Preparing for BIR Tax Annualization: Key Takeaways

Tax season is rarely easy, especially for HR teams juggling compliance deadlines, employee concerns, and new BIR rules.

This is why Sprout hosted a webinar last November to walk teams through the 2025 BIR Tax Annualization process, including updates, deadlines, and smart strategies for a smoother year-end.

The session was designed to help teams stay sharp on annualization basics and avoid common errors that could cost time or trigger penalties.

The session featured expert insights from Richelle Lloren, Tax Associate at the Bureau of Internal Revenue, and Atty. Psydi Oatemar, CPA, Lead Legal Counsel at Sprout Solutions.

In this blog, we’ll share practical takeaways from their talks to help you prepare for the 2025 BIR Tax Annualization with ease and accuracy.

Tax Annualization is the year-end process for computing an employee’s final income tax due based on their total annual earnings and eligible deductions.

The goal is to ensure employees don’t overpay or underpay taxes, while helping your company avoid penalties.

As shared by Richelle Lloren, here’s a quick breakdown of the Annualized Withholding Tax process:

Step 1: Determine Taxable Income

Get the total gross compensation (from current and past employers), then subtract non-taxable income like SSS, PhilHealth, Pag-IBIG, and up to ₱90,000 of 13th month pay.

Step 2: Compute Annual Tax Due

Use BIR’s tax table to calculate the annual tax due based on the estimated taxable income.

Step 3: Compute the Monthly Tax Withholding

Divide the annual tax due by the number of months remaining in the year to find out the monthly tax withholding amount.

Step 4: Adjust the Withholding Tax Based on These Outcomes:

• If tax due > tax withheld → Collect the balance before the final payroll.
• If tax due < tax withheld → Refund the difference to the employee (by January 25 or in their final pay).
• If break-even → No adjustment needed on December payroll.

A smooth tax annualization process helps both employers and employees stay compliant, and avoids unnecessary year-end surprises.

Atty. Psydi Oatemar, CPA and Sprout’s Lead Legal Counsel, shared practical tips to make tax annualization less of a headache for HR teams.

Her advice: Start early and be proactive. It saves time, reduces stress, and gives HR more space to focus on strategic work.

Navigating Payroll Compliance in the Philippines

Payroll compliance in the Philippines is highly regulated with multiple government agencies involved, including the DTI/SEC, BIR, SSS, PhilHealth, and Pag-IBIG.

As Atty. Psydi explained, this creates complexity for HR and payroll teams, especially when calculating:

• Overnight pay
• Night shift differentials
• Holiday premium rates

Employers also need to stay updated on labor and social welfare laws, such as the expanded 105-day maternity leave.

Staying compliant means not only getting tax annualization right, but also ensuring your entire payroll process aligns with all current regulatory requirements.

Best Practices to Elevate Your Compliance Strategies

HR and payroll teams juggle a lot. That’s why Atty. Psydi shared two simple but powerful tips to make compliance easier:

Option 1: Invest in HR Software Nuanced to Philippine Regulatory Requirements

First, consider using an HR system built for Philippine labor laws, like Sprout ’s HR Software. Atty. Psydi shared how it helps remove manual steps and lowers the risk of error.

As a result, companies can enjoy increased efficiency and more time spent on other key initiatives. 

Another advantage she mentioned was how automation improves  talent management. With data-driven insights, HR leaders are able to make more objective, fair decisions, and support workforce reskilling in today’s fast-changing job environment.

Option 2: Consider Outsourcing Payroll and Compliance Housekeeping

For companies not yet ready to fully automate, outsourcing is a smart option.

Sprout offers Payroll Professional Services and HR Expert Services , helping businesses avoid common compliance mistakes, reduce risk, and focus internal resources on what matters most.

Atty. Psydi Oatemar, CPA and Sprout’s Lead Legal Counsel, shared practical tips to make tax annualization less of a headache for HR teams.

Navigating Payroll Compliance in the Philippines

Payroll compliance in the Philippines is highly regulated with multiple government agencies involved, including the DTI/SEC, BIR, SSS, PhilHealth, and Pag-IBIG.

As Atty. Psydi explained, this creates complexity for HR and payroll teams, especially when calculating:

• Overnight pay
• Night shift differentials
• Holiday premium rates

Employers also need to stay updated on labor and social welfare laws, such as the expanded 105-day maternity leave.

Staying compliant means not only getting tax annualization right, but also ensuring your entire payroll process aligns with all current regulatory requirements.

Best Practices to Elevate Your Compliance Strategies

Option 1: Invest in HR Software Nuanced to Philippine Regulatory Requirements

As a result, companies can enjoy increased efficiency and more time spent on other key initiatives. 

Another advantage she mentioned was how automation improves  talent management. With data-driven insights, HR leaders are able to make more objective, fair decisions, and support workforce reskilling in today’s fast-changing job environment.

Option 2: Consider Outsourcing Payroll and Compliance Housekeeping

For companies not yet ready to fully automate, outsourcing is a smart option.

Sprout offers Payroll Professional Services and HR Expert Services , helping businesses avoid common compliance mistakes, reduce risk, and focus internal resources on what matters most.

The webinar also featured great questions from attendees. Here are two of the key ones:

Q: If We Over-Remit on Our Tax Annualization, Can We Offset it the Following Year?

Richelle answered: “Yes. But it has to be offset early in the following year, ideally by January or February. “

Atty Psydi added her perspective: “From my experience, I strongly recommend automating your tax annualization to prevent over-remittance in the first place.”
She explained that BIR doesn’t issue refunds, only tax credits. Plus, offsetting can be a hassle. The RDO expects your original report to be accurate, so any corrections might need extra explanation.

Q: Should the Salary Differential on the Maternity Leave Benefit Be Part of the P90,000 Non-Taxable Threshold, or Should it Be a Separate Line Item?

Richelle answered: “This was actually a common concern we’ve received. After consulting with our legal team, I can confirm that yes, the maternity leave benefit is not only not part of the 90k threshold, but is also non-taxable itself.“

Tax annualization doesn’t have to be stressful. The right tools can turn it into a smooth, hassle-free process.

HR software and professional services, such as those offered by Sprout, help businesses:

• Automate key steps in tax annualization
• Stay compliant with the latest BIR requirements
• Reduce manual errors and free up time for strategic HR work

Want more insights on how to streamline your payroll and compliance processes?

Explore our blog for practical tips, dive into our thought leadership content, and join us at upcoming events where HR, payroll, and finance leaders share their best practices.

Ready to simplify your tax annualization? Book a consultation with us today to see how we can support your compliance strategy.

Tax annualization is the process of computing total annual income tax by adjusting for withheld taxes and deductions throughout the year. Refer to our guide on BIR tax annualization for more information.