Employee Tax Annualization for Local and Foreign Employers in the Philippines
As the end of the year approaches, both local and foreign enterprises in the Philippines must undergo annualization of the compensation of their employees to properly determine the total tax due of each employee in their organization for the current taxable year.
With a full suite of payroll services, our team can help ensure your company is fully compliant with annualization needs and accurate tax dues for employees in your organization.
What is Tax Annualization?
Tax Annualization is the process of equalizing the tax due on the employees’ income from January of the current year-to-date, as against the withholding taxes that have been withheld from his pay for the same period. Companies conduct tax annualization to ensure that their company and its employees are paying the right amount of taxes to the Bureau of Internal Revenue (BIR) each year.
How Does Annualization Work?
Normally, whenever employers deduct tax from an employee’s monthly payroll, the calculation is based on his current gross salary using the BIR’s monthly tax table as supposed to its annual tax table. The tax rate provided in the monthly tax table is the same amount as stated in the annual tax table divided by 12 months. More or less, the total amount of taxes paid at the end of the year will most likely be the same.
However, there are some instances where an employee’s annual tax calculation can change such as:
- Receiving a salary adjustment in the middle of the year
- Accumulation of variable pays such as overtime, commissions, bonuses, etc.
- Frequent absences or prolonged leave
- Hired in the middle of the year
- Hired in the middle of the year and the previous employer issued a tax refund
- Newly-hired employees with a huge increase in compensation in comparison to previous work
Annualization is necessary to cater to such changes and to allow employers to collectively gather an employee’s overall compensation and properly fulfill an employee’s tax requirements.
How to Conduct Tax Annualization for Your Employees
Here is a step-by-step process on how you can conduct annualization for your employees.
#1: Collate Payroll Data from the Previous Months
To ensure the accuracy of the Annualized tax, it is important that all payroll computation processed and paid within the year is considered. You can create a spreadsheet containing all the approved payroll registers and final pay computation from January-December of the current year. To avoid miscalculation, a complete source file is vital before you proceed.
#2: Determine the Non-Taxable Income to exclude from the Taxable Amount
To get the right amount of taxable income, you must ensure that all non-taxable income is excluded. Here is the list of Non-taxable Income to consider:
- De Minimis Benefits
- 13th-month pay and Other Benefits (Other benefits are De Minimis benefits that are beyond the prescribed limit) maximum of Php90,000
- Social Insurances (SSS, Philhealth and HDMF) employee share only
- Separation Pay
- Salaries of Minimum Wage Earners
Please note that not all allowances are considered non-taxable. The Bureau of Internal Revenue (BIR) enumerated the list of benefits not subject to withholding taxes which is also called De Minimis. To help you determine if your current allowances are listed as De Minimis and within the prescribed limit, you may refer to RMC 50-2018.
#3: Compute the Total Withholding Tax Due For the Year
To help you, here is a snippet of the annual taxable income* provided by BIR:
| Taxable Income | Tax Due |
|---|---|
| Not over P250,000 | 0% |
| Over P250,000 but not over P400,000 | 20% of the excess over P250,000 |
| Over P400,000 but not over P800,000 | P30,000 + 25% of the excess over P400,00 |
| Over P800,000 but not over P2,000,000 | P130,000 + 30% of the excess over P800,000 |
| Over P2,000,000 but not over P8,000,000 | P490,000 + 32% of the excess over P2,000,000 |
| Over P8,000,000 | P2,410,000 + 35% of the excess over P8,000,000 |
*Current annual tax table is only valid until the end of 2022. Under the TRAIN Law, a new tax table will be used starting 2023 onwards.
Here is a visualized example of how you can compute your total withholding tax for the year. To get the Annual Tax due for the year, you can follow this formula:
Annual Tax Due = 20% of the excess over ₱250,000
Sample Computation:
Total Gross Income: ₱750,000
(Less)Total Non-Taxable Income: (₱426,300)
Total Taxable Income: ₱323,700
- Annual Tax Due = 20% of the excess over P250,000
- Annual Tax Due = 20% x (₱323,700 – ₱250,000) (based on the annual tax table provided by BIR)
- Annual Tax Due = ₱14,740
#4: Subtract the Annual Tax Due from the Total Taxes Withheld
To obtain the remaining tax due or refund, you may refer to the formula below:
Remaining Tax Due = Annual Tax Due – Tax Already Withheld
Tax annualization is usually conducted at the end of the year to collect accurate tax dues for their employees. If you decide to conduct them earlier, it is best to ensure that your calculations are close to the ones provided in previous months as tax rates per employee may change throughout the course of the year.
Secure Proper Tax Annualization for your Employees in the Philippines
As an employer in the Philippines, it is imperative to ensure that your company is fully compliant with relevant tax laws and regulations to avoid tax assessment in the future. Since the employer act as the Withholding agent, conducting tax annualization every end of the year gives you the security that tax withheld from your employees’ payroll is accurate as required by the BIR.
Conduct Tax Annualization for your Employees With Ease
With a full suite of up-to-date payroll services, our team is dedicated to ensuring that your company is fully compliant with relevant tax laws for your employees in the Philippines