In continuation of our ongoing series, this blog delves into the critical role that Payroll Annualization plays in ensuring precise and timely tax payments for both employers and employees. Learn how this process calculates annual income tax liability based on total compensation earned throughout the year, transcending the limitations of monthly or bi-monthly pay structures.
Understanding the Significance of Payroll Annualization
Payroll Annualization offers several key benefits, including:
- Reduced withholding taxes: By spreading out tax payments over the entire year, employees can avoid large lump-sum deductions at the end of the year, potentially leading to a larger tax refund.
- Simplified tax administration: Payroll Annualization streamlines the tax filing process for both employers and employees, minimizing errors and ensuring compliance with tax regulations.
- Improved cash flow management: Employers can better manage their cash flow by distributing tax payments evenly throughout the year, rather than facing a significant financial burden at the end of the tax period.
Eligibility Criteria for Payroll Annualization
Payroll annualization is not applicable to all employees. To qualify for payroll annualization, an employee must meet the following criteria:
- Earned a total annual compensation of at least P250,001. This includes salary, wages, bonuses, commissions, and other taxable income.
- Received at least two compensation payments: This indicates that the employee has had multiple employers within the year.
- Not receiving any other forms of tax exemptions or deductions: If an employee is entitled to other tax benefits, payroll annualization may not be applicable.
BIR Forms Table
The Bureau of Internal Revenue (BIR) has designated specific forms for payroll annualization:
| BIR Form | Description |
| BIR Form 2316 | Certificate of Compensation Payment/ Tax Withheld |
| BIR Form 0605 | Payment form |
| BIR Form 0619-E | Monthly Remittance Form of Creditable Income Taxes Withheld (Expanded) |
| BIR Form 0619-F | Monthly Remittance Form of Final Income Taxes Withheld |
Important dates for employees and employers for Annualization according to BIR deadline
| Documents | Deadlines | Remarks |
| BIR 2316 FORM | On or before January 31 of the following year | Employers must provide their employees the copy of the BIR 2316 form |
| 1700 Filing | On or before 15 April of the following year | Employees with multiple employer within the year are required to file their own 1700 to BIR |
| Alphalist Dat File | on or before January 31 of the following year | Employers must submit the DAT file to e-submission |
| BIR 2316 Filing | On or before 28 February of the following year | Employers filing of BIR 2316 to Bureau of Internal Revenue (BIR). |
Tax Slab for Payroll Annualization
The current tax slab structure in the Philippines is as follows:
| Annual Income | Tax Rate (Applicable from Year 2023 Onwards) |
| P250,000 and below | None (0%) |
| Above P250,000 to P400,000 | 15% of excess over P250,000 |
| Above P400,000 to P800,000 | P22,500 + 20% of excess over P400,000 |
| Above P800,000 to P2,000,000 | P102,500 + 25% of excess over P800,000 |
| Above P2,000,000 to P8,000,000 | P402,500 + 30% of excess over P2,000,000 |
| Above P8,000,000 | P2.2025 million + 35% of excess over P8 million |
*Source: BIR
Step-by-Step Guide to Payroll Tax Annualization
Here’s a simple way to understand how payroll annualization is computed:
- Get the total taxable income for the previous months / periods. NOTE: De Minimis Benefits (please be mindful on the non-taxable limit of each earning classified as De Minimis Benefits) and 13th Month Pay and Other Benefits (maximum of 90,000. anything in excess is Taxable)
- Get the total taxable income for the current period and statutory deductions being processed
- Forecast the total taxable income for the remaining months of the year
- Include the BIR 2316 from previous employer (if applicable)
- Compute for the total withholding tax due for the year
- Subtract the total tax withheld from the previous month and BIR 2316 from previous employer (if applicable) to get the remaining tax due for the month
- Divide the remaining tax due to the number of remaining payroll periods within the year
|
STEP |
SHORT NAME |
AMOUNT |
| 1. Taxable income from JAN TO SEPT | GROSS_PAY_YTD | 217,685.65 |
| 1.1 Total Bonus Received from JAN TO SEPT | BONUS_YTD | 65,000.00 |
| 1.2 SSS, MPF EE, PHILHEALTH & HDMF (JAN to SEPT ) | PREM_YTD | -10,200.00 |
| 2. Current taxable income (OCT 2023) | GROSS PAY_CUR | 29,933.91 |
| 2.1 SSS, PHIC & HDMF (OCT) | CUR PREM | -2,550.00 |
| 3. Forecasted taxable income (NOV to DEC 2023) | PROJ_INCOME | 165,000.00 |
| 4. PREV EMPLOYER (BIR 2316) | TAXABLE INCOME | 456,503.75 |
| 4.1 PREV EMPLOYER (BIR 2316) | BONUS | 25,851.27 |
| 4.2 PREV EMPLOYER (BIR 2316) | PREV_STAT | -11,423.00 |
| 90K bonus exempt | -90,000.00 | |
| GROSS_INCOME | 845,801.58 | |
| ANNUALIZED (refer to annual tax table) | ANN_TAX_INCOME | 845,801.58 |
| Less | LOW_LIMIT | 800,000.00 |
| Multiply | TAX_RATE | 0.25 |
| Add | FIXED_TAX | 102,500.00 |
| 5. Total Annual Tax due | TOT_TAX | 113,950.40 |
| 6. Total tax withheld from JAN TO SEPT | TAX_DED_TILL DATE | 9,861.55 |
| 6.1 Total tax withheld from PREV EMPLOYER | PREV TAX | 31,516.15 |
| 6.2 Total remaining tax due for the year | BAL_TAX | 72,572.70 |
| 7. Withholding tax for the remaining payroll for the year | Sept to Dec (4 months) | 10,367.53 |
NOTE: Tax Refund, if any, will be processed only during last month of the Current Financial Year (December).
In general, refund applies when:
- Employee has not met the Annualized Tax limit to PHP 250,000
- Newly hired and employee joins in the middle of the year without BIR 2316
- With maternity earnings within the year
Conclusion
Payroll annualization holds a crucial role in the Philippines’ employee taxation system, ensuring that employees meet their tax obligations while mitigating the financial impact of deductions. Employers, by comprehending the process, eligibility criteria, and pertinent BIR forms, can adeptly execute payroll annualization, fostering a more efficient and equitable tax system. The primary objective is to ascertain that deductions align precisely with employees’ tax liabilities, remitting the accurate amounts to the Bureau of Internal Revenue (BIR) – avoiding any excess or shortfall. This approach minimizes the need for issuing tax refunds or burdening employees with sudden, substantial year-end tax deductions. Furthermore, as a responsible employer in the Philippines, strict adherence to relevant tax laws and regulations is imperative to avert potential tax assessments in the future.
