What is Payroll Tax Annualization?

This is when an employee’s payroll for the entire year is consolidated and used to calculate for the withholding tax for the year, to find out the remaining tax (or tax refund) that should be paid by the employee. Normally, you want to do this starting in October. So by the time you reach December, you have already deducted the correct tax from the employee.

The general steps are as follows:

1) Add-up the employee’s taxable income already issued to the employee for the year.

Taxable income is the Basic Pay + Overtime Pay + Night Differential Pay + Restday / Holiday Pay + Leave Pay + Other Taxable Income – SSS Contributions – Philhealth Contributions – PAGIBIG Contributions.

2) If it is not yet the end of the year, predict the employee’s taxable income for the rest of the year.

3) #1 + #2 will be the employee’s taxable income for the entire year. Subtract the Tax Exemption from this amount.

As of 2015, the tax exemption table is as follows:
Single or Married: P50,000.00
Single or Married with 1 Dependent: P75, 000.00
Single or Married with 2 Dependents: P100,000.00
Single or Married with 3 Dependents: P125,000.00
Single or Married with 4 or more Dependents: P150,000.00

4) Use the amount determined in #3 and compare it against the annual tax table:

If the amount is more than:

• P0.00: multiply the excess amount by 0.05.
• P10,000.00: multiply the excess amount by 0.10 and add P500.00
• P30,000.00: multiply the excess amount by 0.15 and add P2,500.00
• P70,000.00: multiply the excess amount by 0.20 and add P8,500.00
• P140,000.00: multiply the excess amount by 0.25 and add P22,500.00
• P250,000.00: multiply the excess amount by 0.30 and add P50,000.00
• P500,000.00: multiply the excess amount by 0.32 and add P125,000.00

5) Once you have figured out the tax that must be paid for the entire year, subtract the tax already paid by the employee.

6) Divide the remaining tax to be paid (#5) by the # of remaining payroll periods for the year. This will be the tax that you need to withhold from the employee’s payroll in order to ensure that the proper tax amount is withheld by year-end.

Does your Payroll System let you annualize at anytime? A good and flexible Payroll Software System should let you do this easily and without any hassle.