Withholding Tax in the Philippines: What It Is and How It Works

If you’ve ever had an employee ask why their take-home pay looks smaller than expected, you’ve already dealt with the complexities of withholding tax.

For HR leaders and payroll managers, accurate withholding tax isn’t just about payslip clarity. It’s about staying compliant with Philippine labor and tax laws while avoiding costly penalties from the Bureau of Internal Revenue (BIR).

This guide breaks down what withholding tax is, how it works, and how you can simplify compliance.

Withholding tax is the amount of income tax that employers or payors are required to deduct from compensation or certain payments and remit directly to the Bureau of Internal Revenue (BIR). This system helps improve tax collection efficiency and ensures the government receives timely revenue.

In short:

• Employees don’t need to compute their own taxes every month.
• Employers ensure the government receives timely tax revenue.

For example, an employee earning a monthly salary of ₱25,000 may fall within certain tax exemption thresholds or lower tax brackets. The exact amount withheld depends on the employee’s taxable income after mandatory deductions like SSS, PhilHealth, and Pag-IBIG contributions, and the applicable tax bracket. 

The BIR tax table (discussed later) will help employees identify where they fall.

Generally, there are three types of withholding tax in the Philippines:

• Withholding Tax on Compensation (WTC): This is the most common type relevant to employers. It involves deducting tax from employees’ salaries and wages based on the graduated tax rates set by the BIR. The tax withheld is credited against the employee’s final income tax liability.

• Expanded Withholding Tax (EWT): EWT applies to certain payments made to individuals and businesses such as professional fees, rent, and commissions. Payors must withhold tax based on prescribed rates and remit this to the BIR.
• Final Withholding Tax (FWT): This tax applies mainly to passive income such as interest, dividends, and certain royalties. The rate is usually fixed and considered final, meaning the tax withheld is the total tax due on that income.

Detailed calculations and examples for these types of withholding tax will be covered shortly. 

Certain persons and entities are responsible for withholding tax and remitting it to the BIR. The following are required to withhold taxes on qualifying payments:

• Employers who pay salaries and wages to employees
• Businesses or individuals who make payments subject to EWT or FWT
• Government agencies and government-owned or controlled corporations (GOCCs)
• Other withholding agents designated by the BIR

The BIR tax table below shows the monthly income tax brackets effective from 2023 onward in the Philippines under the TRAIN Law. Taxpayers are taxed progressively based on these brackets.

Note: Taxable income is calculated after deducting allowable exemptions and deductions.

Tax withholding amounts vary depending on the type of worker and payment involved. Below are simple examples that show how withholding tax is calculated for regular employees, full-time equivalents (FTEs), and consultants.

WTC (Regular Employees and FTEs)

Regular employees and FTEs have income tax withheld from their salaries based on graduated tax brackets established by the TRAIN Law. The taxable income is computed after deducting mandatory contributions to government funds like SSS, PhilHealth, and Pag-IBIG.

Regular Employee Example:

A regular employee earns a gross monthly salary of ₱30,000. After deducting ₱2,000 for mandatory contributions, the taxable income is ₱28,000.

Using the TRAIN tax table:

• The first ₱20,833 is tax-exempt.
• The remaining ₱7,167 (₱28,000 – ₱20,833) is taxed at 20%.

Computation: ₱7,167 × 20% = ₱1,433.40 withholding tax.

This means the employer deducts ₱1,433.40 monthly to remit to the BIR.

FTE Example:

An FTE worker earning a gross monthly salary of ₱25,000 with ₱1,500 in mandatory contributions has a taxable income of ₱23,500.

Using the TRAIN tax table:

• The first ₱20,833 is tax-exempt.
• The remaining ₱2,667 (₱23,500 – ₱20,833) is taxed at 20%.

Computation:

₱2,667 × 20% = ₱533.40 withholding tax.

This means that the employer deducts ₱533.40 monthly as withholding tax for the FTE.

EWT (Consultants and Contractors)

Consultants and contractors are generally subject to Expanded Withholding Tax (EWT), which is deducted from professional fees or other business payments. The withholding rate varies but is commonly 10%.

Example:

A consultant is paid ₱50,000 for services rendered. If the applicable EWT rate is 10%, the withholding tax is:

Computation:
₱50,000 × 10% = ₱5,000 withholding tax.

This means the company pays ₱45,000 to the consultant and remits ₱5,000 to the BIR.

FWT (Passive Income)

As mentioned earlier, FTW applies to passive income such as interest, royalties, and dividends. The tax withheld is the final tax due on this income.

Example:

An employee receives ₱15,000 in interest income with a 20% final withholding tax rate.

Computation:

₱15,000 × 20% = ₱3,000 final withholding tax.

This means the withholding agent deducts ₱3,000 and remits it to the BIR; the employee receives ₱12,000 net.

Not all income is subject to withholding tax. Certain exemptions and special cases apply under Philippine law, including:

• Minimum Wage Earners: Employees earning below the taxable income threshold (₱20,833 per month under TRAIN) are fully exempt.
• De Minimis Benefits: Benefits such as rice allowance, uniform allowance, medical cash allowance, and certain transportation allowances may be exempt up to specified limits.
• Retirement Benefits: Lump-sum retirement benefits received in accordance with the law may be tax-exempt.
• Separation Pay: Certain separation pay or termination benefits may qualify for exemption depending on the circumstances.

TRAIN Law: Key Changes for HR and Employees

Back then, personal income tax rates were based on a taxpayer’s civil status (whether single, married, or head of the family) and the number of dependents claimed. The TRAIN Law, introduced in 2018 during the Duterte administration, changed all this.

According to an article published on P&A Grant Thornton, the TRAIN law lowered personal income tax rates, removed personal exemptions, and increased excise taxes on items like fuel, tobacco, and sweetened drinks. The money from these taxes helps fund infrastructure projects and social programs.

While lowering income taxes gave many Filipinos more take-home pay, higher prices for fuel and goods offset these benefits. For example, fuel excise taxes raised transportation costs, affecting jobs and the cost of living. The sugar tax aimed to encourage healthier choices but didn’t reduce consumption as much as expected. Overall, TRAIN made taxes more straightforward but also brought challenges like inflation and higher daily expenses for many households.

Are Philippine Tax Rates Higher Than In Other Countries?

Tax rates in the Philippines are generally moderate compared to some of its neighbors in Southeast Asia. 

For example, Singapore offers a lower top personal income tax rate of 24% and a corporate tax rate of 17%, making it appealing to multinational corporations and high-income individuals. Malaysia’s rates are somewhat higher, with personal income tax up to 30% and a corporate tax rate of 24%, but extensive tax reliefs soften the burden for many taxpayers.

However, compared to Singapore’s business-friendly incentives and Malaysia’s tiered tax benefits for SMEs, the Philippines may have fewer tax breaks, which businesses and individuals should consider when planning financially in the ASEAN region.

Here are some of the most frequent mistakes employers and withholding agents make when handling withholding tax:

• Incorrect Application of Tax Rates: Each type of worker has different withholding tax rules. For example, regular employees are subject to WTC, while consultants usually fall under EWT. Using the wrong rates can lead to inaccurate tax deductions, causing compliance issues and possible penalties.
• Late Remittance to the BIR: Withholding taxes deducted from employees or payees must be promptly remitted to the Bureau of Internal Revenue (BIR). Delays in remittance can result in the imposition of penalties and interest charges.
• Failure to File Required Reports: Employers and withholding agents are required to file certain tax forms regularly, such as the monthly remittance return (BIR Form 2316) for withholding tax on compensation. When you fail to submit these reports on time or provide inaccurate information, you may face penalties and scrutiny from tax authorities.
• Under-withholding of Tax: Employers may sometimes withhold less than the required statutory amount, either due to error or misunderstanding of tax rules. Under-withholding exposes the employer to liabilities, including paying the tax shortfall plus penalties and interest. 

Withholding tax management and compliance can be complex and time-consuming, especially for growing businesses. Sprout Solutions offers easy-to-use HR and payroll solutions that help businesses manage tax calculations, timely payments, and government reporting. This allows employers and HR professionals to focus on growing their business while staying compliant with tax laws.

To make tax management even simpler, you can use Sprout’s Philippine tax calculator to quickly estimate the correct withholding tax based on the latest tax tables and regulations. For more insights on how to make your business fully compliant, explore our HR compliance guide.

And if you’re ready to simplify your tax compliance, talk to one of our experts today to get started!

To calculate withholding tax in the Philippines, subtract mandatory contributions like SSS, PhilHealth, and Pag‑IBIG from an employee’s gross income to get their taxable income. Then, apply the BIR withholding tax table based on their income level and pay period to determine the correct amount to withhold. Learn more about how to compute withholding tax Philippines.