New year, new rates! Apparently, lower rates!
In this article, we will be sharing the Bureau of Internal Revenue’s (BIR) tax tables to be used effective January 1, 2023 and onwards. For easy reference and free download, an excel format of the tax table with a bonus sample calculator is available here. Reduced withholding tax rates are to be used in accordance with Republic Act No. 10963 or Tax Reform for Acceleration & Inclusion, in brevity and known as TRAIN Law.
Graduated Income Tax Rates
For Individual Citizens and Resident Aliens Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession, below are the Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as amended by the TRAIN Law.
ANNUAL TAX TABLE
Effective January 1, 2023, an employee with annual taxable income of P400,000 will have a tax of P22,500 compared to a P30,000 tax in the past years. P7,500 lower, indeed!
WITHOLDING TAX TABLE
Effective January 1, 2023, an employee with a monthly taxable income of P33,333 will have a tax of P1,875 compared to a P2,500 tax in the past months. P625 lower, indeed!
Understanding withholding tax
Withholding tax on compensation is the tax withheld from the income payments to individuals/employees arising from an employer-employee relationship. The tax withheld is remitted to the tax authority on or before its due date.
The system of withholding tax helps the Philippine government on its cash flow in order to financially support its projects and expenses. On the part of the employee, the system enables him/her to avoid the burden of paying a huge amount of tax at the end of the year, unless he/she is a minimum wage earner. The withholding agent, in this case, the employer, has the obligation to remit the tax on a timely basis thru BIR Form 1601-C and to furnish the employee a withholding tax statement or BIR Form 2316 either upon release of the final pay of the resigned employee or on or before January 31 whichever comes first. Said form contains the employee’s salary or compensation and the taxes withheld by his employer for a tax period. To know more about BIR Form 2316, please read our article on The Comprehensive Guide to Filling Out BIR Form 2316.
Components used to calculate withholding tax on compensation.
Gross compensation includes all remunerations for the services performed under an employee-employer relationship such as but not limited to salary, wages, allowances, commissions, bonuses and those “de minimis” benefits. The name on how it is called and the manner of its payment is immaterial. However, the Tax Code specifies some limitations and exceptions on these remunerations received thereby making taxable income as the basis for the withholding tax calculation. Under RR 8-2018 Sec 3 (B), Taxable income for compensation earners is the gross compensation income less non-taxable income/benefits such as but not limited to Thirteenth (13th month pay and other benefits (subject to limitations), de minimis benefits, and the employee’s share in the SSS, GSIS, PHIC, Pag-ibig contributions and union dues.
In a simple calculation:
Taxable income = Compensation Income − De Minimis Benefits − Gov’t contributions
Withholding tax = Taxable income x prescribed tax rate
Minimum Wage Earners (MWE) in the private sector are not subject to income tax. Compensation income which includes the statutory minimum wage, holiday pay, overtime pay, night shift differential pay and hazard pay are exempted by law from income tax. However, additional compensation such as commissions, and benefits above the P90,000 ceiling for benefits are subject to tax.
How To Compute Withholding Tax using Compensation Tax Table
Using the prescribed BIR Withholding tax table for 2023 and onwards, sample computations are provided below:
1. Daily-paid employee
Taxable income = P 2,000, net of mandatory contributions
The compensation range falls on Bracket 3:
Base = P 1,096 = Fix tax of 61.65
Excess = P 904 x 20% = Additional tax of 180.80
Total Withholding tax = P 242.45
2. Weekly-paid employee
Taxable income = P 8,000, net of mandatory contributions
The compensation range falls on Bracket 2:
Base = P4,808 = Fix tax of 0.00
Excess = P 3,192 x 15% = Additional tax of 478.80
Total Withholding tax = P 478.80
3. Semi-monthly-paid employee
Taxable income = P 17,500, net of mandatory contributions
The compensation range falls on Bracket 3:
Base = P 16,667 = Fix tax of 937.50
Excess = P 833 x 15% = Additional tax of 124.95
Total Withholding tax = P 1.062.50
4. Monthly-paid employee
Taxable income = P 30,000, net of mandatory contributions
The compensation range falls on Bracket 2:
Base = P 20,833 = Fix tax of 0.00
Excess = P 9,167 x 15% = additional tax of 1,375.05
Total Withholding tax = P 1,375.05
Tips For Complying with Withholding Tax on Compensation Requirements
Know the employment contract of your employees to determine his/her category, the salary package and timing of withholding the tax.
Use the latest prescribed tax rates.
Withhold and remit the tax to BIR to avoid penalty.
Annualize to avoid the huge tax obligation at the end of the taxable year.
Most importantly, learn and stay updated with the BIR Rules and Regulations. As a quotation goes, "Knowledge is power."
We are hopeful that the withholding tax change will create an impact on the purchasing power of every employee despite the country’s inflation, among other factors.
Good news! AanyaHR is compliant with the TRAIN Law and the changes in tax rates are automatically applied. Withholding tax calculation will be easy and be done accurately. Human Resource in-charge or the Payroll Department does not need to do anything! Government-mandated reports are even at a few clicks. Want to know more about other helpful and awesome features of AanyaHR, please send an email to customerfirst@illimitado.com or visit our website
Source: BIR