Withholding tax on compensation is the tax withheld from income payments to individuals arising from an employer-employee relationship. The one withholding the tax is the employer. The employer is required to withhold tax on the employeeâ€™s compensation at the time an income is paid or payable (i.e., obligation becomes due, demandable or legally enforceable), whichever comes first.
Withholding tax on compensation has the following features:
- An employer-employee relationship must exist
- Withholding tax on compensation applies only to pay or and payee who are in an employer-employee relationship. In the absence of such, other tax types will apply like expanded withholding tax or final withholding tax.
- An employer-employee relationship exists if it satisfies all the following elements:
- Selection and engagement of the employee by the employer;
- Agreed payment of wages to employee;
- Power of dismissal by the employer to employee; and
- Employerâ€™s power to control the employeeâ€™s conduct.
- Employee is a natural person
A natural person is a Filipino citizen from birth without having to perform any act to acquire Filipino citizenship. On the other hand, withholding tax does not apply to corporations and juridical entities because it is not a natural persons, hence, they would fall on another type of withholding tax.
- Employer is a resident of the Philippines
- A resident employer refers to a person who has a permanent home in the Philippines to which he/she intends to return whenever he/she is absent for business or pleasure. It is required that an employer is a resident of the Philippines because the Bureau of Internal Revenue may not be able to go against nonresident employers in case of non-compliance because it has no jurisdiction over nonresidents.
- Compensation is paid or payable in cash or in kind upon receipt
- Compensation must be subject to withholding tax upon receipt of the income, either actually or constructively. Constructive receipt means that the income has not been physically received by the employee, however, it may have been credited to its account or otherwise, already made available for him/her to withdraw without restriction.
- Withheld amount is deductible from employeeâ€™s income tax liability
- The amount withheld by the employer is just an estimated amount of tax liability, thus, at the end of the taxable year, the actual income tax liability of the employee will be computed. The total amount of the tax withheld by employer is credited against the actual income tax liability.
- If the actual income tax liability of the employee is greater than the total tax withheld, the difference would be an additional income tax liability and the employee must pay for it upon filing tax return.
- If the actual income tax liability of the employee is lower than the total tax withheld, the difference will be refunded to the employee.
- Regular filing of reports and returns must be done by employer
- Employers must file withholding tax returns every month within ten (10) days after the end of each month. They must also furnish each payee with a Certificate of Withholding Tax Withheld on Compensation annually or upon the separation of employment by the employee.
- Withholding tax rates
- The withholding tax rate on compensation is based on the withholding tax table issued by the Commission on Internal Revenue.
This article is intended to equip the taxpayers or their bookkeepers in complying with the Bureau of Internal Revenueâ€™s (BIR) and other Government rules and regulations. It is not intended to teach the taxpayers the details of tax planning and avoidance or to commit tax evasion or any fraudulent tax activities. Certain advice, comments and opinions expressed in this article are based on specific situations, limited available definitive tax and other government rulings and the actual experience of the authors, and may not apply to the readerâ€™s specific tax or business concern and should not be used to avoid tax under the National Internal Revenue Code (NIRC) or applicable tax laws and other government regulations without consulting an accountant or lawyer or secure a BIR ruling before using any suggested advice or strategy.
Tax Code of the Philippines
Labor Code of the Philippines