With the end of the year fast approaching, one of the goals of any company is to ensure that its employees pay the right amount of taxes to the Bureau of Internal Revenue (BIR) – not a single cent over or under. This is to avoid the hassle of having to issue tax refunds, or causing employees inconvenience by suddenly having to deduct huge tax amounts at the end of the year.
BIR’s annual tax table (as of 2020) is as follows:
| Taxable Income | Tax Due |
| Not over P250,000 | 0% |
| Over P250,000 but not over P400,000 | 20% of the excess over P250,000 |
| Over P400,000 but not over P800,000 | P30,000 + 25% of the excess over P400,000 |
| Over P800,000 but not over P2,000,000 | P130,000 + 30% of the excess over P800,000 |
| Over P2,000,000 but not over P8,000,000 | P490,000 + 32% of the excess over P2,000,000 |
| Over P8,000,000 | P2,410,000 + 35% of the excess over P8,000,000 |
When an employee is paid his or her monthly salary, tax is normally calculated based on the BIR’s monthly tax table:
| Taxable Income | Tax Due |
| Not over P20,833 | 0% |
| Over P20,833 but not over P30,332 | 20% of the excess over P20,833 |
| Over P30,332 but not over P6,666 | P2,500 + 25% of the excess over P30,332 |
| Over P66,666 but not over P166,666 | P10,833.33 + 30% of the excess over P66,666 |
| Over P166,666 but not over P666,666 | P40,833.33 + 32% of the excess over P166,666 |
| Over P666,666 | P200,833.33 + 35% of the excess over P666,666 |
The amounts in the BIR monthly tax table are the same as the amounts in the annual tax table but divided by 12 (since there are 12 months in a year).
So if an employee receives a constant salary of P25,000 x 12 months, then the tax being deducted per month (approximately P833.40) will more or less be okay, with no big adjustments needed by the end of the year:
- Tax calculated monthly -> P833.40 x 12 months = P10,000.80
- Total taxable income for the year -> P25,000 x 12 months = P300,000
- Annual tax due based on P300,000 = P10,000
But there are a few instances when an employee’s tax might vary month-to-month, and wherein tax annualization would be necessary:
- Employee gets a raise in the middle of the year (which causes him/her to move to a higher tax bracket)
- Employee has a lot of overtime (which also causes him/her to move temporarily to a higher tax bracket)
- Employee has a lot of absences / tardiness (which might cause him/her to move temporarily to a lower tax bracket)
- Employee was hired in the middle the year with no previous employment
- Employee was hired in the middle of the year with a big jump in compensation from the previous employer
- Employee was hired in the middle of the year and the previous employer issued a tax refund
How to Annualize
Step 1: Get the total taxable income for the previous months / periods
Taxable income includes the employee’s basic pay, overtime pay, holiday pay, restday pay, leave pay, plus allowances that are not considered benefits or de minimis benefits. This does not include employees who are considered minimum wage earners (or MWEs). Benefits (such as 13th month pay) only become taxable if it has already exceeded the tax exempt benefit limit which is currently P90,000 (as of 2020).
Example:
| Month | Basic Pay | OT Pay | Meal Allowance (taxable) | SSS | Philhealth | HDMF / PAGIBIG | Taxable Income | Tax Withheld |
| January | 25, 000 | 5,000 | 1,500 | 800 | 375 | 100 | 30,225 | 1,878.40 |
| February | 25,000 | 3,000 | 1,500 | 800 | 375 | 100 | 28,225 | 1,478.40 |
| March | 25,000 | 4,000 | 1,500 | 800 | 375 | 100 | 29,225 | 1,678.40 |
| April | 25,000 | 3,000 | 1,500 | 800 | 375 | 100 | 28,225 | 1,478.40 |
| May | 25,000 | 0 | 1,500 | 800 | 375 | 100 | 25,225 | 878.40 |
| June | 25,000 | 1,000 | 1,500 | 800 | 375 | 100 | 26,225 | 1,078.40 |
| July | 25,000 | 1,500 | 1,500 | 800 | 375 | 100 | 26,725 | 1,178.40 |
| August | 25,000 | 2,500 | 1,500 | 800 | 375 | 100 | 27,725 | 1,378.40 |
| September | 25,000 | 0 | 1,500 | 800 | 375 | 100 | 25,225 | 878.40 |
| TOTAL | 225,000 | 20,000 | 13,500 | 7,200 | 3,375 | 900 | 247,025 | 11,905.60 |
Step 2: Get the total taxable income for the current period being processed
| Period | Basic Pay | OT Pay | Meal Allowance (taxable) | SSS | Philhealth | HDMF / PAGIBIG | Taxable Income |
| October 15 | 12,500 | 1,000 | 750 | 400 | 187.50 | 50 | 13,612.50 |
Step 3: Predict the total taxable income for the rest of the year
| Period / Month | Basic Pay | OT Pay | Meal Allowance (taxable) | SSS | Philhealth | HDMF / PAGIBIG | Taxable Income |
| October 31 | 12,500 | 0 | 750 | 400 | 187.50 | 50 | 12,612.50 |
| November | 25,000 | 0 | 1,500 | 800 | 375 | 100 | 25,225 |
| December | 25,000 | 0 | 1,500 | 800 | 375 | 100 | 25,225 |
| TOTAL | 62,500 | 0 | 3,750 | 2,000 | 937 | 250 | 63,062.50 |
Step 4: Compute for the total withholding tax due for the year
- Get your total taxable income for the year
- Total Taxable Income = Previous total taxable income + Present total taxable income + Predicted total taxable income
- Total Taxable Income = 247,025.00 + 13,612.50 + 63,062.50
- Total Taxable Income = 323,700.00
- Compute for the total annual tax due
- Total Annual Tax Due = 20% of the excess over P250,000
- Total Annual Tax Due = 20% x (P323,700 – P250,000) (based on the annual tax table below)
- Total Annual Tax Due = P14,740
| Taxable Income | Tax Due |
| Not over P250,000 | 0% |
| Over P250,000 but not over P400,000 | 20% of the excess over P250,000 |
| Over P400,000 but not over P800,000 | P30,000 + 25% of the excess over P400,000 |
| Over P800,000 but not over P2,000,000 | P130,000 + 30% of the excess over P800,000 |
| Over P2,000,000 but not over P8,000,000 | P490,000 + 32% of the excess over P2,000,000 |
| Over P8,000,000 | P2,410,000 + 35% of the excess over P8,000,000 |
Step 5: Subtract the total tax already withheld
Remaining Tax Due = Total Annual Tax Due – Tax Already Withheld
Remaining Tax Due = P14,740 – P11,905.60 = P2,834.40
Step 6: Divide the remaining tax due by the # of remaining periods left
Tax for the current period = Remaining Tax Due / Number of remaining periods left
Tax for the current period = P2,834.40 / 6 periods lefts = P472.40
When to Annualize
Annualization is normally done starting on the “ber” months, which means September. Some even do it all year round (January – December). While some choose to do it near the end of the year (November or even December), one possible drawback is if the employee has to pay a huge amount of tax within a short span of time. For most cases, starting in September or October is a safe bet as there would be enough time to ensure that the amounts balance out in the end without having to issue any tax refunds or deducting huge amounts of tax.
Summary
Tax Annualization is a necessary process that you must go through for your company’s sake, and for your employees’ sake. You want to make sure your employees pay the correct taxes, as that is your responsibility as an employer. After all, you do not want BIR to come breathing down your neck.
While Tax Annualization can be a tedious process, thankfully this is not something you have to do manually. By using smart Payroll Systems such as Everything at Work, these types of computations can be easily automated for you.
If you are still using spreadsheets or outdated systems to manage your payroll for you, it’s probably time that you upgraded now. Click here to inquire more about the Everything at Work System.
