What is Withholding Tax in the Philippines?

May 7, 2025

Withholding tax is a critical component of the Philippine tax system, designed to streamline tax collection and ensure compliance. It’s a method where a portion of income is deducted at the source by the payer (known as the withholding agent) and remitted directly to the government on behalf of the recipient. This system shifts the burden of tax collection from the Bureau of Internal Revenue (BIR) to businesses, employers, and other entities, making it an efficient way to collect income taxes in advance.

In the Philippines, withholding tax applies to various types of income, and understanding its mechanics is essential for businesses, employees, and freelancers alike. We’ll do our best to explain the basics – what withholding tax is, its types, and who is responsible for it

What is the Meaning of Withholding Tax?

Withholding tax (WHT) is an advance payment of income tax deducted from specific income payments before they reach the recipient. Instead of the recipient paying the tax directly to the BIR, the payer withholds a percentage of the payment and remits it to the government. This ensures that the government receives tax revenue promptly and reduces the risk of tax evasion.

Withholding tax is commonly applied to salaries, professional fees, rental payments, and other income types, depending on the nature of the transaction and the status of the recipient. The withheld amount is then credited against the recipient’s total income tax liability when they file their annual tax return.

Types of Withholding Tax in the Philippines

In the Philippines, withholding tax is categorized into three main types, each serving a distinct purpose:

Withholding Tax on Compensation (WTC)
This applies to income earned by employees from their employers. Employers are required to deduct a portion of an employee’s salary, based on graduated income tax rates, and remit it to the BIR. This includes not only basic salaries but also bonuses, allowances, and other forms of compensation, except for certain exempt benefits.

The withheld amount is reported on BIR Form 2316, which employees receive annually to reflect their tax contributions.

Expanded Withholding Tax (EWT)
Also known as creditable withholding tax, EWT applies to specific income payments made to suppliers, contractors, or professionals, such as professional fees, rentals, or payments for goods and services. The rate varies depending on the nature of the payment—for example, 1% for purchases of goods and 2% for services from local suppliers, or 5% for rental payments.

The withheld tax is creditable against the recipient’s income tax liability, and the payer issues BIR Form 2307 as proof of withholding.

Final Withholding Tax (FWT)
FWT is the full and final payment of income tax due on certain types of income, typically passive income like interest, dividends, or royalties, and payments to non-resident foreign corporations (NRFCs).

For instance, interest from peso bank deposits is subject to a 20% FWT, while payments to NRFCs are generally taxed at 25%. Unlike EWT, FWT is not creditable against other income taxes, meaning the withheld amount settles the tax obligation entirely.

Withholding tax rates vary depending on the source and amount being taxed. To ensure compliance, seek out a professional tax consultation service.

Who Are Withholding Agents?

Withholding agents are individuals, businesses, or entities responsible for deducting and remitting withholding tax to the BIR. They include:

Employers, who withhold taxes from employees’ salaries.
Businesses and corporations, withhold taxes on payments to suppliers, contractors, or professionals.
E-Marketplace Operators (e.g., Shopee, Lazada), who act as withholding agents for sellers on their platform earning 500,000.00 pesos annually or more because of RR 16-2023.
DFSPs (e.g., GCash, PayMaya), are also liable because of RR 16-2023. They withhold taxes from transactions done on their system.
Banks and financial institutions, withhold taxes on interest income or dividends.
Government agencies, withhold taxes on payments to suppliers or contractors.

Certain businesses, known as Top Withholding Agents (TWAs), have additional responsibilities. TWAs are identified by the BIR based on criteria like gross sales or receipts exceeding PHP 12 million annually and are required to withhold taxes on a broader range of transactions.

Who is Exempt from Paying Withholding Taxes

Certain incomes can be exempt depending on their source. Some compensations, benefits, investments, and other items may be exempt from withholding taxes.

Individuals and entities exempt from paying withholding taxes include those with annual gross income of PHP 250,000 or less (e.g., low-income freelancers or self-employed individuals), employees earning below the taxable threshold under graduated income tax rates, and certain entities like government agencies, tax-exempt organizations (e.g., registered non-stock, non-profit corporations), and foreign governments or international organizations under tax treaties, as specified in the National Internal Revenue Code (NIRC) and BIR regulations like Revenue Regulations No. 2-98, as amended.

Responsibilities and Compliance

Withholding agents must file and remit withholding taxes using specific BIR forms, such as BIR Form 0619-E (for EWT) and BIR Form 1601-C (for WTC), within deadlines set by the BIR. If you work under a withholding agent, they are generally responsible for deducting and remitting your withholding taxes on your income to the Bureau of Internal Revenue.

Freelancers and self-employed individuals earning more than 250,000.00 annually are responsible for filing their own withholding taxes. They must ensure they receive BIR Form 2307 from payers to claim tax credits when filing their annual income tax return (BIR Form 1701).

The percentage filed for withholding tax in the Philippines varies by income type—compensation, professional fees, rentals, or passive income like interest and dividends. Categories like Withholding Tax on Compensation (WTC), Expanded Withholding Tax (EWT, 1%–15%), and Final Withholding Tax (FWT, e.g., 20% on interest) each have unique rates and rules. Consider consulting a tax professional to ensure your business meets its obligations.

Failure to withhold or remit taxes can lead to penalties, including fines, imprisonment, or the non-deductibility of expenses for income tax purposes.

For more information, you can visit the BIR’s official website here.

Final Thoughts

Unfortunately, withholding tax can be complex due to multiple governing laws. Understanding your applicable tax category, eligibility for exemptions, and how to calculate your withholding tax can be complicated. Hopefully, our guide has given you a better understanding so you can do further research and properly consult with a tax expert.

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