How to Calculate Withholding Tax in the Philippines: 2026 Guide

Withholding tax is a critical part of payroll and business compliance in the Philippines. Withholding tax is a key part of payroll and staying compliant in the Philippines. In fact, tax errors, including wrong withholding tax calculations, are still some of the most common issues local businesses run into, and they can lead to penalties or legal problems if not managed properly.

This 2026 guide is designed to make withholding tax actionable and straightforward. From calculating taxes on employee salaries and bonuses to payments for freelancers and suppliers, we’ll walk you through step-by-step computations, practical examples, and tips to avoid common errors.

Withholding tax is a system where the payer (usually an employer or business) deducts a portion of income at the source and remits it to the Bureau of Internal Revenue (BIR) on behalf of the payee. It functions like a down payment on an individual’s or business’s income tax liability.

It has two main purposes: it ensures timely government revenue collection and helps taxpayers avoid large year‑end tax liabilities. 

According to the BIR, withholding tax applies to various types of income, including compensation, certain payments to contractors and suppliers, interest, dividends, and other passive income. 

In the Philippines, withholding tax comes in three main types, each applying to different income sources and payees. While all are important, this guide will focus primarily on Withholding Tax on Compensation (WTC) and Expanded Withholding Tax (EWT), as these are most relevant to HR teams and business owners managing payroll and supplier payments.

WTC is the tax deducted from employee salaries, wages, and other compensation. Employers act as withholding agents, calculating the amount based on the BIR tax tables and remitting it directly to the government. This tax is creditable, meaning it reduces the employee’s total income tax due at the end of the year. 

FWT is applied to certain passive income, such as interest, dividends, and royalties. Unlike WTC, FWT is final, meaning the tax withheld constitutes the full tax liability for that income; the payee does not include it in their annual tax return.

Expanded Withholding Tax (EWT), also known as Creditable Withholding Tax (CWT),  applies to payments for services, rentals, professional fees, and other business transactions. Businesses act as withholding agents when paying suppliers, contractors, or freelancers. For example, if you hire a consultant or pay rent for your office, you may be required to withhold a certain percentage and remit it to the BIR.

The table below shows how much withholding tax to deduct from an employee’s monthly salary under the TRAIN Law. These rates have been in effect since January 1, 2023, and continue through 2026 unless updated by new legislation.

The Official BIR Withholding Tax Table (2026)

Follow these five simple steps to determine the correct WTC for your employees using the 2026 BIR table.

Gross compensation includes all earnings subject to tax before deductions. This typically covers:

• Basic salary
• Overtime pay
• Holiday pay / special days
• Commissions or allowances are considered taxable
• Bonuses and other monetary benefits

Next, subtract all non-taxable items and mandatory contributions to determine taxable income. This includes:

Mandatory Contributions:

• SSS employee share 
• PhilHealth employee share
• Pag-IBIG employee share 

Other Non-Taxable Items:

• De minimis benefits, such as:
  • Rice subsidy
  • Uniform allowance
  • Medical cash allowance
  • Laundry allowance
  • Employee achievement awards (up to statutory limits)
• Non-taxable portion of 13th-month pay (up to ₱90,000 per year)

Use the simple formula:

Taxable Income = Gross Compensation − Total Non-Taxable Income

This is the amount you will use to find the correct tax bracket in the BIR table.

Refer to the official 2026 BIR Withholding Tax Table. Locate the bracket corresponding to your employee’s taxable income.

• Each bracket shows:
  • Base tax (fixed amount)
  • Percentage rate applied to the excess over the lower limit of the bracket

Example: If taxable income is ₱35,000 per month, find the bracket that includes ₱35,000 and note the base tax and percentage rate to apply.

Finally, apply the formula in the table:

Withholding Tax = Base Tax + (Percentage × Excess over bracket minimum)

• Round off according to BIR rules
• Ensure the amount is reflected in payroll for remittance and employee payslip

Feeling overwhelmed? This 5-step process is exactly what Sprout Payroll automates in seconds for thousands of employees, guaranteeing 100% BIR compliance without spreadsheets. See how it works.

The following examples show how gross pay, bonuses, and non-taxable deductions interact to determine withholding tax. Each scenario includes a calculation breakdown for clarity.

Employee Profile:

• Monthly salary: ₱35,000
• No bonuses, overtime, or additional allowances

Step 1: Gross Compensation

• ₱35,000 (basic monthly salary)

Step 2: Total Non-Taxable Income

• SSS: ₱800
• PhilHealth: ₱400
• Pag-IBIG: ₱100
• 13th-month pay (portion under ₱90,000): ₱2,916 per month

Step 3: Taxable Income

• Gross Compensation − Total Non-Taxable Income
• ₱35,000 − (₱800 + ₱400 + ₱100 + ₱2,916) = ₱30,784

Step 4: Find the Tax Bracket (2026 BIR Table)

• Bracket includes ₱30,784 → Base tax ₱0 + 20% of excess over bracket minimum

Step 5: Calculate WTC Due

• WTC = 20% × (₱30,784 − bracket minimum) = ₱X

Calculation Breakdown:

• Gross: ₱35,000
• Less Non-Taxable: ₱4,216
• Taxable Income: ₱30,784
• Tax Due: ₱X

Employee Profile:

• Monthly salary: ₱35,000
• Overtime: ₱3,000
• Holiday pay: ₱2,000

Step 1: Gross Compensation

• ₱35,000 + ₱3,000 + ₱2,000 = ₱40,000

Step 2: Total Non-Taxable Income

• SSS: ₱800
• PhilHealth: ₱400
• Pag-IBIG: ₱100
• 13th-month portion: ₱2,916

Step 3: Taxable Income

• ₱40,000 − (₱800 + ₱400 + ₱100 + ₱2,916) = ₱35,784

Step 4: Tax Bracket

• Bracket includes ₱35,784 → apply base tax + percentage of excess

Step 5: WTC Due

• WTC = Base tax + % of excess = ₱Y

Calculation Breakdown:

• Gross: ₱40,000
• Less Non-Taxable: ₱4,216
• Taxable Income: ₱35,784
• Tax Due: ₱Y

Employee Profile:

• Monthly salary: ₱35,000
• 13th-month pay: ₱100,000 (exceeds ₱90,000 non-taxable limit)
• Performance bonus: ₱20,000

Step 1: Gross Compensation

• Monthly salary: ₱35,000
• 13th-month portion over ₱90,000: ₱100,000 − ₱90,000 = ₱10,000
• Bonus: ₱20,000
• Total Gross: ₱35,000 + ₱10,000 + ₱20,000 = ₱65,000

Step 2: Total Non-Taxable Income

• SSS: ₱800
• PhilHealth: ₱400
• Pag-IBIG: ₱100
• 13th-month under ₱90,000: ₱7,500 per month

Step 3: Taxable Income

• ₱65,000 − (₱800 + ₱400 + ₱100 + ₱7,500) = ₱56,200

Step 4: Tax Bracket

• Bracket includes ₱56,200 → apply base tax + percentage

Step 5: WTC Due

• WTC = Base tax + % of excess = ₱Z
  

Calculation Breakdown:

• Gross: ₱65,000
• Less Non-Taxable: ₱8,800
• Taxable Income: ₱56,200
• Tax Due: ₱Z

When your business pays for services, rent, or other professional fees, you may also act as a withholding agent. This is known as Expanded Withholding Tax (EWT), and it ensures the government collects taxes on non-salary payments. Unlike WTC, EWT applies to payments made to suppliers, contractors, freelancers, and landlords, making it crucial for every business to understand and comply.

Suppose you hire a freelance designer for a project worth ₱50,000. If the service is subject to a 10% EWT, here’s how the calculation works:

• Total project fee: ₱50,000
• EWT (10%): ₱5,000
• Payment to freelancer: ₱50,000 − ₱5,000 = ₱45,000
• Remittance to BIR: ₱5,000

It is essential to issue BIR Form 2307 to your freelancer. This form acts as a certificate of withholding tax, which the payee can use to credit against their income tax.

EWT also applies to rental payments. For example, if your business pays ₱20,000 monthly rent for office space:

• EWT rate on rental: 5%
• Tax withheld: 5% × ₱20,000 = ₱1,000
• Payment to landlord: ₱20,000 − ₱1,000 = ₱19,000
• Remittance to BIR: ₱1,000

Pro Tip: Always ask new vendors or consultants for their BIR Certificate of Registration. This helps determine if they are subject to income tax withholding and at what rate, preventing mistakes and penalties.”

Here are the most frequent mistakes Philippine businesses make when it comes to withholding tax and their consequences.

• Incorrect Calculation of Taxable Income. May lead to underpayment of tax, which may incur surcharges, interest, and deficiency assessments.
• Misclassifying Employees vs. Contractors. Misclassification can trigger additional withholding, penalties, and possible audit red flags from the BIR.
• Late Remittance of Withholding Tax (BIR Form 1601-C). A 25% surcharge on the unpaid amount plus 12% annual interest, plus potential administrative fines.
• Failure to Issue BIR Form 2316 on Time. Not giving employees their 2316 forms at the end of the year. Fines up to ₱5,000 per employee and complications during employee tax filing.

Tip: For additional guidance on withholding tax and staying compliant with Philippine regulations, including WTC, EWT, BIR forms, and remittance deadlines, check out Sprout’s Compliance Hub. It offers step-by-step resources for payroll, freelancers, and supplier payments to help you avoid common mistakes and penalties.

Manual withholding tax computation, EWT tracking, and BIR form submissions can be overwhelming, especially as your team grows. With Sprout Payroll, you can eliminate the guesswork and reduce human error to zero. 

And if you want to take compliance off your plate entirely, Sprout’s payroll outsourcing has you covered. A team of payroll experts handles everything, from calculating withholding taxes and EWT to preparing and submitting BIR forms, so you can focus on growing your business. You’ll get the accuracy and efficiency of a fully compliant payroll system without having to expand your in-house HR team.

Book a demo now to simplify withholding tax compliance and make payroll completely stress-free.

Yes, employees whose annual taxable income falls below the BIR’s minimum threshold are generally exempt from withholding tax. However, if they earn additional taxable income or bonuses, withholding may still apply.

BIR Form 2316 is the Certificate of Compensation Payment/Tax Withheld issued by employers at the end of the year. It shows total compensation, deductions, and taxes withheld. Employees need it for personal tax filing and proof of paid taxes.

Under the TRAIN Law, personal exemptions for dependents have been removed. Taxable income is computed after mandatory contributions and non-taxable allowances, regardless of family status.

Yes, if more tax was withheld than your actual liability, the employee can file for a tax refund or credit with the BIR, usually during the annual income tax return submission.

The 2026 withholding tax table sets income brackets and corresponding tax rates for employees. Employers use it to compute monthly deductions accurately. Learn more in our guide on how to calculate withholding tax in the Philippines.