How to Compute Withholding Tax on Compensation in the Philippines

May 7, 2025

In the Philippines, employers are responsible for deducting taxes from employees’ salaries and remitting them to the Bureau of Internal Revenue (BIR). This process, known as withholding tax on compensation, ensures that income taxes are collected at the source, simplifying tax compliance for both employers and employees.

Understanding how to compute withholding tax on compensation is crucial for businesses to stay compliant with the Tax Reform for Acceleration and Inclusion (TRAIN) Law. This guide provides a clear, step-by-step approach to computing withholding tax on compensation, tailored for the Philippine tax system as of 2025.

What is Withholding Tax on Compensation?

Withholding tax on compensation is the income tax deducted from an employee’s salary, wages, or other compensation (e.g., bonuses, allowances) before payment. Employers act as withholding agents, remitting these taxes to the BIR via BIR Form 1601-C (Monthly Remittance of Compensation Withholding Tax).

The withheld amounts serve as advance payments toward the employee’s annual income tax liability, which is finalized when filing BIR Form 1701 (Annual Income Tax Return).

The BIR provides withholding tax tables to simplify calculations, ensuring accuracy and compliance. We’ll show you how to do this later in this guide.

Why is Computing Withholding Tax on Compensation Important?

Proper computation ensures:

Compliance: Employers meet BIR requirements, avoiding penalties for under-remittance or non-compliance.
Fair Pay: Employees receive accurate net pay after tax deductions.
Tax Credits: Withheld taxes reduce the employee’s tax liability during annual filing.
Exemption Benefits: Employees with annual taxable income of PHP 250,000 or less (as per the TRAIN Law) are exempt from withholding tax, maximizing their take-home pay.

Step-by-Step Guide to Computing Withholding Tax on Compensation

Here’s our basic guide. Remember that under the TRAIN Law, Employees with annual taxable income of PHP 250,000 or less are exempt from withholding tax.

1. Determine Gross Compensation

Calculate the employee’s total compensation for the payroll period (daily, weekly, semi-monthly, or monthly). Include:

Basic salary or wages.
Taxable allowances (e.g., transportation allowance exceeding exemptions).
Bonuses or commissions (if taxable).

Example: An employee earns a monthly basic salary of PHP 25,000 and a PHP 2,000 taxable allowance. Total gross compensation = PHP 27,000.

2. Subtract Non-Taxable Deductions

Deduct mandatory contributions and non-taxable benefits to arrive at taxable income. These include:

Mandatory Contributions: SSS, PhilHealth, and Pag-IBIG contributions (rates vary by income; check BIR/SSS tables).
Non-Taxable Benefits (if they haven’t been excluded from the income yet): Up to PHP 90,000 annually for 13th-month pay, Christmas bonuses, and other benefits (prorated monthly, e.g., PHP 7,500/month).

Example:

SSS: PHP 1,125
PhilHealth: PHP 675
Pag-IBIG: PHP 100
Total contributions: PHP 1,900
Taxable income = PHP 27,000 – PHP 1,900 = PHP 25,100

3. Apply the Withholding Tax Table

Use the BIR’s Compensation Withholding Tax Table (updated under Revenue Regulations No. 8-2018) for the payroll period. The table aligns with the graduated income tax rates.

Revised Withholding Tax Table from the official BIR Website.

Find the taxable income in the table’s income bracket and apply the corresponding tax rate or fixed tax amount plus excess percentage.

Example (Monthly Payroll):

Taxable income: PHP 25,100
Per the 2025 monthly table, PHP 25,100 falls below PHP 33,333 (equivalent to PHP 400,000/year), taxed at 15% over PHP 20,833.
Computation:
- Excess over PHP 20,833 = PHP 25,100 – PHP 20,833 = PHP 4,267
- Tax = PHP 0 (base tax for bracket) + (PHP 4,267 × 0.15) = PHP 640.05

4. Deduct the Withholding Tax

Subtract the computed tax and mandatory contributions from the gross compensation to determine the employee’s net pay.

Example:

Gross compensation: PHP 27,000
Withholding tax: PHP 640.05
Mandatory contributions: PHP 1,900
Net pay = PHP 27,000 – PHP 640.05 – PHP 1,900 = PHP 24,459.95

5. Remit and Report to the BIR

Employers must:

Remit the withheld tax using BIR Form 1601-C by the 10th of the following month via the BIR’s eBIRForms platform or authorized banks.
Issue employees a BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) by January 31 of the following year, detailing annual compensation and taxes withheld.
File an Annual Information Return (BIR Form 1604-C) by January 31 to summarize all withheld taxes.

Special Cases

Exempt Employees: If taxable income is PHP 250,000 or less annually (e.g., PHP 20,833/month), no tax is withheld.
Mixed Income Earners: Employees with freelance income (subject to BIR Form 2307, as in your prior question) combine compensation and business income in BIR Form 1701, using withheld taxes as credits.
Interest and Dividends: These are subject to final withholding tax (20% for interest, 10% for dividends, per your earlier question) and not included in compensation tax tables.

Tips for Employers and Employees

Employers: Use payroll software to automate calculations based on the latest BIR tax tables. You may also consider hiring a payroll outsourcing company to handle the filing of compensation withholding taxes and ensure full compliance with government regulations.
Employees: Review your payslip and BIR Form 2316 to ensure correct withholding. If exempt (below PHP 250,000), confirm no tax is deducted.

Final Thoughts

Computing withholding tax on compensation can be straightforward with the BIR’s withholding tax table, especially for small businesses. By correctly calculating taxable income, applying the table, and remitting taxes, employers fulfill their obligations while employees benefit from tax credits. Alternatively, for larger businesses, it is often more efficient to partner with a payroll service provider to ensure fast, accurate, and compliant filing.

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