As a taxpayer, one of the biggest challenges you’ll face is understanding how withholding tax works.
Withholding tax involves calculations based on your income, tax bracket, exemptions, and potentially adjustable credits, which can vary greatly from one individual to another, making it difficult to navigate without a deep understanding of tax laws and personal finance.
However, mastering this aspect of finance is crucial for managing your finances effectively and avoiding unexpected tax liabilities.
In this guide, we’ll simplify the concept of withholding tax, providing you with the knowledge and tools to navigate it confidently.
Whether you’re a seasoned investor or new to the world of finance, understanding withholding tax will empower you to make informed decisions and reach your financial goals.
What is Withholding Tax?
Withholding tax deducts taxes from your income before you receive it, ensuring tax compliance and consistent government revenue. Everyone, from businesses to individuals, must follow withholding tax rules.
Understanding different types of withholding taxes, like creditable withholding tax and withholding tax on compensation, is crucial. Also, knowing exemptions and benefits not subject to withholding tax helps you meet tax obligations. Under RR 4-2024, tax returns must be filed electronically, but manual filing is allowed if electronic platforms are unavailable.
Familiarizing yourself with these concepts ensures you fulfill your responsibilities as an employer and abide by tax laws.
Types of Withholding Tax
There are three types of withholding tax, each with unique tax collection methods. Withholding Tax on Compensation applies to payments from employers to employees, excluding specific exemptions such as salary and allowances. Expanded Withholding Tax is imposed on certain income payments, deducted upfront, and credited against the recipient’s income tax liability. Lastly, the Final Withholding Tax acts as the full income tax payment, with the payer handling remittance and streamlining tax processes for the recipient.
Withholding Tax on Compensation
Withholding Tax on Compensation covers all payments an employee receives from an employer, excluding those exempted by law. This includes salary, allowances, commissions, overtime, and fringe benefits. Calculating this tax requires considering factors like the employee’s salary and extra benefits to ensure accurate withholding according to regulations.
Compensation Chart of Withholding Tax
Below is the table for the withholding tax rate effective January 1, 2023, and onwards:
| DAILY | 1 | 2 | 3 | 4 | 5 | 6 |
| Compensation Range | PHP 685 and below | PHP 685 – PHP 1,095 | PHP 1,096 – PHP 2,191 | PHP 2,192 – PHP 5,478 | PHP 5,479 – PHP 21,917 | PHP 21,918 and above |
| Prescribed Withholding Tax | 0 | 0.00 +15% over PHP 685 | PHP 61.65 +20% over PHP 1,096 | PHP 280.85 +25% over PHP 2,192 | PHP 1,102.60 +30% over PHP 5,479 | PHP6,034.30 +35% over PHP 21,918 |
| WEEKLY | 1 | 2 | 3 | 4 | 5 | 6 |
| Compensation Range | PHP 4,808 and below | PHP 4,808 – PHP 7,691 | PHP 7,692 – PHP 15,384 | PHP 15,385 – PHP 38,461 | PHP 38,462 – PHP 153,845 | PHP 153,846 and above |
| Prescribed Withholding Tax | 0 | 0.00 +15% over PHP 4,808 | PHP 432.60 +20% over PHP 7,692 | PHP 1,971.20 +25% over PHP 15,385 | PHP 7,740.45 +30% over PHP 38,462 | PHP 42,355.65 +35% over PHP 153,846 |
| SEMI-MONTHLY | 1 | 2 | 3 | 4 | 5 | 6 |
| Compensation Range | PHP 10,417 and below | PHP 10,417 – PHP 16,666 | PHP 16,667 – PHP 33,332 | PHP 33,333 – PHP 83,332 | PHP 83,333 – PHP 333,332 | PHP 333,333 and above |
| Prescribed Withholding Tax | 0 | 0.00 +15% over PHP 10,417 | PHP 937.50 +20% over PHP 16,667 | PHP 4,270.70 +25% over PHP 33,333 | PHP 16,770.70 +30% over PHP 83,333 | PHP 91,770.70 +35% over PHP 333,333 |
| MONTHLY | 1 | 2 | 3 | 4 | 5 | 6 |
| Compensation Range | PHP 20,833 and below | PHP 20,833 – PHP 33,332 | PHP 33,333 – PHP 66,666 | PHP 66,667 – PHP 166,666 | PHP 166,667 – PHP 666,666 | PHP 666,667 and above |
| Prescribed Withholding Tax | 0 | 0.00 +15% over PHP 20,833 | PHP 1,875.00 +20% over PHP 33,333 | PHP 8,541.80 +25% over PHP 66,667 | PHP 33,541.80 +30% over PHP 166,667 | PHP 183,541.80 +35% over PHP 666,667 |
Source: Bureau of Internal Revenue
Annual Tax Table
| Effective Date January 1, 2023 | |
| Not over PHP 250,000.00 | 0% |
| Over PHP 250,000.00 but not over PHP 400,000.00 | 15% of the excess over PHP 250,000.00 |
| Over PHP 400,000.00 but not over PHP 800,000.00 | PHP 22,500.00 + 20% of the excess over PHP 400,000.00 |
| Over PHP 800,000.00 but not over PHP 2,000,000.00 | PHP 102,500.00 + 25% of the excess over PHP 800,000.00 |
| Over PHP 2,000,000.00 but not over PHP 8,000,000.00 | PHP 402,500.00 + 30% of the excess over PHP 2,000,000.00 |
| Over PHP 8,000,000.00 | PHP 2,202,500.00 + 35% of the excess over PHP 8,000,000.00 |
Source: Bureau of Internal Revenue
Expanded Withholding Tax
Expanded Withholding Tax (EWT) is imposed on specific income payments, deducted upfront, and then offset against the payee’s income tax liability for the same period. This approach distributes the tax responsibility evenly across the year, ensuring accurate withholding based on earnings. It simplifies tax procedures by enabling taxpayers to adjust their tax obligations with the withheld amounts.
The EWT rate is based on the total gross income. Additionally, top withholding agents (TWAs) are required to withhold 1% EWT on goods and 2% on services purchased from local suppliers and non-resident aliens doing business in the Philippines.
EWT for Online Sellers
Under RR 16-2023, half of the gross remittances from e-marketplaces and digital financial services to sellers or merchants will be subject to a 1% creditable withholding tax.
The BIR’s RMC 8-2024 also requires online sellers to register with the BIR and submit tax documents, with a 1% tax on remittances over PHP 500,000 a year. Non-compliance leads to automatic tax deductions and penalties.
Income Payments Subject to Expanded Withholding Tax
Here’s a list of income payments subject to EWT:
Professional Fees
This encompasses payments to individuals engaged in various professions, such as lawyers, certified public accountants, and engineers. The rates differ based on income levels, with specific rates for both individuals and corporations.
Fees of Directors
This applies to directors who are not employed by the company and whose duties are limited to attending board meetings. Like professional fees and management consultancy, the rates are based on income levels.
Management and Technical Consultant
This category includes entities responsible for supervising and directing the management of other companies and providing services to unrelated parties. Similar to professional fees, the rates vary depending on the income levels of individuals and corporations.
Business and Bookkeeping Agents and Agencies
These involve individuals and agencies engaged in business and bookkeeping services. Like professional fees and management consultancy, the rates are determined by income levels for both individuals and corporations.
Contractors
This includes various types of contractors engaged in construction, demolition, salvage work, and related activities. Contractor rates are fixed and do not vary based on income levels.
Rentals
This pertains to payments for using or possessing real or personal properties. The rates for rentals vary based on the property type and the rental income amount.
Credit Card Companies
This involves credit card companies paying a percentage of the gross amounts to businesses for goods/services sold to cardholders. Both individuals and corporations are subject to a fixed rate on a portion of the gross amount received from credit card companies.
Chart for Expanded Withholding Tax
Below are the tax rates for the following payments:
| TAX TYPE | DESCRIPTION | TAX RATE | ALPHANUMERIC TAX CODES (ATC) | |
| INDIVIDUAL | CORPORATE | |||
| Professional fees (lawyers, CPA’s, engineers, etc.) | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI010 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI011 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC010 | ||
| If gross income exceeds PHP 720,000 | 15% | WC011 | ||
| Professional entertainers (actors, singers, etc.) | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI020 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI021 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC020 | ||
| If gross income exceeds PHP 720,000 | 15% | WC021 | ||
| All directors and producers involved in movies, stage, television, etc. | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI040 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI041 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC040 | ||
| If gross income exceeds PHP 720,000 | 15% | WC040 | ||
| Management and technical consultants | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI050 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI051 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC050 | ||
| If gross income exceeds PHP 720,000 | 15% | WC051 | ||
| Business and Bookkeeping agents and agencies | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI060 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI061 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC060 | ||
| If gross income exceeds PHP 720,000 | 15% | WC061 | ||
| Insurance agents and insurance adjusters | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI070 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI071 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC070 | ||
| If gross income exceeds PHP 720,000 | 15% | WC071 | ||
| Other Recipients of Talent Fees | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI080 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI081 | ||
| If gross income for the current year did not exceed PHP 720,000 | 10% | WC080 | ||
| If gross income exceeds PHP 720,000 | 15% | WC081 | ||
| Fees of Director who are not employees of the company | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI090 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI091 | ||
| Rentals on gross rental or lease for the continued use or possession of personal property | Annual rentals exceeding PHP 10,000 and business-related real property without ownership or equity, including poles, satellites, transmission facilities, and billboards | 5% | WI100 | WC100 |
| Cinematographic film rentals and other payments to resident individuals and corporate cinematographic film owners, lessors, and distributors | 5% | WI110 | WC110 | |
| Income payments to certain contractors | 2% | WI120 | WC120 | |
| Income distribution to the beneficiaries of estate and trusts | 15% | WI130 | ||
| Gross Commission of service fees of customs, insurance, stock, immigration, and commercial brokers, fees of agents of professional entertainers, and real estate service practitioners | If gross income for the current year did not exceed PHP 3,000,000 | 5% | WI139 | |
| If gross income is more than PHP 3,000,000 or VAT registered regardless of amount | 10% | WI140 | ||
Source: Bureau of Internal Revenue
How to Determine Whether You are Classified as a Top Withholding Agent (TWA)
To determine whether you are classified as a Top Withholding Agent (TWA), you must assess your gross sales/receipts or purchases during the preceding taxable year. The BIR has set specific minimum thresholds for different RDO groups:
| RDO Group Classification | Gross Sales/Receipts or Gross Purchases |
| Groups A and B | At least PHP 12,000,000 |
| Groups C, D, and E | At least PHP 5,000,000 |
Source: Bureau of Internal Revenue (RR No. 31-2020)
Final Withholding Tax
Final Withholding Tax means the tax withheld by the payer is the payee’s complete income tax payment. The payer is primarily responsible for tax remittance, and any deficits are their responsibility. This system exempts the payee from filing an income tax return for that specific income.
Chart for Final Withholding Tax
| Description | Tax Rate |
| Income payments on foreign currency transactions/loans by Offshore Banking Units (OBUs) | 20% |
| Income payments on foreign currency transactions/loans by Foreign Currency Deposit Units (FCDUs) | 10% |
| Cash dividends from domestic corporations to citizens, resident aliens, or NRFCs | 10% |
| Property dividends from domestic corporations to citizens, resident aliens, or NRFCs | 10% |
| Cash dividends from domestic corporations to NRFCs eligible for tax-sparing rule | 25% |
| Property dividends from domestic corporations to NRFCs eligible for tax-sparing rule | 10% |
| Cash dividends from domestic corporations to non-resident aliens engaged in Philippine business | 25% |
| Property dividends from domestic corporations to non-resident aliens engaged in Philippine business | 15% |
| Share of non-resident aliens in partnership income after tax | 15% |
| Various payments to NRFCs | 20% |
| Share of individual partners in partnership income | 20% |
| Royalty payments to citizens, resident aliens, and non-resident aliens engaged in Philippine business | 20% |
| Tax on prizes exceeding PHP 10,000 paid to individuals | 25% |
| Profit remittance by corporations (excluding certain registrations) | 10% |
| Tax on rentals, leases, and charter fees for foreign vessels | 20% |
| Tax on rentals, charter, and other fees for foreign aircraft, machinery, and equipment | 20% |
| Payments to oil exploration service contractors/sub-contractors | 15% |
| Payments to non-resident aliens not engaged in Philippine business (excluding sales of shares or real property) | 4.50% |
| Payments to non-resident individuals/foreign corporations for cinematographic film rights | 7.50% |
| Royalties paid to non-resident aliens engaged in Philippine business for cinematographic works | 8% |
| Final tax on interest or payments for tax-free bonds, mortgages, or deeds | 25% |
| Royalties paid to citizens, resident aliens, and non-resident aliens engaged in Philippine business for books and compositions | 25% |
| Rewards for informers, individuals, or legal entities | 25% |
| Cash dividends from Real Estate Investment Trusts | 30% |
| Income payments on foreign currency transactions/loans by Offshore Banking Units (OBUs) | 10% |
| Income payments on foreign currency transactions/loans by Foreign Currency Deposit Units (FCDUs) | 10% |
| Cash dividends from domestic corporations to citizens, resident aliens, or NRFCs | 10% |
Source: Bureau of Internal Revenue
What are the Exemptions for Withholding Tax?
Here are the exemptions for withholding tax:
Withholding Tax on Compensation
- Employer-provided medical or transportation benefits
- Employee bonuses or incentives under specific conditions
- Employer contributions to retirement plans or insurance premiums up to set limits
- Reimbursements for necessary business expenses incurred by employees
Expanded Withholding Tax
- Professional fees, based on income thresholds
- Management and technical consultant fees under specified income limits
- Rentals for specific properties under certain conditions
- Certain contractors, based on classification and work nature
- Credit card payments to businesses (reduced rate)
Final Withholding Tax
- Prizes and lotto winnings up to PHP 10,000
- Some interest income from sources outside the Philippines
- Negative Certification from SEC or service agreement/billing proving services abroad
- Transactions with non-residents outside the Philippines
Let Babylon2k Handle Your Withholding Tax Worries
Understanding withholding tax is crucial for individuals and businesses to follow tax regulations and manage finances effectively. With various types of withholding tax, like on compensation and expanded withholding tax, it’s vital to stay informed about their rules and exemptions.
At Babylon2k, we specialize in tax services tailored to businesses, including understanding withholding tax. We offer comprehensive solutions to navigate these complexities and ensure compliance with tax laws. Get a quote today and find out how we can support your needs.
Message our AI chatbot today for expert guidance. You can also contact us at [email protected] or through Viber/WhatsApp at +63-927-945-3382.
