treatment.
Synchronise payroll & DOLE distribution schedule so withholding happens in the same pay-run.
Run threshold tests monthly to identify MWEs who may become taxable once cumulative income exceeds ₱250k.
Issue detailed payslips showing service-charge component to satisfy both BIR and DOLE inspectors.
Annual reconciliation: match total service charges billed per POS against total amounts distributed plus WTC remitted; variances prompt an internal audit.

XII. Conclusion

In the Philippines, a hotel’s obligation with respect to service charges is two-fold: labour-law compliance (full and timely distribution) and tax-law compliance (proper withholding and remittance). After RA 11360’s enactment, the entire service-charge pool is purely employee compensation; the hotel merely acts as custodian. Consequently, withholding tax on compensation is the sole national tax directly tied to that pool. Correct classification, monthly withholding, and tight reconciliation processes are the keys to avoiding both BIR and DOLE penalties.

(This article reflects statutes, BIR/RMC issuances, and DOLE regulations in force as of 16 June 2025. It is intended as general guidance; for specific situations seek professional tax advice.)