The end of the calendar year is near and during the year-end, companies with employees will perform tax annualization to determine the final income tax due to be reported to the BIR. It is also the time where companies determine if there is a tax refund applicable to certain employees.
What is Tax Annualization?
Tax Annualization is the process of summarizing all taxable income of the employee from January to December of the calendar year or the YTD (year-to-date) and compute the applicable tax due based on the BIR annual tax table.
Why Tax Annualization is Needed?
During the regular payroll run weekly/monthly/semi-monthly payroll, the tax is normally computed based on the Withholding Tax table. These taxes are withholding taxes and not yet the income tax of the employee. You can think of it as a prepayment of a portion of the year-end income tax. Oftentimes, the withholding tax deducted from each payslip is higher or lower compared to the Income Tax Due of the employee based on the annual tax table.
During tax annualization, it will be determined if the employee should receive a tax refund or not.
When to Annualize Tax?
Tax Annualization is done every end of the year. It can be after or during the last payroll for the calendar year.
It is also performed during the computation of the employees last pay in case the employee was separated from the company during the calendar year.
Income Tax Table for Annual Tax Computation
The following is the income tax table for computing income taxes of individual tax payers at the time of this writing. The tax table may be different depending on what year you are reading this article. We will use this income tax table later in our later example.
| Bracket | From | To | Fix Tax | Rate on Excess |
|---|---|---|---|---|
| 1 | 0 | 250,000 | 0 | 0 |
| 2 | 250,000 | 400,000 | 0 | 15% |
| 3 | 400,000 | 800,000 | 22,500 | 20% |
| 4 | 800,000 | 2,000,000 | 102,500 | 25% |
| 5 | 2,000,000 | 8,000,000 | 402,500 | 30% |
| 6 | 8,000,000 | and above | 2,202,500 | 35% |
How to Annualize Tax in the Philippines?
Here is a guide on how you can annualize or compute your employees income taxes.
- Prepare an annual summary of your employees Earnings and Deductions for the entire year.
- Total the amount of Taxable and Non-Taxable Income for the entire year. Example of Non-Taxable Income are the following
- Deminimis Benefits (please be mindful on the non-taxable limit of each earning classified as Deminimis Benefits)
- 13th Month Pay and Other Benefits (maximum of 90,000. anything in excess is Taxable)
- Total the amount of SSS, PHIC and HDMF contributions deducted from the employee (employee share only) during the year. From now on we will refer to this number as the Total Contributions.
- Total the amount of Withholding Tax Compensation deducted from the employee during the year.
- Subtract the Total Taxable Income with the Total Contributions to compute the Net Taxable Compensation Income.
- Based on the employees Net Taxable Compensation Income, check which tax range it falls in the Income Tax Table above. For example if the Net Taxable Compensation Income is 500,000, you will use Bracket 3 of the income tax table since the Net Taxable Compensation Income is in between 400,000 and 800,000.
- Use this formula to compute the Income Tax Due
- Income Tax = ((Net Taxable Compensation Income – From) x Rate) + Fix
- Subtract the Total Withholding Tax in item 4 from the computed Income Tax Due in item 7. If the difference is a positive number, it means there is remaining tax due to be deducted from the employee’s salary. If it’s a negative, it means that the employee is entitled for a tax refund.
How to Annualize Tax Using MPM Payroll?
In MPM Payroll, payroll tax annualization can be performed in any payroll period simply by clicking Options -> Tax Computation -> Annualize.
How to Report the Employees Income Tax to the BIR?
The summary of the YTD (year-to-date) earnings and deductions of each employee will be reported to the BIR via the following
- Alphalist of Employees submitted as attachment to BIR Form 1604C – Annual Information Return of Income Taxes Withheld on Compensation
- BIR Form 2316 – Certificate of Compensation Tax Withheld
These reports can also be already prepared automatically using MPM Payroll. If you need to easier way to compute your payroll and taxes as well as easy way to prepare your government reports, you can try our MPM Payroll Software which is free for 30 days.
Is Tax Refund Avoidable?
The short answer is yes. There are several methods to avoid tax refund during your last payroll of the year. If the employees salary is fixed every month (no variables like OT, tardy, UT or absences), you can easily project or forecast the one year income of the employee thus you can compute the Income Tax ahead of time and distribute the tax deductions monthly. On employees with variable income, you can avoid or minimize the tax refunds on year end by annualizing the YTD early (October is a good start) then annualize every payroll run and stop the WTAX deduction temporarily if there is an over deductions or refunds. This method may become tedious if done manually but will only take a click via MPM Payroll Software.
How to Handle Over remittances of Withholding Tax?
There are times where you might have deducted and paid total withholding tax compensation, via BIR Form 1601C, that is more than the total income tax due after you annualized. You can use the over-remitted amount as tax credits for your BIR Form 1601C for the first month of the following year provided you reflected the over remittance of withholding tax in the annual information summary BIR Form 1604C.
