Every year end, employers are reminded to carry out their year-end payroll adjustments for compliance with the existing withholding tax regulations. These adjustments, also called tax annualization, are performed to determine the final income tax due of each employee for all the salary and other supplementary income they received, including those from any previous employer. This also allows the employers to determine if there are any tax refunds applicable to certain employees.
If the annualization results in any excess withholding tax, the employer must credit or refund the excess amount to the employee on or before January 25 of the following year. Otherwise, if it shows that additional taxes must be withheld, the employer must withhold such amounts from the employees, of which they can remit them in advance or charge as a deduction in the succeeding payroll.
Here’s how you can annualize your employees’ income taxes:
- Prepare a summary of your employee’s earnings and deductions for the entire year.
- Compute the total amount of their taxable and non-taxable income.
- Compute the total amount of SSS, PHIC, and HDMF contributions deducted from the employee throughout the year. Use employee share only.
- Compute the total withholding tax deducted from the employee during the year.
- Deduct the total contributions from the total taxable income to compute the Net Taxable Compensation Income.
- Based on the Net Taxable Compensation Income, check which tax range it falls in this table:
| Amount of Taxable Income | Rate | |
| Over | But Not Over | |
| – | 250,000 | 0% |
| 250,000 | 400,000 | 20% of the excess over Php 250,000 |
| 400,000 | 800,000 | Php 30,000 + 25% of the excess over Php 400,000 |
| 800,000 | 2,000,000 | Php 130,000 + 30% of the excess over Php 800,000 |
| 2,000,000 | 8,000,000 | Php 490,000 + 32% of the excess over Php 2 million |
| 8,000,000 | – | Php 2,410,000 + 35% of the excess over Php 8 million |
- Compute the income tax due using the applicable income tax rate.
- Deduct the total withholding tax from the computed income tax due. If the difference is a positive number, there is still a remaining tax due. If it is a negative number, the employee is entitled to a tax refund.
With all the steps and computations, it’s possible to overlook some errors that can might prove to be costly later on. But don’t worry, our professionals are here to assist you on your annualization. Email us now at mpcamaso@mpca.com.ph so we can get started.
