Compensation Income: Forms and Tax Treatment - PDF

Topic 5: Compensation Income INCOME TAXATION By Atty. Alpine Sunshine A. Chiweran, CPA Compensation Income (TOPIC 5) 1. Forms of Compensation Income 2. Tax Exempt Compensation 3. Final Tax on Fringe Benefits 4. Creditable Withholding Tax on Compensation Income (RA 8424, Section 78) Introduct...

Topic 5: Compensation Income INCOME TAXATION By Atty. Alpine Sunshine A. Chiweran, CPA Compensation Income (TOPIC 5) 1. Forms of Compensation Income 2. Tax Exempt Compensation 3. Final Tax on Fringe Benefits 4. Creditable Withholding Tax on Compensation Income (RA 8424, Section 78) Introduction to Compensation Income Compensation Income  Any remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Tax Code. Sec 2 (a) BIR RR No. 8-2018 Introduction to Compensation Income Employer-Employee Relationship  There is Employer-Employee Relationship when the person for whom services are rendered (Employer) has the right to control and direct the individual who performs the services (Employee), not only as to the result in accomplishing the work but also as to the details and means by which that result is accomplished. Sec 2 (e) BIR RR No. 8-2018 Introduction to Compensation Income Elements of Employer and Employee Relationship under case law: 1. Selection and engagement of employees – There is screening process for employees to be hired. 2. Payment of wages – The employer usually fixes and controls the payment of wages. 3. Power of dismissal – Employer has power to retrench or terminate employees when incurring heavy losses and other reasonable basis. 4. Power of control – The employer has power to control the employee on the means and methods by which the work is accomplished. Note: an arrangement which do not manifest all the elements is not an employer- employee relationship but an independent contract for the provision of services. Introduction to Compensation Income Types of Employees as to Function 1. Managerial Employees – Those who are given powers or prerogatives to lay down and execute managerial policies and/or to hire, transfer, suspend, lay off, recall, discharge, assign or discipline employees. 2. Supervisory Employees – Those who effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. 3. Rank and file employees– Those who hold neither managerial nor supervisory functions. Introduction to Compensation Income Types of Employees as to Taxability 1. Minimum Wage Earners– Employees who are recipients of minimum wage as fixed by the Regional Tripartite Wage and Productivity Board of the DOLE. They are exempt from income tax on their compensation. 2. Regular Employees– Employees who are subject to the regular progressive income tax. Introduction to Compensation Income The Tax Model on Compensation Income: Gross Compensation Income PhP xxx,xxx Less: Non-taxable compensation xxx,xxx Taxable compensation income xxx,xxx Gross Compensation Income – generally includes all remunerations received under an employer-employee relationship. Non-Taxable Compensation – includes mandatory deductions and exempt benefits A. Forms of Compensation Income 1. Regular Compensation 2. Supplemental Compensation a. Overtime Pay b. Hazard Pay c. Night shift differential pay d. Holiday pay e. Commissions f. Fees, including director’s fees (if director is an employee) g. Emoluments and honoraria h. Taxable retirement and separation pay i. Value of living quarter or meals j. Gains on exercise of stock options k. Profit sharing and taxable bonuses A. Forms of Compensation Income 1. Regular Compensation - This pertains to the fixed remunerations received by an employee every payroll period such as: a. Basic salary b. Fixed allowances such as cost-of-living allowance, fixed housing allowance, representation, transportation, and other allowances paid to an employee every payroll period. Exception Rule on the taxability of allowances:  Ordinary and necessary allowances for travelling, representation or entertainment expenses of employees incurred in the pursuit of the employer’s trade, business or profession.  The expense is subject to accounting or liquidation.  Any excess advances are returned to the employer. A. Forms of Compensation Income 2. Supplemental Compensation – This pertains to other performance- based pays to employees with or without regard to the payroll period. a. Overtime Pay b. Hazard Pay c. Night shift differential pay d. Holiday pay e. Commissions f. Fees, including director’s fees (if director is an employee) g. Emoluments and honoraria h. Taxable retirement and separation pay i. Value of living quarter or meals j. Gains on exercise of stock options k. Profit sharing and taxable bonuses A. Forms of Compensation Income 2. Supplemental Compensation Overtime, holiday, hazard and night differential pay  These constitutes additional compensation, except when derived by a minimum wage earner. Commissions, emoluments and honoraria  Commissions – incentives intended to stimulate sales, may be given as a profit sharing or performance bonus.  Emoluments – pertains to any pay in general  Honoraria - additional payments for attending to special tasks or assignments. A. Forms of Compensation Income 2. Supplemental Compensation Living quarters or meals  If an employee receives free living quarters or meals in addition to salary for services rendered, the value to the employee of such living quarters or meals is included in compensation income.  However, when the same is furnished to an employee for the convenience of the employer or out of necessity of the employer’s business, the value thereof is not compensation income, but a business expense. A. Forms of Compensation Income 2. Supplemental Compensation Stock Option Plans  To motivate employees, employers give stock options to employees allowing them to earn additional reward on the appreciation of stock price of the company. Profit sharing or taxable bonus  Reward for churning the business to post a profit. Productivity incentive bonus  A productivity incentive is linked to improvements in productivity usually in terms of cost savings through waste reduction, efficient labor utilization or increase in volume of production. B. Tax Exempt Compensation / Non-Taxable Compensation A. Mandatory Deductions  These includes employee’s mandatory contribution to GSIS, SSS, PhilHealth, HDMF and union dues. B. Exempt Benefits 1. Benefits excluded and/or exempted under the NIRC and special laws 2. Benefits exempt under treaty or international agreements 3. Benefits necessary to trade, business or conduct of profession of the employer. 4. Benefits for the convenience or advantage of the employer. B. Tax Exempt Compensation / Non-Taxable Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 1. Remuneration received as incident of employment: a. Exempt retirement benefits under RA 7641 including exempt retirement gratuities to government officials and employees b. Exempt termination benefits c. Benefits from the United States Veterans Administration d. Social security, retirement gratuities, pensions and similar benefits from foreign government agencies and other institutions, private or public. e. Benefits from SSS f. Benefits from GSIS g. COVID-19 benefits to health workers B. Tax Exempt Compensation / Non-Taxable Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 2. De Minimis Benefits  The Bureau of Internal Revenue (BIR) defines de minimis benefits as small perks that employers give to employees that are exempt from income tax.  These benefits are intended to improve employee morale and work experience. B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 2. De Minimis Benefits The following shall be considered De Minimis benefits and form part of the non-taxable compensation of employees as of RR Nos. 4-25, amending certain provisions of RR No. 11-18, and RR No. 2-98: a. Monetized unused vacation leave credits of private employees up to ten (10) days; b. Monetized value of vacation and sick leave credits paid to government officials and employees; c. Medical cash allowance to dependents of employees up to Php 1,500 per semester of Php 250 per month; d. Rice subsidy up to Php 2,000 or one sack of 50kg rice per month amounting to not more than P2,000; e. Uniform and clothing allowance not exceeding Php 7,000 per annum. (Increased per RR No. 004- 2025) B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 2. De Minimis Benefits f. Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum; g. Laundry allowance up to Php 300 per month; h. Employee achievement awards, e.g., for length of service or safety achievement, in any form, whether in cash, gift certificate or any tangible personal property, with an annual monetary value not exceeding Php 10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 2. De Minimis Benefits i. Gifts given during Christmas and major anniversary celebrations not exceeding Php 5,000 per employee per annum; j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis; k. Benefits under a Collective Bargaining Agreement and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentives schemes combined up to Php 10,000 per employee per annum. B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 2. De Minimis Benefits Taxable De Minimis Benefits: a. Excess de minimis over their regulatory limits b. Other benefits of relatively small value that are not included in the list of the de minimis benefits. B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 3. 13TH Month Pay and Other Benefits  Includes: 3.1 13th Month Pay 3.2 Other Benefits: a. Christmas bonus of private employees b. Cash gifts other than Christmas or anniversary gifts of private employees c. Additional compensation allowance of government personnel d. 14th month pay, 15th month pay, etc. e. Other fringe benefits of rank and file employees B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 3. 13TH Month Pay and Other Benefits 3.1 13th Month Pay a. The 13th month pay of government employees consists of a Christmas bonus equivalent to one month salary plus a PhP5,000 cash gift b. The 13th month pay of private employees is equivalent to one- month salary. B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 3. 13TH Month Pay and Other Benefits  Includes: 3.2 Other Benefits: Christmas Bonus and Christmas gift Government Private Employees Employees Christmas Bonus 13th month pay and 13th month pay and other benefits other benefits Christmas Gift 13th month pay and De minimis other benefits B. Tax Exempt Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 3. 13TH Month Pay and Other Benefits  Includes: 3.2 Other Benefits: Other Fringe Benefits a. For rank and file employees – treated as compensation income as part of “other benefits” under “13th month pay and other benefits” b. For managerial or supervisory employees– treated as fringe benefits subject to fringe benefit tax Note: The other fringe benefits of managerial or supervisory employees are excluded from their “13th month pay and other benefits” B. Tax Exempt Compensation *13TH Month Pay and Other Benefits  Illustration 1: The employer pay for the tuition fee of an employee in addition to his regular compensation. The tuition fee paid is a fringe benefit which will be treated as follows:  If employee is a rank and file employee – as a compensation income as part of “other benefits” under “13th month pay and other benefits”  If employee is a managerial or supervisory employee – as fringe benefit subject to fringe benefit tax  As an exempt fringe benefit, regardless of the type of employee if the same was given by the employer for his convenience or business necessity such as when an employee is required to study to acquire expertise for the future use of the employer’s business. B. Tax Exempt Compensation *13TH Month Pay and Other Benefits  Illustration 2: An employee receives a monthly rice allowance of PhP3,000 a month which is PhP1,000 in excess of the PhP2,000 a month de minimis limit for rice allowance.  If employee is a rank and file employee - The PhP1,000 monthly excess constitutes a taxable de minimis benefit taxable as compensation as part of “other benefits”  If employee is a managerial or supervisory employee – as fringe benefit subject to fringe benefit tax B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment  RR2-98 provides that 13th month pay and other benefits are exempt from withholding on compensation provided they do not exceed PhP90,000.  Excess above PhP90,000 is treated as compensation income subject to the regular income tax. B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment Illustration 1: A government rank and file employee received the following benefits aside from the basic pay in 2023. Christmas Bonus PhP 70,000 Cash Gift 5,000 Additional Compensation Allowance 36,000 Personnel Economic Relief Allowance (PERA) 2,000/month 24,000 Monetized value of vacation leave and sick leave (18 days) 9,000 Uniform and clothing allowance 8,000 Determine the taxable “13th month pay and other benefits”? B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment Illustration 1: A government rank and file employee received the following benefits aside from the basic pay in 2023. Determine the taxable “13th month pay and other benefits”? Christmas Bonus PhP 70,000 Cash Gift 5,000 Additional Compensation Allowance 36,000 Excess Uniform and clothing allowance (8,000-7,000) 1,000 Total 13th month pay and other benefits 112,000 Less: Exclusion Threshold 90,000 Taxable total 13th month pay and other benefits 22,000 B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment Note on government employee: 1. Personnel Economic Relief Allowance (PERA) is not subject to income tax and withholding tax (Under RR8-2000 as affirmed by RR10-2008. 2. The PhP5,000 Christmas gift of government employees is designated by the NIRC to be part of “13th month pay and other benefits); hence, it is not a de minimis benefit. 3. Under RR5-2011, the monetization of vacation leave and sick leave credits of government officials is an exempt de minimis benefit without regard to the number of days. B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment  Illustration 2: A private rank and file employee working in a remote tower station of Fox Internet Company received the following benefit during 2023: 13th Month Pay PhP 72,000 Performance Bonus 15,000 Christmas Gift 30,000 Danger exposure allowance (hazard pay) 6,000 Housing privilege (annual value of the employee’s living 38,000 quarters furnished by the employer to employee for staying on-site) Uniform and clothing allowance 8,000 Laundry allowance 6,000 Determine the taxable “13th month pay and other benefits”? B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment  Illustration 2: A private rank and file employee working in a remote tower station of Fox Internet Company received the following benefit during 2023. Other De Minimis Limit Benefits Christmas Gift PhP 30,000 PhP5,000 PhP25,000 Uniform and clothing allowance 8,000 7,000 1,000 Laundry allowance 6,000 3,600 2,400 Excess de minimis benefits (other fringe benefits) PhP28,400 13th Month Pay 72,000 Total 13th Month Pay and other benefits 100,400 Less: Exclusion Threshold 90,000 Taxable total 13th month pay and other benefits 10,400 B. Tax Exempt Compensation *13TH Month Pay and Other Benefits: Tax Treatment Note on private employee: 1. Performance bonus is a supplemental or additional compensation 2. The laundry allowance limit is computed as 300 x 12 = PhP3,600 3. The Christmas gift is a de minimis benefits for private employees under RR5-2011 4. The housing privilege is exempt under the convenience of the employer rule. 5. The “13th month pay and other benefits” of rank and file employees includes “other fringe benefits. B. Tax Exempt Compensation / Non-Taxable Compensation *Remunerations Exempt under THE NIRC, as Amended and Special Laws 4. Certain Benefits of Minimum Wage Earners  Minimum wage earners are exempt from income tax on the following: a. Basic minimum wage b. Other benefits (HHON)  Holiday pay  Hazard pay  Overtime pay  Night shift differential pay Note: Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable amount of 90k, taxable allowances and other taxable income given by the employers to MWEs are subject to income tax. B. Tax Exempt Compensation / Non-Taxable Compensation 4. Certain Benefits of Minimum Wage Earners  Illustration: Mary Dela Fuente, a minimum wage employee was able to close a sales deal for her employer in 2023. She received the following compensation during the year. Basic minimum wage, net of P8,000 mandatory deductions PhP 160,800 13th Month Pay 14,000 Holiday Pay 4,000 Overtime Pay 70,000 Night Shift Differential Pay 15,000 Hazard Pay 10,000 Profit sharing Bonus 12,000 Commission income 370,000 Total 655,800 How much is the exempt benefits? How much is the taxable compensation income. How much is the tax due? B. Tax Exempt Compensation / Non-Taxable Compensation 4. Certain Benefits of Minimum Wage Earners  Illustration: Mary Dela Fuente, a minimum wage employee was able to close a sales deal for her employer in 2023. She received the following compensation during the year. How much is the exempt benefit? Basic minimum wage, net of P8,000 mandatory deductions PhP 160,800 13th Month Pay 14,000 Holiday Pay 4,000 Overtime Pay 70,000 Night Shift Differential Pay 15,000 Hazard Pay 10,000 Total 273,800 B. Tax Exempt Compensation / Non-Taxable Compensation 4. Certain Benefits of Minimum Wage Earners  Illustration: Mary Dela Fuente, a minimum wage employee was able to close a sales deal for her employer in 2023. She received the following compensation during the year. How much is the taxable compensation income? Gross compensation income (655+8k) PhP 663,800 Less: Non-taxable compensation income Mandatory deductions 8,000 Exempt benefits 273,800 281,800 Taxable compensation income 382,000 B. Tax Exempt Compensation / Non-Taxable Compensation 4. Certain Benefits of Minimum Wage Earners  Illustration: Mary Dela Fuente, a minimum wage employee was able to close a sales deal for her employer in 2023. She received the following compensation during the year. How much is Mary’s tax due? Tax Due Taxable compensation income 382,000 Less: Lower limit of the income bracket 250,000 0 where the taxable income qualifies Excess 132,000 Multiply by: 15% 19,800 Total Tax Due 19,800 B. Tax Exempt Compensation / Non-Taxable Compensation 4. Certain Benefits of Minimum Wage Earners *Rules of change in status as Minimum Wage Earner during the year: a. When an employee becomes a minimum wage earner during the year, he shall be subject to income tax only on compensation earned before becoming a minimum wage earner. Example: Anthony had a basic pay of PhP400/day when the minimum wage was PhP382/day. He is also receiving overtime pay and the year-end 13th month pay. On July 1, 2021, the RTWPB increased the minimum wage by PhP22/day to PhP404/day. Anthony’s employer increased his salary to the minimum PhP404/day.  Anthony shall be taxed on his income from January 1 to June 30 because he is not yet a minimum wage earner. B. Tax Exempt Compensation / Non-Taxable Compensation 4. Certain Benefits of Minimum Wage Earners *Rules of change in status as Minimum Wage Earner during the year: b. When an employee ceases to be a minimum wage earner during the year due to increase in salary, only the income for the rest of the year is taxable. Example: Andrea is a minimum wag earner. She was promoted and was given a salary raise above the minimum wage starting August 1, 2021.  Andrea shall be exempt from income tax from January 1 to July 31 because she is a minimum wage earner.  Effective August 1, Andrea shall be subject to tax. Note: If the taxable income of the employee does not exceed PhP250,000 for the year, there will be no income tax due for the period under the tax table. C. Final Tax on Fringe Benefits *Fringe Benefits  Under labor laws, fringe benefits pertain to all other benefits or incentives of employees other than the basic pay.  Under the NIRC, the term “fringe benefit” was defined to pertain to goods, services or other benefits furnished by the employer to the employees. C. Final Tax on Fringe Benefits *General Categories of Fringe Benefits Subject to Final Tax 1. Management perquisite benefits / Management Perks 2. Employee personal expenses shouldered by the employer 3. Taxable de minimis benefits a. Excess de minimis over their limits b. Benefits not included in the de minimis list C. Final Tax on Fringe Benefits *General Categories of Fringe Benefits Subject to Final Tax 1. Management perquisite benefits / Management Perks  Highly privileged incentives given only to a special group of employees  These benefits are non-performance based and are given as incentives to management employees. 2. Employee personal expenses shouldered by the employer  When an expense takes the nature of an employee personal expense or expenditure and is paid or assumed by the employer in default of a proximate business necessity, it is deemed a fringe benefit in its entirety even if the expense is receipted in the name of the employer. C. Final Tax on Fringe Benefits *Fringe Benefits Tax  Covers only the taxable fringe benefits of managerial or supervisory employees.  It is a final tax imposed on the fringe benefits furnished, granted or paid by the employer to the employee, except rank and file employees, whether such employer is an individual, a professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities. C. Final Tax on Fringe Benefits *Fringe Benefits Tax  For the purpose of fringe benefit tax, “fringe benefit” means any goods, services or other benefits furnished or granted in cash or in kind by the employer to individual employees (except rank and file employees) such as, but not limited to, the following:  Housing benefits  Expense account  Vehicles of any kind  Household personnel such as maid, drivers or others  Interest, for the difference between the market rate (12%) and the actual interest granted.  Membership fees, dues and other expenses borne by the employer for the employee in social and athletics clubs or other similar organizations  Expense for foreign travel  Holiday and vacation expenses  Educational assistance to the employee or his dependents  Life or health and other non-life insurance premiums or similar accounts in excess of what the law allows C. Final Tax on Fringe Benefits *Characteristic of Fringe Benefits Tax 1. Final tax 2. Tax upon the fringe benefits of managerial or supervisor employees 3. Paid by the employer 4. Grossed-up tax  The monetary value or the amount of fringe benefit realized or taken home by the employee is effectively net of the final tax which is to be withheld at source. 5. Due quarterly  The fringe benefit tax is due on remittance quarterly based on the accounting selected by the employer. Remitted through BIR Form 1603Q.  Due on or before the last day of the month following the quarter in which the withholding was made. C. Final Tax on Fringe Benefits *Procedures in Computing Fringe Benefits Tax 1. Determine the monetary value 2. Determine the gross-up rate and fringe benefit tax rate applicable for the taxpayer 3. Determine the grossed-up monetary value by dividing the monetary value by the gross-up rate. 4. Determine the fringe benefit tax by multiplying the fringe benefit tax rate to the grossed-up monetary value. C. Final Tax on Fringe Benefits *Rules on Valuation of Fringe Benefits 1. Benefits paid in cash  The monetary value is the amount paid in cash.  The only exception here is when the employer pays for the rent of the residence of the employee, MV is 50% of the rental payment. 2. Benefits paid in kind  MV is the fair value of the thing given or its book value whichever is higher. C. Final Tax on Fringe Benefits *Rules on Valuation of Fringe Benefits 3. Benefits that are furnished  When the benefit is given in the form of free use of the employer’s property, the MV is 50% of the rental value of the property. If the property has no available rental value, the depreciation value is used.  For the purposes of the depreciation value, the presumptive useful lives of the property are: a. 20 years for real properties b. 5 years for movable properties C. Final Tax on Fringe Benefits *Fringe Benefit Tax Rates  The fringe benefit tax rates and grossed-up rates are as follows: Employees Resident or citizens Non-resident alien Fringe benefit tax rates 35% 25% Grossed-up rates 65% 75% C. Final Tax on Fringe Benefits Illustration 1: Resident Citizen In the last quarter of 2023, Alexander, a Filipino supervisory employee, was given PhP13,000 worth of groceries for personal use. Compute the fringe benefit tax. Monetary value PhP 13,000 Divide by: Gross-up rate 65% Grossed-up monetary value 20,000 Multiply by: Fringe benefit tax rate 35% Fringe Benefit Tax 7,000 C. Final Tax on Fringe Benefits Illustration 2: Resident Alien An offshore banking unit (OBU) reimbursed the following personal expenses of its non-resident managerial employee during a calendar year. Golf club membership dues – 100% in the name of PhP 10,000 the employer Groceries – 50% in the name of the employer 24,000 Home owner’s association dues 5,000 Total 39,000 Compute the fringe benefit tax.  PhP21,000 Note: Personal expenses are taxable fringe benefits in full even if they are receipted in full or in part in the name of the employer. C. Final Tax on Fringe Benefits Illustration 3: Non-Resident Alien On January 2023, Cyberspace Company purchased a PhP3,000,000 car and designated it for the personal use of its non-resident alien executive Compute the fringe benefit tax. Monetary value (PhP3,000,000/5 years) x 50% PhP 300,000 Divided by: 4 quarters 4 Quarterly monetary value 75,000 Grossed up quarterly monetary value (75,000 /75%) 100,000 Multiply: FBT rate 25% Fringe Benefit Tax 25,000 Note: The fringe benefit tax continues to be payable for as long as the employee uses the property for personal use and/or business use. D. Creditable Withholding Tax on Compensation Income  The withholding tax on compensation is a method of collecting the income tax at source upon receipt of the income.  It applies to all employed individuals whether citizens or aliens.  The employer is constituted as the withholding agent. D. Creditable Withholding Tax on Compensation Income *Withholding Tax Table D. Creditable Withholding Tax on Compensation Income *Procedural Computation of the Withholding tax on compensation 1. Determine the total monetary and non-monetary compensation of the employee for the payroll period: monthly, semi-monthly, weekly or daily. Segregate non-taxable benefits, mandatory contributions and supplemental compensation. 2. Determine the bracket that applies to the regular compensation of the employee for the applicable payroll period. Determine the basic tax for the bracket. 3. Add supplemental compensation to the excess of the regular compensation. Subject the total to the incremental tax rate for the bracket. 4. Total the basic tax and the incremental basic tax. D. Creditable Withholding Tax on Compensation Income *Illustration: XYZ Company employs Mr. V, he has semi-monthly salary of PhP35,000. During the period, he earned a total overtime pay of PhP12,000. His mandatory contributions for SSS, Philhealth, HDMF and union dues were PhP2,400. How much is the total withholding tax on compensation? Tax Due Regular compensation income (35K-2,400) PhP 33,800 Less: Base amount at Column No. 4 – semi 33,333 4,270.70 monthly Excess PhP 467 Add: Supplemental Compensation 12,000 Total PhP 12, 467 Multiply by: Incremental tax rate 25% 3,116.75 Total Withholding tax on compensation 7,387.45 D. Creditable Withholding Tax on Compensation Income *Illustration: XYZ Company employs Mr. V, he has semi-monthly salary of PhP35,000. During the period, he earned a total overtime pay of PhP12,000. His mandatory contributions for SSS, Philhealth, HDMF and union dues were PhP1,200. How much of the semi-monthly pay will be released to Mr. V? Tax Due Regular compensation PhP 35,000 Add: Supplemental compensation 12,000 Gross Compensation PhP 47,000 Less: Mandatory deduction 1,200 Non –taxable benefits 0 1,200 Taxable Income PhP 45,800 LESS: Withholding tax on compensation 7,387.45 Net payroll due to Mr. V 38,412.55 D. Creditable Withholding Tax on Compensation Income Note:  It must be noted that the total amount withheld on every payroll date may not exactly match the annual tax due. Due to this, the income of the employee needs to be reckoned at the end of the year and adjustment is made as necessary.  Any under-withholding shall be deducted on the final payroll of the employee  An over-withholding shall be refunded to the employee. D. Creditable Withholding Tax on Compensation Income Deadline of Filing and Remittance of the Withholding Tax on Compensation:  BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation) – on or before 10th day of the following month the withholding was made except for taxes withheld for December which is due on or before January 15 of the succeeding year.  BIR Form 1604-C (Annual Information Return of Income Taxes Withheld on Compensation) – on or before January 31 of the following calendar year in which the compensation income payments and passive income payments were made.  Employers shall furnish each employee a copy of BIR Form 2316 (Certificate of Compensation Payment or Income Tax Withheld) on or before January 31 of the succeeding year. THANK YOU!