Navigating Finances: Demystifying Withholding Tax

Navigating Finances: Demystifying Withholding Tax

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:

DAILY123456
Compensation RangePHP 685 and belowPHP 685 – PHP 1,095PHP 1,096 – PHP 2,191PHP 2,192 – PHP 5,478PHP 5,479 – PHP 21,917PHP 21,918 and above
Prescribed Withholding Tax00.00 +15% over PHP 685PHP 61.65 +20% over PHP 1,096PHP 280.85 +25% over PHP 2,192PHP 1,102.60 +30% over PHP 5,479PHP6,034.30 +35% over PHP 21,918
WEEKLY123456
Compensation RangePHP 4,808 and belowPHP 4,808 – PHP 7,691PHP 7,692 – PHP 15,384PHP 15,385 – PHP 38,461PHP 38,462 – PHP 153,845PHP 153,846 and above
Prescribed Withholding Tax00.00 +15% over PHP 4,808PHP 432.60 +20% over PHP 7,692PHP 1,971.20 +25% over PHP 15,385PHP 7,740.45 +30% over PHP 38,462PHP 42,355.65 +35% over PHP 153,846
SEMI-MONTHLY123456
Compensation RangePHP 10,417 and belowPHP 10,417 – PHP 16,666PHP 16,667 – PHP 33,332PHP 33,333 – PHP 83,332PHP 83,333 – PHP 333,332PHP 333,333 and above
Prescribed Withholding Tax00.00 +15% over PHP 10,417PHP 937.50 +20% over PHP 16,667PHP 4,270.70 +25% over PHP 33,333PHP 16,770.70 +30% over PHP 83,333PHP 91,770.70 +35% over PHP 333,333
MONTHLY123456
Compensation RangePHP 20,833 and belowPHP 20,833 – PHP 33,332PHP 33,333 – PHP 66,666PHP 66,667 – PHP 166,666PHP 166,667 – PHP 666,666PHP 666,667 and above
Prescribed Withholding Tax00.00 +15% over PHP 20,833PHP 1,875.00 +20% over PHP 33,333PHP 8,541.80 +25% over PHP 66,667PHP 33,541.80 +30% over PHP 166,667PHP 183,541.80 +35% over PHP 666,667

Source: Bureau of Internal Revenue

Annual Tax Table

Effective Date January 1, 2023
Not over PHP 250,000.000%
Over PHP 250,000.00 but not over PHP 400,000.0015% of the excess over PHP 250,000.00
Over PHP 400,000.00 but not over PHP 800,000.00PHP 22,500.00 + 20% of the excess over PHP 400,000.00
Over PHP 800,000.00 but not over PHP 2,000,000.00PHP 102,500.00 + 25% of the excess over PHP 800,000.00
Over PHP 2,000,000.00 but not over PHP 8,000,000.00PHP 402,500.00 + 30% of the excess over PHP 2,000,000.00
Over PHP 8,000,000.00PHP 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 TYPEDESCRIPTIONTAX RATEALPHANUMERIC TAX CODES (ATC)
INDIVIDUALCORPORATE
Professional fees (lawyers, CPA’s, engineers, etc.)If gross income for the current year did not exceed PHP 3,000,0005%WI010
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI011
If gross income for the current year did not exceed PHP 720,00010%WC010
If gross income exceeds PHP 720,00015%WC011
Professional entertainers (actors, singers, etc.)If gross income for the current year did not exceed PHP 3,000,0005%WI020
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI021
If gross income for the current year did not exceed PHP 720,00010%WC020
If gross income exceeds PHP 720,00015%WC021
All directors and producers involved in movies, stage, television, etc.If gross income for the current year did not exceed PHP 3,000,0005%WI040
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI041
If gross income for the current year did not exceed PHP 720,00010%WC040
If gross income exceeds PHP 720,00015%WC040
Management and technical consultantsIf gross income for the current year did not exceed PHP 3,000,0005%WI050
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI051
If gross income for the current year did not exceed PHP 720,00010%WC050
If gross income exceeds PHP 720,00015%WC051
Business and Bookkeeping agents and agenciesIf gross income for the current year did not exceed PHP 3,000,0005%WI060
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI061
If gross income for the current year did not exceed PHP 720,00010%WC060
If gross income exceeds PHP 720,00015%WC061
Insurance agents and insurance adjustersIf gross income for the current year did not exceed PHP 3,000,0005%WI070
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI071
If gross income for the current year did not exceed PHP 720,00010%WC070
If gross income exceeds PHP 720,00015%WC071
Other Recipients of Talent FeesIf gross income for the current year did not exceed PHP 3,000,0005%WI080
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI081
If gross income for the current year did not exceed PHP 720,00010%WC080
If gross income exceeds PHP 720,00015%WC081
Fees of Director who are not employees of the companyIf gross income for the current year did not exceed PHP 3,000,0005%WI090
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%WI091
Rentals on gross rental or lease for the continued use or possession of personal propertyAnnual rentals exceeding PHP 10,000 and business-related real property without ownership or equity, including poles, satellites, transmission facilities, and billboards5%WI100WC100
Cinematographic film rentals and other payments to resident individuals and corporate cinematographic film owners, lessors, and distributors5%WI110WC110
Income payments to certain contractors2%WI120WC120
Income distribution to the beneficiaries of estate and trusts15%WI130
Gross Commission of service fees of customs, insurance, stock, immigration, and commercial brokers, fees of agents of professional entertainers, and real estate service practitionersIf gross income for the current year did not exceed PHP 3,000,0005%WI139
If gross income is more than PHP 3,000,000 or VAT registered regardless of amount10%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 ClassificationGross Sales/Receipts or Gross Purchases
Groups A and BAt least PHP 12,000,000
Groups C, D, and EAt 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

DescriptionTax 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 NRFCs10%
Property dividends from domestic corporations to citizens, resident aliens, or NRFCs10%
Cash dividends from domestic corporations to NRFCs eligible for tax-sparing rule25%
Property dividends from domestic corporations to NRFCs eligible for tax-sparing rule10%
Cash dividends from domestic corporations to non-resident aliens engaged in Philippine business25%
Property dividends from domestic corporations to non-resident aliens engaged in Philippine business15%
Share of non-resident aliens in partnership income after tax15%
Various payments to NRFCs20%
Share of individual partners in partnership income20%
Royalty payments to citizens, resident aliens, and non-resident aliens engaged in Philippine business20%
Tax on prizes exceeding PHP 10,000 paid to individuals25%
Profit remittance by corporations (excluding certain registrations)10%
Tax on rentals, leases, and charter fees for foreign vessels20%
Tax on rentals, charter, and other fees for foreign aircraft, machinery, and equipment20%
Payments to oil exploration service contractors/sub-contractors15%
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 rights7.50%
Royalties paid to non-resident aliens engaged in Philippine business for cinematographic works8%
Final tax on interest or payments for tax-free bonds, mortgages, or deeds25%
Royalties paid to citizens, resident aliens, and non-resident aliens engaged in Philippine business for books and compositions25%
Rewards for informers, individuals, or legal entities25%
Cash dividends from Real Estate Investment Trusts30%
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 NRFCs10%

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.

More Posts

Subscribe to our newsletter for the latest updates, news, insights, and promotions.

Leave a Reply

Your email address will not be published. Required fields are marked *