Withholding Tax on Compensation in the Philippines

Withholding Tax on Compensation

• Withholding tax on compensation is a method of collecting income tax at the source upon receipt of income.
• This applies to all employed individuals, citizens or aliens, earning income from compensation for services rendered in the Philippines.
• The employer acts as the withholding agent.
• Section 2.78 of RR 2098, as amended, governs this process.

Compensation Income Defined

• "Compensation" generally means all payment for services performed by an employee for their employer under an employer-employee relationship, unless specifically excluded by relevant laws.
• The name given to the payment and the basis for payment are irrelevant in determining if it constitutes compensation.
• Compensation is considered even if the employer-employee relationship no longer exists at the time of payment.

"De Minimis" Benefits

• Benefits furnished by employers to employees, considered "de minimis" (trivial) are not subject to income tax and withholding if they are of relatively small value and offered to promote employee health, goodwill, contentment, or efficiency.

Examples of "De Minimis" Benefits

• Monetized unused vacation leave credits (up to 10 days).
• Monetized vacation and sick leave credits for government employees.
• Medical cash allowance for dependents (up to P1,500 per semester or P250 per month).
• Rice subsidy (up to a specific amount or value per month).
• Uniform and clothing allowance (up to P6,000 per year).
• Actual medical assistance (e.g., medical allowance, check-ups, maternity assistance), up to P10,000 per year.
• Laundry allowance (up to P300 per month).
• Employee achievement awards (tangible property not cash, up to P10,000 yearly).
• Gifts during Christmas and other holidays (up to P5,000 annually).
• Daily meal allowance for overtime/night shifts (up to 25% of the basic minimum wage).
• Benefits from collective bargaining agreements (CBAs) and productivity incentive schemes, with combined annual totals not exceeding P10,000.

Amount in Excess of "De Minimis" Benefits

• Any amount exceeding the "de minimis" threshold is included in the 13th-month pay and other benefits threshold.
• Excess amounts are subject either to withholding tax on compensation (for rank-and-file employees) or fringe benefits tax (for managerial and supervisory).

Thirteenth (13th) Month Pay and Other Benefits

• Amounts paid in the form of 13th-month pay and other benefits are not taxed if the total amount does not exceed P90,000.
• Rules and regulations issued by the Secretary of Finance, upon recommendation by the Commissioner (of relevant agency), can adjust this limit.

Exempt Statutory Contributions

• GSIS, SSS, Medicare, Pag-IBIG, and union dues are exempt.

BIR Form No. 2316

• Employers must issue a certificate (BIR Form No. 2316) to each employee with details of total compensation and withheld taxes each year.
• The certificate is attached to the Annual Income Tax Return.

This quiz explores the concept of withholding tax on compensation, focusing on its application in the Philippines. It covers definitions of compensation income, the role of the employer as a withholding agent, and the treatment of 'de minimis' benefits. Test your knowledge on the intricacies of tax collection at the source!