Withholding BIR taxes due from employee compensation: (An Overview)

Are you planning to put up a business, or have started running one recently? Basically, you must understand that the law puts a huge responsibility on you as a Withholding Agent for taxes due to the Bureau of Internal Revenue (BIR).

After all, the compensation that you pay to your employees are generally subject to withholding taxes that must be remitted to the BIR. Costly fines and penalties — even imprisonment in extreme cases — await if you are negligent in your role as a Withholding Agent.

How should you prevent this potential headache? First, understand and have a clear overview of how withholding taxes on compensation are processed. Read this article to do just that. We will also introduce you to the following BIR forms along the way:

BIR Form 1601-C: Monthly Remittance Return of Income Taxes Withheld on Compensation
BIR Form 1604-C: Annual Information Return of Income Taxes Withheld on Compensation
Alphalist of Employees (an attachment to BIR Form 1604-C)
BIR Form 2316: Certificate of Compensation Payment or Income Tax Withheld

What does it mean to be a Withholding Agent?

A Withholding Agent is any person or entity who has control of the payment that is subject to withholding tax.

As a business, you are tasked to collect taxes on behalf of BIR. But how do you do this? You automatically withhold (subtract and temporarily keep) the taxes due when your business makes certain payments. Afterwards, you remit those collections to the BIR.

Who are required by Philippine law to serve as Withholding Agents?

There are three classifications:

- Individuals that engage in business or practice a profession
- Non-individuals such as corporations, associations, partnerships, and cooperatives
- Government agencies and instrumentalities

What types of withholding taxes am I obliged to collect?

Businesses are required to collect three types of withholding taxes.

1. Withholding Tax on Compensation

First, the business sets aside remuneration for the services rendered by its employees. Deduct and withhold the applicable taxes even before the employees receive their pay.

2. Expanded Withholding Tax

These are taxes that you withhold for specific income payments. Examples are:

- Professional fees, usually outside of employer-employee relationships.
- Rental income for properties used by your business.
- Income payments to certain contractors (e.g., general engineering, transportation, warehousing)

The business as a payee can credit the taxes withheld here against its income tax due for that period.

3. Final Withholding Tax

This is also applied to certain income payments. However, the taxes withheld are not creditable against the income tax due of the receiver of the income. This includes, but is not limited to, dividends, royalties, and prizes.

Withholding Tax on Compensation: How do I go about it?

Here’s a general overview on what you need to do as an employer when it comes to your role as a Withholding Agent for compensation tax.

1. Organize your payroll computation so that withholding taxes are clearly shown per pay period.

- You will need a reputable accountant for this.
- Use a spreadsheet at the very least. Input the full list of your employees and specify the components of their monthly salaries and benefits.
- Important! Each employee must be classified as either a Minimum Wage Earner (MWE) or non-MWE. MWEs are employees who earn P20,833 per month or below.
- MWEs are exempt from income tax. The same applies to their holiday pay, overtime pay, night differential pay, and hazard pay. However, additional compensation in excess of a certain amount is taxable. Refer to your accountant for this.
- Check out the BIR’s withholding tax calculator. You can pattern your spreadsheet after this. Or, if you prefer to download free or paid payroll spreadsheet templates (scan for malware first), check if your accountant’s computation will tally with the results of the BIR calculator.

2. Withhold the proper tax on compensation for every payroll.

- 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.
- Keep and update records. You must be able to generate monthly reports on the amount of taxes withhold.

3. Remit to the BIR the taxes you’ve withheld. Do this monthly.

- Use BIR Form 1601-C: Monthly Remittance Return of Income Taxes Withheld on Compensation
- This form shows the total amount of taxes that you’ve withheld from all employees for the month.
- Completely fill out and submit this form to the BIR on the 10th day of the following month. For the month of December, the withheld taxes must be remitted by the 25th of the following month – January.
- Include MWS in this report, even though they are exempt from withholding taxes.

4. Submit to the BIR the summary of taxes you’ve withheld from employees for the calendar year.

- Use BIR Form 1604-C: Annual Information Return of Income Taxes Withheld on Compensation
- File this form before January 31 of the following year.
- The accomplished form serves as your annual report to the BIR. It confirms the total amount of income tax that you’ve withheld from your employees for the tax year.
- Attachments required for BIR Form 1604-C are: Alphalist of Employees and Alphalist of MWEs. The BIR provides an app that you can download and install to generate such lists.
- Declare and certify each name on the Alphalist using BIR Form 2316. .

5. Issue BIR Form 2316 to your employees.

- This form is the Certificate of Compensation Payment or Income Tax Withheld
- It shows your employees’ gross income and the taxes that you’ve withheld for the whole calendar year.
- Fill out and issue individual forms to all of your employees by the 31st of January of the following year.
- If there’s a termination of employment, this form must be issued on the last day that the payment of wages was made.
- The more employees that you have, the more tedious this task can become.

In Hurey’s previous blog, we discussed in detail what BIR Form 2316 is, and the steps involved in its preparation and submission.

Getting a headache, already?

To remind you, this is just an overview. We have not touched on the nitty-gritty of the subject, like how to actually remit the withheld taxes, and the yearend adjustments and refunds if too much or too little taxes were withheld. Most of all, we have not discussed the legal technicalities, as well as the remedies and penalties involved when firms commit errors in their role as a Withholding Agent.

Let Hurey deal with your withholding tax troubles

Why build everything from scratch when there’s a ready-made solution available for you? Save yourself from all these troubles and consider getting Hurey, the Philippines’ most scalable HR and Payroll app.

With Hurey, Filipino firms can fulfill their role as a Withholding Agent without breaking a sweat. Simply input all employee data and complete the initial setup required, and payroll runs become automatic!

The cloud-based app then generates filled-out BIR Forms 2316, 1601-C, 1604-C, as well as the attached Alphalists — all with just a few clicks on a button. Just imagine the precious work hours that this will save you!

What’s more, Hurey’s dedicated team works diligently in the background, keeping tab on the latest developments that concern its cloud-based app. BIR forms, tax computations, and such are automatically updated as needed.

Don’t waste your time and get your new business running ASAP! Book a free Hurey demo now!