Employers are required to act as withholding agents to ensure that their employees’ pay the right amount of income tax every year. Failure to do so may be liable to penalties. And therefore it is important to understand the income tax rate and the exemptions of taxation to compute the right amount of income tax.
This will provide you with a basic understanding of the current and new personal income tax and the Philippines withholding tax on compensation.
- What is the income tax rate?
- New Income Tax Table
- What is not included in taxable income?
- What are ‘De Minimis’ benefits?
- What is included in non taxable income?
- Income Tax Exemptions in the Philippines
- Withholding Tax Table
What is the income tax rate?
Annual Income Tax Table Philippines:
However, the government is working on the income tax reform bill which aims to reduce individual income tax. With the new income tax rate, 83% of the taxpayers will be exempted from paying personal income tax (according to data from BIR).
- The reform will be carried out in 2 phases – 1st phase in 2017 onwards, 2nd phase in 2020 onwards.
- Employees who earned less than 250,000 a year will be exempted from personal income tax.
Taxable Income Philippines
All compensation (including basic salary, allowances, overtime pay, etc) is taxable unless:
- The employee is a minimum wage earner;
- It is part of de minimis benefits;
- It is the employee’s contribution for SSS, Philhealth and HDMF;
- It is a non-taxable item such as 13th-month pay;
- It was deducted from the salary for absences or tardiness.
De Minimis Benefits
Revenue Regulations Nos. 2-98 and 3-98 were amended by Revenue Regulations 5-2008, 5-2011, 8-2012 and 1-2015 to reflect the current ‘De Minimis’ benefits.
De Minimis Benefits are facilities or privileges that are of relatively small value given to the employees by the employer which are not subjected to income tax nor fringe benefit tax.
The 11 ‘De Minimis’ Benefits are:
- Monetized unused vacation leave credits of private employees not exceeding 10 days during the year;
- Monetized value of vacation and sick leave credits to government official and employees;
- Medical cash allowance to dependents of employees, not exceeding PHP 750 per employee per semester or PHP 125 per month;
- Rice subsidy of PHP 1,500 or 1 sack of 50kg of rice per month amounting to not more than PHP 1,500;
- Uniform and clothing allowance not exceeding PHP 5,000 per annum;
- 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 PHP 10,000 per annum;
- Laundry allowance not exceeding PHP 300 per month;
- Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of tangible personal property other than cash or gift certificate, 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;
- Gifts made during Christmas and major anniversary celebrations not exceeding PHP 5,000 per employee per annum;
- Daily meal allowance for overtime work and night/ graveyard shift not exceeding 25% of the basic minimum wage on a per region basis, and
- Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive schemes combined do not exceed PHP 10,000 per employee per taxable year.
Any amount in excess of the stipulated de minimis benefit may still be exempted from taxation under Republic Act No. 10653, provided that the total exclusion shall not exceed P82,000.
Non Taxable Income Philippines
According to Republic Act No. 10653, 13th-month pay, productivity incentives, Christmas bonus and other benefits shall not be included in gross income and shall be exempt from taxation. The total exclusion shall not exceed eighty-two thousand pesos (P82,000).
Income Tax Exemption Philippines
Every employee is entitled to P50,000 income tax exemption and an additional P25,000 income tax exemption for each qualified dependent children, not exceeding 4 children.
However, if an employee has multiple employers, only the main employer shall claim personal and additional exemption. All other employers shall declare zero exemption for the employee. An employee who failed to file an application for registration shall likewise not entitled to any exemption.
Withholding Tax Table
Employers can withhold employee’s withholding tax based on the BIR Withholding Tax Table.