As the end of the year is fast approaching, one of the year-end compliances of any company is to perform Payroll Tax Annualization of employees in order to come up with the correct income tax due per employee to be reported to the Bureau of Internal Revenue (BIR).
What is Tax Annualization?
Tax annualization is the process of summarizing all the taxable income and non-taxable income of an employee and compute how much is the Projected Income Tax Due and prepare adjustments, if necessary.
What is the purpose of Tax Annualization?
In the regular processing of payroll, withholding tax due is normally computed using the Withholding Tax Table as amended under Republic Act No. 10963 otherwise known as the TRAIN LAW. More or less the amount of taxes paid at the end of the year will mostly be the same but there are some factors wherein the annual tax computation may vary. Some of the factors include; employee hired at the middle of the year; employee received salary increase at the middle of the year; increase in variable pays such as bonuses, commissions, overtime pay etc.
In tax annualization, it will indicate if the employee has tax refund or tax payable. Once this is determined, the company can avoid hassle of issuing tax refunds or causing inconvenience to employees by sudden deduction of huge taxes at the end of the year.
How to compute Tax Annualization?
Collate all the payroll registers paid within the year and prepare the estimated data for the remaining months to come up with the Estimated Annual Summary.
Determine the Taxable and Non-taxable income for the whole year.
Below are the examples of Taxable Income based on BIR’s calculation of Withholding Tax:
a. Basic Salary
b. Representation Allowance
c. Transportation Allowance
e. Fixed Housing Allowance
f. Other Taxable Regular Compensation (includes other regular income not identified
b. Profit Sharing
c. Fees including director’s fee
d. Taxable 13th month pay & other benefits (the excess of non-taxable 13th month
pay & other benefits over the prescribes P 90,000.00 ceiling)
e. Hazard Pay
f. Overtime Pay
g. Other Taxable Supplementary Compensation (includes taxable retirement pay,
taxable separation pay, excess over the prescribed minimum amount for De Minim is benefits after deducting the excess of the non-taxable 13th month pay over the prescribed 90,000 ceiling)
And below are examples for Non-taxable Income:
a. 13th month pay and other Benefits (ceiling is 90K, other benefits includes
Christmas bonus, productivity incentive bonus, loyalty award, gift in cash or in cash
and other benefits of similar in nature actually received by an employee)
b. De Minimis Benefits (please refer to RR No. 11-2018 for the threshold as amended
January 31, 2018)
c. SSS, GSIS, PAG-IBIG Contributions and Union Dues (Employee’s Share Only)
3. After gathering the estimated Year to Date (YTD) data, compute the Withholding Tax Due for
the Year using the Annual Income Tax Table provided by the Bureau of Internal Revenue (BIR).
4. Subtract the Projected Annual Tax Due and the total Amount of Taxes Withheld and you will
arrive with the amounts for adjustments if any, either Tax Refund or Tax Payable.
In the final computation of withholding tax, any taxes withheld in excess of the Income Tax Due should be refunded to employees while any deficiency will be deducted to employees’ compensation for the calendar year. If tax annualization was conducted earlier, employers can better manage on how to deal with employees with tax adjustments.
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