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TaxesHow to Compute Compensation Withholding Tax in 4 Steps (with Sample Computations)

May 8, 2025
Home » How to Compute Compensation Withholding Tax in 4 Steps (with Sample Computations)

In the Philippines, employers are required to withhold taxes on employees’ compensation income, as mandated by the Bureau of Internal Revenue (BIR) under the National Internal Revenue Code. Compensation withholding tax is deducted from an employee’s salary and remitted to the BIR. This guide explains the process of computing withholding tax, giving you an easy step-by-step guide.

Step 1: Determine the Employee’s Taxable Income

Taxable income includes basic salary, allowances, bonuses, and other compensation, minus non-taxable benefits and deductions. Non-taxable benefits include contributions to SSS (Social Security System), PhilHealth, Pag-IBIG, and de minimis benefits (e.g., small-value benefits like rice subsidies up to a certain limit). The 13th-month pay and other benefits up to ₱90,000 annually are also exempt from tax.

Example 1: Maria, a single employee, earns a monthly salary of ₱30,000. She receives a ₱2,000 transportation allowance (taxable) and contributes ₱1,800 to SSS, ₱800 to PhilHealth, and ₱100 to Pag-IBIG. Her taxable income is calculated as follows:

  • Gross compensation: ₱30,000 (salary) + ₱2,000 (allowance) = ₱32,000
  • Less non-taxable deductions: ₱1,800 (SSS) + ₱800 (PhilHealth) + ₱100 (Pag-IBIG) = ₱2,700
  • Taxable income: ₱32,000 – ₱2,700 = ₱29,300

Step 2: Apply the BIR Compensation Withholding Tax Table

The BIR provides a graduated tax table (updated under the TRAIN Law, Republic Act No. 10963) to determine the withholding tax. 

Remember that (as seen indicated in the table) under the TRAIN Law, employees with annual taxable income of PHP 250,000 or less are exempt from withholding tax.

Using the table above for our example, we see the monthly tax table for a single employee (no qualified dependents) includes:

  • ₱0 to ₱20,833: 0%
  • ₱20,833 to ₱33,333: 15% of excess over ₱20,833
  • ₱33,333 to ₱66,667: ₱1,875 + 20% of excess over ₱33,333
  • ₱66,667 to ₱166,667: ₱8,541.67 + 25% of excess over ₱66,667
  • ₱166,667 to ₱666,667: ₱33,541.67 + 30% of excess over ₱166,667
  • Over ₱666,667: ₱183,541.67 + 35% of excess over ₱666,667

Example 2: Using Maria’s taxable income of ₱29,300 per month, we apply the monthly tax table:

  • This falls in the ₱20,833–₱33,333 bracket: 15% of excess over ₱20,833
  • Excess: ₱29,300 – ₱20,833 = ₱8,467
  • Tax: ₱8,467 × 15% = ₱1,270.05
  • Monthly withholding tax: ₱1,270 (rounded to the nearest peso, per BIR practice)

Step 3: Account for Year-End Adjustments

Year-end adjustments correct withholding taxes to reflect changes in an employee’s income, such as increases from a large bonus or a higher-paying job. Depending on circumstances, like switching jobs, the responsibility for filing withholding taxes may fall to the new employer or the employee.

For complex year-end adjustments, we recommend consulting with a tax professional to ensure you file your taxes correctly.

Example 3: Juan, a married employee with two qualified dependents, earns ₱30,000 monthly (₱360,000 annually) and pays ₱3,000 in mandatory contributions (SSS, PhilHealth, Pag-IBIG). Mid-year, he receives a ₱50,000 bonus. His taxable income is:

  • Monthly: ₱30,000 – ₱3,000 = ₱27,000
  • Annual (without bonus): ₱27,000 × 12 = ₱324,000
  • With bonus: ₱324,000 + ₱50,000 = ₱374,000
  • Tax per BIR table (₱250,000–₱400,000 bracket): ₱15,000 + 20% of (₱374,000 – ₱250,000) = ₱15,000 + ₱24,800 = ₱39,800 annually.
  • Monthly withholding (pre-adjustment, based on ₱324,000): ~₱2,500 × 12 = ₱30,000.
  • Year-end adjustment: ₱39,800 – ₱30,000 = ₱9,800 additional tax to be withheld.

Step 4: Remit the Withholding Tax to the BIR

Employers must remit the withheld tax to the BIR using Form 1601-C, typically within 10 days after the end of the month (or 15 days for electronic filers). Accurate record-keeping is essential to ensure compliance.

Example 4: Suppose a company has 10 employees like Maria, each with a monthly withholding tax of ₱1,270. The total tax to remit is:

  • ₱1,270 × 10 = ₱12,700 The employer files Form 1601-C and pays ₱12,700 to an authorized bank or BIR office.

Key Notes

  • This guide is accurate as of 2025. Always verify the latest BIR tax tables and regulations, as rates or exemptions may change. 
  • Use BIR’s withholding tax calculator or consult a tax professional for complex cases (e.g., employees with multiple income sources).
  • Non-compliance with withholding tax rules may result in penalties.

By following these steps, employers can accurately compute and remit compensation withholding tax, ensuring compliance with Philippine tax laws. For businesses with complex payroll needs, we recommend partnering with a professional payroll outsourcing service to ensure full compliance with legal requirements.

Do You Need to Check if Your Business is Compliant? Find Help Here.

BusinessRegistrationPhilippines.com offers legal and accounting services to simplify tax compliance. Outsourcing many of your bookkeeping, payroll, and other accounting tasks to us is often more cost-effective than expanding your in-house team. Reach out today to schedule an initial consultation with one of our experts. 

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What is the Meaning of Withholding Tax in the Philippines

In the Philippines, employers are required to withhold taxes on employees’ compensation income, as mandated by the Bureau of Internal Revenue (BIR) under the National Internal Revenue Code. Compensation withholding tax is deducted from an employee’s salary and remitted to the BIR. This guide explains the process of computing withholding tax, giving you an easy step-by-step guide.

Step 1: Determine the Employee’s Taxable Income

Taxable income includes basic salary, allowances, bonuses, and other compensation, minus non-taxable benefits and deductions. Non-taxable benefits include contributions to SSS (Social Security System), PhilHealth, Pag-IBIG, and de minimis benefits (e.g., small-value benefits like rice subsidies up to a certain limit). The 13th-month pay and other benefits up to ₱90,000 annually are also exempt from tax.

Example 1: Maria, a single employee, earns a monthly salary of ₱30,000. She receives a ₱2,000 transportation allowance (taxable) and contributes ₱1,800 to SSS, ₱800 to PhilHealth, and ₱100 to Pag-IBIG. Her taxable income is calculated as follows:

  • Gross compensation: ₱30,000 (salary) + ₱2,000 (allowance) = ₱32,000
  • Less non-taxable deductions: ₱1,800 (SSS) + ₱800 (PhilHealth) + ₱100 (Pag-IBIG) = ₱2,700
  • Taxable income: ₱32,000 – ₱2,700 = ₱29,300

Step 2: Apply the BIR Compensation Withholding Tax Table

The BIR provides a graduated tax table (updated under the TRAIN Law, Republic Act No. 10963) to determine the withholding tax. 

Remember that (as seen indicated in the table) under the TRAIN Law, employees with annual taxable income of PHP 250,000 or less are exempt from withholding tax.

Using the table above for our example, we see the monthly tax table for a single employee (no qualified dependents) includes:

  • ₱0 to ₱20,833: 0%
  • ₱20,833 to ₱33,333: 15% of excess over ₱20,833
  • ₱33,333 to ₱66,667: ₱1,875 + 20% of excess over ₱33,333
  • ₱66,667 to ₱166,667: ₱8,541.67 + 25% of excess over ₱66,667
  • ₱166,667 to ₱666,667: ₱33,541.67 + 30% of excess over ₱166,667
  • Over ₱666,667: ₱183,541.67 + 35% of excess over ₱666,667

Example 2: Using Maria’s taxable income of ₱29,300 per month, we apply the monthly tax table:

  • This falls in the ₱20,833–₱33,333 bracket: 15% of excess over ₱20,833
  • Excess: ₱29,300 – ₱20,833 = ₱8,467
  • Tax: ₱8,467 × 15% = ₱1,270.05
  • Monthly withholding tax: ₱1,270 (rounded to the nearest peso, per BIR practice)

Step 3: Account for Year-End Adjustments

Year-end adjustments correct withholding taxes to reflect changes in an employee’s income, such as increases from a large bonus or a higher-paying job. Depending on circumstances, like switching jobs, the responsibility for filing withholding taxes may fall to the new employer or the employee.

For complex year-end adjustments, we recommend consulting with a tax professional to ensure you file your taxes correctly.

Example 3: Juan, a married employee with two qualified dependents, earns ₱30,000 monthly (₱360,000 annually) and pays ₱3,000 in mandatory contributions (SSS, PhilHealth, Pag-IBIG). Mid-year, he receives a ₱50,000 bonus. His taxable income is:

  • Monthly: ₱30,000 – ₱3,000 = ₱27,000
  • Annual (without bonus): ₱27,000 × 12 = ₱324,000
  • With bonus: ₱324,000 + ₱50,000 = ₱374,000
  • Tax per BIR table (₱250,000–₱400,000 bracket): ₱15,000 + 20% of (₱374,000 – ₱250,000) = ₱15,000 + ₱24,800 = ₱39,800 annually.
  • Monthly withholding (pre-adjustment, based on ₱324,000): ~₱2,500 × 12 = ₱30,000.
  • Year-end adjustment: ₱39,800 – ₱30,000 = ₱9,800 additional tax to be withheld.

Step 4: Remit the Withholding Tax to the BIR

Employers must remit the withheld tax to the BIR using Form 1601-C, typically within 10 days after the end of the month (or 15 days for electronic filers). Accurate record-keeping is essential to ensure compliance.

Example 4: Suppose a company has 10 employees like Maria, each with a monthly withholding tax of ₱1,270. The total tax to remit is:

  • ₱1,270 × 10 = ₱12,700 The employer files Form 1601-C and pays ₱12,700 to an authorized bank or BIR office.

Key Notes

  • This guide is accurate as of 2025. Always verify the latest BIR tax tables and regulations, as rates or exemptions may change. 
  • Use BIR’s withholding tax calculator or consult a tax professional for complex cases (e.g., employees with multiple income sources).
  • Non-compliance with withholding tax rules may result in penalties.

By following these steps, employers can accurately compute and remit compensation withholding tax, ensuring compliance with Philippine tax laws. For businesses with complex payroll needs, we recommend partnering with a professional payroll outsourcing service to ensure full compliance with legal requirements.

Do You Need to Check if Your Business is Compliant? Find Help Here.

BusinessRegistrationPhilippines.com offers legal and accounting services to simplify tax compliance. Outsourcing many of your bookkeeping, payroll, and other accounting tasks to us is often more cost-effective than expanding your in-house team. Reach out today to schedule an initial consultation with one of our experts.