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TaxesWhat is the Meaning of Withholding Tax in the Philippines

May 8, 2025
Home » What is the Meaning of Withholding Tax in the Philippines

Withholding tax is an efficient way for the Philippine government to track and collect income tax. A portion of income is deducted by the payer, known as the withholding agent, and sent directly to the Bureau of Internal Revenue (BIR) on behalf of the recipient. This system simplifies tax collection by shifting the responsibility to employers, businesses, and other entities.

It covers various types of income (not just from a business’s income or an employee’s salary), and understanding it is essential for employees, freelancers, and businesses. Below, we explain the basics.

Types of Withholding Tax

There are three main types of withholding tax in the Philippines:

  • Withholding Tax on Compensation (WTC): Deducted from employees’ salaries, bonuses, and allowances (excluding exempt benefits) based on graduated income tax rates. Employers report this on BIR Form 2316, provided to employees annually.
  • Expanded Withholding Tax (EWT): Applies to payments like professional fees, rentals, or services (e.g., 1% for goods, 2% for services, 5% for rentals). Recipients receive BIR Form 2307 to claim tax credits.
  • Final Withholding Tax (FWT): The final tax on passive income, such as interest (20% on bank deposits) or payments to non-resident foreign corporations (25%). It’s not creditable against other taxes.

Even withholding taxes of the same type may have different rules and rates (depending on their income source and amount). Consult a tax expert for guidance.

Who Are Withholding Agents?

Withholding agents are responsible for deducting and remitting taxes to the BIR. They include:

  • Employers, who withhold taxes from employees’ salaries.
  • Businesses and corporations, withhold taxes on payments to suppliers, contractors, or professionals.
  • E-Marketplace Operators (e.g., Shopee, Lazada), who act as withholding agents for sellers on their platform earning 500,000.00 pesos annually or more because of RR 16-2023.
  • DFSPs (e.g., GCash, PayMaya), are also liable because of RR 16-2023. They withhold taxes from transactions done on their system.
  • Banks and financial institutions, withhold taxes on interest income or dividends.
  • Government agencies, withhold taxes on payments to suppliers or contractors.

Certain businesses, known as Top Withholding Agents (TWAs), have additional responsibilities. TWAs are identified by the BIR based on criteria like gross sales or receipts exceeding PHP 12 million annually and are required to withhold taxes on a broader range of transactions.

Exemptions from Withholding Tax

Certain incomes can be exempt depending on their source. Some compensations, benefits, investments, and other items may be exempt from withholding taxes.

Individuals and entities exempt include:

  • People with an annual gross income of PHP 250,000 or less (e.g., low-income freelancers or self-employed individuals)
  • Employees earning below the taxable threshold 
  • Government agencies 
  • tax-exempt organizations (e.g., registered non-stock, non-profit corporations)
  • Foreign governments or international organizations under tax treaties

Check the BIR website for the complete list.

Compliance Responsibilities

Withholding agents must file taxes using BIR forms like 0619-E (EWT) and 1601-C (WTC) by set deadlines. If you work under a withholding agent, they are typically responsible for deducting and remitting withholding taxes on your income to the BIR. 

For freelancers and self-employed individuals with annual gross income exceeding PHP 250,000, they must handle their own withholding tax filings. They should obtain BIR Form 2307 from payers to claim tax credits when submitting their annual income tax return (BIR Form 1701).

Tax rates depend on the income’s source and amount. WTC uses graduated rates, EWT ranges from 1%–15%, and FWT has fixed rates (e.g., 20% on interest). Failure to comply can result in fines, imprisonment, or disallowed expense deductions.

Key Takeaways

Withholding tax can be tricky due to varying rules and rates. Knowing your tax category, exemptions, and obligations is crucial. This is a guide for understanding what a withholding tax is, but for specific advice, we recommend booking a tax consultation service.

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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Withholding tax is an efficient way for the Philippine government to track and collect income tax. A portion of income is deducted by the payer, known as the withholding agent, and sent directly to the Bureau of Internal Revenue (BIR) on behalf of the recipient. This system simplifies tax collection by shifting the responsibility to employers, businesses, and other entities.

It covers various types of income (not just from a business’s income or an employee’s salary), and understanding it is essential for employees, freelancers, and businesses. Below, we explain the basics.

Types of Withholding Tax

There are three main types of withholding tax in the Philippines:

  • Withholding Tax on Compensation (WTC): Deducted from employees’ salaries, bonuses, and allowances (excluding exempt benefits) based on graduated income tax rates. Employers report this on BIR Form 2316, provided to employees annually.
  • Expanded Withholding Tax (EWT): Applies to payments like professional fees, rentals, or services (e.g., 1% for goods, 2% for services, 5% for rentals). Recipients receive BIR Form 2307 to claim tax credits.
  • Final Withholding Tax (FWT): The final tax on passive income, such as interest (20% on bank deposits) or payments to non-resident foreign corporations (25%). It’s not creditable against other taxes.

Even withholding taxes of the same type may have different rules and rates (depending on their income source and amount). Consult a tax expert for guidance.

Who Are Withholding Agents?

Withholding agents are responsible for deducting and remitting taxes to the BIR. They include:

  • Employers, who withhold taxes from employees’ salaries.
  • Businesses and corporations, withhold taxes on payments to suppliers, contractors, or professionals.
  • E-Marketplace Operators (e.g., Shopee, Lazada), who act as withholding agents for sellers on their platform earning 500,000.00 pesos annually or more because of RR 16-2023.
  • DFSPs (e.g., GCash, PayMaya), are also liable because of RR 16-2023. They withhold taxes from transactions done on their system.
  • Banks and financial institutions, withhold taxes on interest income or dividends.
  • Government agencies, withhold taxes on payments to suppliers or contractors.

Certain businesses, known as Top Withholding Agents (TWAs), have additional responsibilities. TWAs are identified by the BIR based on criteria like gross sales or receipts exceeding PHP 12 million annually and are required to withhold taxes on a broader range of transactions.

Exemptions from Withholding Tax

Certain incomes can be exempt depending on their source. Some compensations, benefits, investments, and other items may be exempt from withholding taxes.

Individuals and entities exempt include:

  • People with an annual gross income of PHP 250,000 or less (e.g., low-income freelancers or self-employed individuals)
  • Employees earning below the taxable threshold 
  • Government agencies 
  • tax-exempt organizations (e.g., registered non-stock, non-profit corporations)
  • Foreign governments or international organizations under tax treaties

Check the BIR website for the complete list.

Compliance Responsibilities

Withholding agents must file taxes using BIR forms like 0619-E (EWT) and 1601-C (WTC) by set deadlines. If you work under a withholding agent, they are typically responsible for deducting and remitting withholding taxes on your income to the BIR. 

For freelancers and self-employed individuals with annual gross income exceeding PHP 250,000, they must handle their own withholding tax filings. They should obtain BIR Form 2307 from payers to claim tax credits when submitting their annual income tax return (BIR Form 1701).

Tax rates depend on the income’s source and amount. WTC uses graduated rates, EWT ranges from 1%–15%, and FWT has fixed rates (e.g., 20% on interest). Failure to comply can result in fines, imprisonment, or disallowed expense deductions.

Key Takeaways

Withholding tax can be tricky due to varying rules and rates. Knowing your tax category, exemptions, and obligations is crucial. This is a guide for understanding what a withholding tax is, but for specific advice, we recommend booking a tax consultation service.

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.