BIR Form 1601-C as Guide for Payroll Computation in the Philippines

Establishing a payroll system can easily become a daunting task, especially if you’re a new entrepreneur who has little or no background in accounting. Our suggestion? Start with looking at BIR Form 1601-C because:

the Bureau of Internal Revenue (BIR) requires businesses to file this form every month.
it needs information that your payroll computation should provide.
it is important to keep the form’s criteria in mind when setting up a payroll system.

In any case, a clear understanding of BIR Form 1601-C will give you a general idea of what you should look out for in a payroll system.

Generally, you have three options as to how to proceed with your payroll. You can:

Develop a payroll system from scratch, in-house.
Hire a professional — most likely an accountant — to establish a worksheet-based system for you.
Purchase a spreadsheet template or a payroll software, depending on what your budget allows.

What is BIR Form 1601-C?

Did you know that businesses in the Philippines are obligated by law to act as Withholding Agents for the BIR? In fact, costly penalties and even jail time can result if a business is negligent in this aspect.

In a nutshell, what is BIR Form 1601-C?

It is called the “Monthly Remittance Return of Income Taxes Withheld on Compensation.”
When you fill out this form, your business basically answers this question: “In total, how much taxes due from your employees have you collected for the BIR this month?”
Here, you summarize your firm’s payroll computation. No individual names or individual pay data are shown.
You start off by stating the total amount of compensation you’ve paid to your employees for a specific month
You then break its components down into taxable and non-taxable classifications, as determined by Philippine laws.
BIR Form 1601-C should be filed by the tenth day of the next month. However, an exemption is set for the December report — its deadline is set on the 25th day of January on the following year.

Parts of BIR Form 1601-C

Briefly, let us scan the sections of this form to get familiar with its structure and the specific sets of data it requires.

The Heading

The topmost portion of BIR Form 1601-C asks you to indicate:

- The specific month covered
- If you are filing the month’s tax return for the first time, or if you are submitting an amended return
- If you’ve withheld taxes for that month
- The number of sheets attached, if there are any
- The tax code specific to your industry (alphanumeric tax code or ATC)

The heading covers Items 1-5.

Main Sections

Part I- Background Information

Here’s where you’ll input the company’s name, address, contact details, tax identification number (TIN), and other business info. Covers Items 6-13.

Part II- Computation of Tax

The core of BIR Form 1601-C. In this section, you’re essentially making a summary of your firm’s payroll. Moreover, the data you’ll provide will show how you’ve arrived at the total withholding tax figure. Includes Items 14-36.

Part III- Details of Payment

How did you remit the taxes you’ve withheld to the BIR? Provide the related information in Items 37-40.

Part IV- Schedule

Withholding tax corrections from the previous months are indicated here, if there are any.

Deconstructing BIR Form 1601-C

Now that we have a general overview of this BIR form, let us dissect its Part II to reveal key takeaways to guide your payroll computation.

The section starts off with Item 14. What’s the Total Amount of Compensation that you’ve paid all your employees in the given month? From this, we learn the following:

- First, deduct and withhold the applicable taxes even before the employees receive their pay.
- Their pay slip should clearly reflect the deductions made, if there are any.
- Finally, keep and update records. You must be able to generate monthly reports on the amount of taxes withheld.

From the Total Amount of Compensation, you break it down into two: the non-taxable (Item 21) and the taxable (Item 22).

- Your payroll should be able to identify and process all taxable and non-taxable components of employees’ renumerations.

The Total Non-Taxable Compensation (Item 21) is broken down into five groups:

- Statutory Minimum Wage for Minimum Wage Earners or MWEs (Item 15)
- Holiday Pay, Overtime Pay, Night Differential Pay, Hazard Pay for MWEs (Item 16)
- 13th Month Pay and Other Benefits (Item 17)
  De Minimis Benefits (Item 18)
- SSS, GSIS, PHIC, HDMF Contributions & Union Dues- Employees’ Share (Item 19)

Our key takeaways:

- First, is that your payroll must be able to tag employees who are MWEs
- Their Holiday Pay, Overtime Pay, Night Differential Pay, and Hazard Pay are tax exempt. Thus, your payroll system must easily distinguish such items from their Non-MWE counterparts.
- The previous items are dependent on the number of work hours rendered. Your payroll and timesheet must always be in sync.
- The 13th Month Pay and Other Benefits, for the most part, are non-taxable for both MWEs and Non-MWEs. However, your payroll computation must know that any sum received above P90,000 per individual is subject to tax.
- Also, your payroll must itemize the De Minimis Benefits (or benefits with minimal value) as identified by the BIR in their website. Furthermore, your system must be able to identify the ceiling that’s set for each item, so that the proper taxes can be imposed on the excess amount.
- Finally, the mandated deductions listed in Item 19 are also tax exempt. However, your payroll should be able to separate the deductions shouldered by the employees, and not include the employer’s share for the purpose of BIR Form 1601-C.

Due to the Tax Reform for Acceleration and Inclusion Act (TRAIN), the Total Taxable Compensation in Item 22 can be further reduced to arrive at the Net Taxable Compensation in Item 24.

- For Non-MWEs, the first P250,000 of their income for the year are tax-exempt due to the TRAIN law.
- Therefore, your payroll system should be able to set apart the taxable and non-taxable components of the compensation received by Non-MWEs.

Finally, we go to the Total Taxes Withheld (Item 25).

- In summary, your payroll system must accurately identify the taxable components of your employees’ compensation, apply the correct tax rates, and report the total withholding taxes due for every payroll run.

Items 26-30 concern withholding tax adjustments if there were errors in previous months’ calculation or remittance (or both) as well as the penalties involved (if there are any).

- An ideal payroll system, therefore, should allow you to view the original payroll report and its amended versions to easily facilitate and report the proper adjustments.

Congratulations! You have successfully completed our crash course on BIR Form 1601-C. Hopefully, you can now clearly see the depth and scope of your payroll system project. Good luck!

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