Northest Business Solutions, Inc. NBS
The Ultimate Guide to Annualized Tax Computation in the Philippines
As the calendar year draws to a close, employers and payroll professionals across the Philippines shift their focus to a critical requirement mandated by the Bureau of Internal Revenue (BIR): Tax Annualization. This process is essential for ensuring that every employee pays the correct amount of income tax based on their total earnings for the year.
This guide provides a comprehensive, expert overview of how annualized tax computation works in the Philippines, ensuring compliance and financial accuracy.
What is Tax Annualization?
Annualization, or Annualized Tax Computation, is the process required by the BIR to review the whole year's earnings, deductions, statutory contributions, and tax withheld for each employee.
The Philippine government operates on a "pay-as-you-earn" system, where taxes are withheld monthly. However, factors like salary increases, bonuses, overtime, or unpaid leaves can cause discrepancies between the monthly withholding tax and the actual annual tax liability. Annualization reconciles these differences.
The goal is to compare the calculated Annual Tax Due against the Total Tax Withheld from January to December.
Tax Refund (Overpayment)
If the employee paid too much tax throughout the year (Tax Withheld > Tax Due), the employer must refund the excess amount.
Tax Payable (Liability)
If the employee paid less tax than required (Tax Withheld < Tax Due), the employee must pay the tax liability, which is typically deducted by the employer in the final payroll of the year.
When is Annualization Performed?
Annualization is typically conducted in November or December, before the final payroll of the year is processed.
Importantly, annualization must also be performed whenever an employee resigns or is terminated, regardless of the time of year, to determine their final tax status upon receiving their back pay.
The Philippine Annual Income Tax Table
The calculation of the annual tax due is based on the graduated income tax rates implemented under the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The table below is effective from January 1, 2023, onwards:
| Bracket | Annual Net Taxable Income Range | Tax Rate (Fixed Tax + Rate on Excess) |
|---|---|---|
| 1 | ₱250,000 and below | 0% (Exempt) |
| 2 | Over ₱250,000 to ₱400,000 | 0 + 15% of the excess over ₱250,000 |
| 3 | Over ₱400,000 to ₱800,000 | ₱22,500 + 20% of the excess over ₱400,000 |
| 4 | Over ₱800,000 to ₱2,000,000 | ₱102,500 + 25% of the excess over ₱800,000 |
| 5 | Over ₱2,000,000 to ₱8,000,000 | ₱402,500 + 30% of the excess over ₱2,000,000 |
| 6 | Over ₱8,000,000 | ₱2,202,500 + 35% of the excess over ₱8,000,000 |
Key Components of the Computation
To accurately perform annualization, the following components must be totaled for the entire calendar year:
1. Gross Income (Total Earnings)
This includes all remuneration received by the employee, such as basic salary, overtime pay, holiday pay, taxable allowances, commissions, and the taxable portion of bonuses.
2. Non-Taxable Income and Deductions
These amounts reduce the Gross Income and are excluded from taxation.
- Statutory Contributions: The total employee share of contributions to SSS, PhilHealth, and Pag-IBIG (HDMF) for the whole year.
- De Minimis Benefits: Small value benefits provided by the employer that are exempt from tax (e.g., rice subsidy, laundry allowance) within limits set by the BIR.
- 13th Month Pay and Other Benefits Exclusion: A crucial component. The 13th Month Pay combined with other benefits (like Christmas bonuses and performance incentives) is non-taxable up to a maximum ceiling of ₱90,000. Any amount exceeding this threshold is added back to the taxable Gross Income.
3. Tax Withheld
The total withholding tax already paid by the employee (via employer remittance) from January up to the current payroll period.
How to Calculate Annualized Tax: A Step-by-Step Guide
Step 1: Calculate Net Taxable Income
First, determine the basis for the tax calculation.
Less: Total Statutory Contributions
Less: Total Non-Taxable Income (e.g., De Minimis)
Less: 13th Month Non-Taxable Exclusion (Max ₱90,000)
= Net Taxable Income
Step 2: Determine the Annual Tax Due
Using the Net Taxable Income, refer to the Annual Income Tax Table.
- Identify the Bracket: Find where the Net Taxable Income falls.
- Note the Fixed Tax and Tax Rate for that bracket.
- Calculate Excess Taxable Income: Net Taxable Income - Minimum Amount of the bracket.
- Calculate Tax on Excess: Excess Taxable Income * Tax Rate.
- Calculate Total Tax Due: Fixed Tax + Tax on Excess.
Step 3: Determine Tax Payable or Refund
The final step is the reconciliation.
Less: Total Tax Withheld (Taxes already paid Jan-Dec)
= Tax Payable / (Tax Refund)
A positive result indicates Tax Payable. A negative result indicates a Tax Refund.
Practical Example of Annualization
Let's consider Employee A with the following totals for the year:
- Gross Income (Including all pay and taxable allowances): ₱580,000
- Total Statutory Contributions (SSS, PHIC, HDMF): ₱28,000
- 13th Month Pay and Other Bonuses Received: ₱100,000
- Total Tax Withheld (Jan-Nov): ₱38,000
The Calculation:
Step 1: Calculate Net Taxable Income
Determine 13th Month Exclusion: Employee A received ₱100,000, but the maximum exclusion is ₱90,000. (The excess ₱10,000 is already included in the Gross Income figure).
- ₱28,000 (Contributions)
- ₱90,000 (13th Month Exclusion)
= ₱462,000 (Net Taxable Income)
Step 2: Determine the Annual Tax Due
₱462,000 falls into Bracket 3 (Over ₱400,000 to ₱800,000).
Rate on Excess: 20%
Excess Taxable Income: ₱462,000 - ₱400,000 = ₱62,000
Tax on Excess: ₱62,000 * 0.20 = ₱12,400
Total Tax Due: ₱22,500 + ₱12,400 = ₱34,900
Step 3: Determine Tax Payable or Refund
- ₱38,000 (Tax Withheld)
= (₱3,100)
Outcome: Employee A is entitled to a Tax Refund of ₱3,100.
Special Considerations: Employees with Multiple Employers
Handling employees who worked for more than one company during the year requires specific procedures:
Consecutive Employers (Transferees)
If an employee switched jobs (one employer after another), the current (year-end) employer is responsible for the consolidated annualization. The employee must provide the BIR Form 2316 from their previous employer. The current employer will incorporate the previous income and taxes withheld into the year-end calculation.
Concurrent Employers
If an employee works for multiple employers simultaneously, they do not qualify for "substituted filing." The employers will annualize based only on the income they provided. The employee is then personally responsible for consolidating all income and filing their own Annual Income Tax Return (BIR Form 1700).
The Outcome: BIR Form 2316
The final result of the annualization process is the issuance of BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld). Employers must provide this document to all employees on or before January 31st of the following year.
For employees who qualify for substituted filing (one employer during the year, taxes correctly withheld), this form serves as their official Income Tax Return (ITR).
Frequently Asked Questions (FAQs)
Q: When is the deadline for processing the refund or collection?
A: The employer must settle any refunds or collect any payables on or before January 15 of the succeeding year. However, it is common practice to complete this within the last payroll cycle of December.
Q: Is the PHP 90,000 exclusion only for the 13th month pay?
A: No. It applies to the 13th month pay and other benefits, including Christmas bonuses, productivity incentives, and other similar compensation. The total exclusion cannot exceed PHP 90,000.
Q: Why did I have a large tax payable this year?
A: This can happen due to significant mid-year salary increases, large amounts of taxable overtime, or receiving substantial bonuses that pushed your annual income into a higher tax bracket.
Accurate annualized tax computation is a cornerstone of Philippine payroll compliance. By meticulously reviewing annual earnings, applying the correct deductions, and utilizing the official BIR tax tables, employers ensure fairness in taxation and maintain compliance with national regulations.