Northest Business Solutions, Inc. NBS
How to Compute Withholding Tax in the Philippines: A Definitive BIR Guide (2025 Update)
Understanding how withholding tax is calculated is crucial for every Filipino employee and employer. Compliance with the Bureau of Internal Revenue (BIR) mandates accurate computation and timely remittance of these taxes.
This guide provides a comprehensive, step-by-step walkthrough on how to compute withholding tax on compensation, based on the latest BIR Revised Withholding Tax Table implemented under the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
What is Withholding Tax on Compensation?
Withholding Tax on Compensation is the amount an employer is required by law to deduct from an employee's salary. This amount is remitted by the employer to the BIR on the employee's behalf. It functions as an advance payment of the employee's annual income tax liability.
Key Components of Salary Computation
Before calculating the tax, it's essential to understand the different elements that make up an employee's income and deductions.
Gross Income
This is the total remuneration received by the employee before any deductions. It includes:
- Basic Salary
- Overtime Pay
- Holiday Pay
- Night Shift Differential
- Taxable Allowances and Bonuses
Non-Taxable Deductions
Mandatory contributions deducted from Gross Income and exempt from tax:
- SSS (Social Security System)
- PhilHealth (Philippine Health Insurance Corporation)
- Pag-IBIG (Home Development Mutual Fund)
Other Non-Taxable Income
Benefits exempt from tax, such as:
- De Minimis Benefits: Small value benefits (e.g., rice subsidy, laundry allowance) within BIR-prescribed limits.
- 13th Month Pay and Bonuses: The first ₱90,000 of total bonuses and 13th-month pay annually is tax-exempt.
Taxable Income
This is the resulting amount after subtracting all non-taxable deductions and income from the Gross Income. This figure is the basis for the withholding tax computation.
The BIR Revised Withholding Tax Table
The BIR provides specific tables for different payroll frequencies (Daily, Weekly, Semi-Monthly, and Monthly). It is vital to use the correct table corresponding to your company's pay cycle.
Below is the Revised Withholding Tax Table for Semi-Monthly compensation, which remains effective for 2025:
| Bracket | Compensation Range (Min - Max) | Prescribed Withholding Tax |
|---|---|---|
| 1 | ₱10,416.99 and below | ₱0.00 |
| 2 | ₱10,417.00 - ₱16,666.99 | ₱0.00 + 15% over ₱10,417.00 |
| 3 | ₱16,667.00 - ₱33,332.99 | ₱937.50 + 20% over ₱16,667.00 |
| 4 | ₱33,333.00 - ₱83,332.99 | ₱4,270.70 + 25% over ₱33,333.00 |
| 5 | ₱83,333.00 - ₱333,332.99 | ₱16,770.70 + 30% over ₱83,333.00 |
| 6 | ₱333,333.00 and above | ₱91,770.70 + 35% over ₱333,333.00 |
(Source: Bureau of Internal Revenue Philippines)
The Step-by-Step Computation Formula (Semi-Monthly)
Calculating the withholding tax involves a precise sequence of steps.
Calculate Taxable Income
Determine the amount subject to tax by removing all deductions.
Identify the Tax Bracket
Compare the resulting Taxable Income against the "Compensation Range" in the Semi-Monthly BIR table to determine which bracket the employee falls into.
Compute the Withholding Tax
Apply the corresponding "Prescribed Withholding Tax" formula.
- Identify Fixed Tax: The base amount assigned to the bracket.
- Calculate Excess Taxable Income:
Taxable Income - Minimum Amount from Compensation Range - Calculate Tax on Excess:
Excess Taxable * Rate - Calculate Total Withholding Tax:
Fixed Tax + Tax on Excess
Scenario Walkthroughs
Let's apply these steps using two distinct scenarios for a semi-monthly payroll.
Scenario 1: Income Below the Tax Threshold
Employee A Details:
- Gross Income: ₱12,000.00
- Non-Taxable Income: ₱2,000.00
- Mandatory Contributions: ₱950.00 (SSS+PhilHealth+Pag-IBIG)
- Total Deductions: ₱2,950.00
Step 1: Calculate Taxable Income
₱12,000.00 - ₱2,950.00 = ₱9,050.00
Step 2: Identify Bracket
₱9,050.00 falls into Bracket 1 (₱10,416.99 and below).
Step 3: Compute Tax
Prescribed tax is ₱0.00.
Withholding Tax: ₱0.00
Scenario 2: Income Within a Taxable Bracket
Employee B Details:
- Gross Income: ₱25,000.00
- Non-Taxable Income: ₱2,000.00
- Mandatory Contributions: ₱1,925.00
- Total Deductions: ₱3,925.00
Step 1: Calculate Taxable Income
₱25,000.00 - ₱3,925.00 = ₱21,075.00
Step 2: Identify Bracket
₱21,075.00 falls into Bracket 3 (₱16,667.00 - ₱33,332.99).
Step 3: Compute Tax
Fixed Tax: ₱937.50 | Rate: 20% over ₱16,667.00
Excess: ₱21,075.00 - ₱16,667.00 = ₱4,408.00
Tax on Excess: ₱4,408.00 * 0.20 = ₱881.60
Total Withholding Tax: ₱937.50 + ₱881.60 = ₱1,819.10
Important Consideration: Tax Annualization
While the above process covers regular payroll periods, employers are required to perform Tax Annualization at the end of the calendar year. Annualization is the process of calculating the employee's total income tax due based on their total annual compensation. This total tax due is then compared to the total taxes withheld from January to December.
- If total withheld > annual tax due: Tax Refund (usually in December).
- If total withheld < annual tax due: Tax Payable (deducted from final salary).
Frequently Asked Questions (FAQs)
Q: Are SSS, PhilHealth, and Pag-IBIG contributions taxable?
A: No. The employee's share of these mandatory contributions is excluded from the computation of Taxable Income.
Q: What if my pay cycle is Monthly, not Semi-Monthly?
A: The computation process is identical, but you must use the "Monthly" section of the BIR Withholding Tax Table, which has different compensation ranges and fixed tax amounts.
Q: Where can I verify the official tax tables?
A: You can find the most up-to-date information on the official BIR website.
Q: What happens if an employer makes a mistake in the calculation?
A: Employers act as withholding agents and are responsible for accuracy. Errors can lead to penalties and interest imposed by the BIR.
Conclusion
Accurate computation of withholding tax is a fundamental aspect of payroll management and regulatory compliance in the Philippines. By understanding the components of income, identifying the correct non-taxable deductions, and strictly adhering to the BIR's Revised Withholding Tax Table, businesses can ensure they meet their obligations while maintaining transparency with their employees.