How to Compute Withholding Tax in the Philippines

Every payday, your employer quietly deducts a portion of your salary before it ever reaches your bank account. That deduction is your withholding tax on compensation — and understanding how it is computed can save you from year-end surprises, tax deficiencies, or simply the nagging feeling that you are being charged something you do not understand. This step-by-step guide breaks down exactly how Philippine employers compute your withholding tax, what the current rates are under the TRAIN Law, and how you can verify that your payslip is correct.

What Is Withholding Tax on Compensation?

Withholding tax on compensation is the advance income tax that your employer deducts from your salary or wages every payroll period and remits directly to the Bureau of Internal Revenue (BIR) on your behalf. Think of it as a pay-as-you-earn system: instead of waiting until the end of the year to collect your entire income tax in one lump sum, the government collects it gradually throughout the year through your employer.

This system is governed by the National Internal Revenue Code (NIRC), as significantly amended by the Tax Reform for Acceleration and Inclusion Law — commonly known as the TRAIN Law (Republic Act 10963), which took effect in 2018 and introduced lower income tax rates for most individual taxpayers. The amount withheld is not an extra charge on top of your income. It is a prepayment of your annual income tax liability. At the end of the year, the total amount withheld is credited against whatever income tax you actually owe — if too much was withheld, you get a refund; if too little, you pay the difference.

It is important to distinguish this from expanded withholding tax (EWT), which applies to self-employed individuals, professionals, and certain business transactions. Withholding tax on compensation applies specifically to employees who receive income from an employer-employee relationship. Your employer is legally required to withhold the correct amount and file BIR Form 1601-C every month to remit what was collected.

Who Is Required to Have Tax Withheld?

In the Philippines, virtually every employee receiving compensation income from a Philippine employer is subject to withholding tax — whether you are rank-and-file, supervisory, or managerial. This includes both full-time and part-time employees, probationary employees, and even those on fixed-term contracts, as long as their compensation exceeds the tax-exempt threshold under the TRAIN Law.

Overseas Filipino Workers (OFWs) working and earning income abroad are generally not subject to Philippine withholding tax on their foreign-sourced income — the Philippines taxes its residents on worldwide income, but OFWs are treated as non-resident citizens during their time abroad. However, any locally sourced income they receive (for example, from a part-time local employer) would be subject to withholding in the normal way.

Understanding the TRAIN Law Tax Rates (2023 Onwards)

Effective January 1, 2023, the TRAIN Law's second set of reduced income tax rates took effect. These are the rates your employer must use today when computing your withholding tax. The rates are applied on a graduated basis — meaning different portions of your income are taxed at different rates, not your entire income at one flat rate.

• ₱0 to ₱250,000 annual taxable income — 0% (no income tax)
• Over ₱250,000 to ₱400,000 — 15% on the excess over ₱250,000
• Over ₱400,000 to ₱800,000 — ₱22,500 plus 20% on the excess over ₱400,000
• Over ₱800,000 to ₱2,000,000 — ₱102,500 plus 25% on the excess over ₱800,000
• Over ₱2,000,000 to ₱8,000,000 — ₱402,500 plus 30% on the excess over ₱2,000,000
• Over ₱8,000,000 — ₱2,202,500 plus 35% on the excess over ₱8,000,000

These rates apply to your annualized taxable compensation. Because payroll is processed monthly, semi-monthly, weekly, or daily depending on your employer, the BIR publishes official withholding tax tables for each payroll frequency. These tables convert the annual tax into smaller per-period deductions so employers can apply the correct withholding without manually annualizing every pay cycle. You can ask your HR or payroll team which specific table applies to your payroll setup. For a fast automated result, use the PesoHub Withholding Tax Calculator.

Step 1 — Identify Your Gross Compensation Income

The first step in computing your withholding tax is knowing exactly what counts as taxable gross compensation. This is broader than just your basic salary. Gross compensation includes your basic monthly pay, cost-of-living allowances (COLA) that are not specifically exempted, fixed monthly allowances, commissions, honoraria, and any other taxable benefits you receive as part of your employment arrangement.

Not everything on your payslip is taxable, however. The following items are excluded from gross taxable compensation: mandatory SSS, PhilHealth, and Pag-IBIG contributions; the first ₱90,000 of your 13th month pay and other qualifying bonuses per year; and de minimis benefits within BIR-prescribed limits. Under Revenue Regulations No. 29-2025 (effective January 6, 2026), these include a rice subsidy of up to ₱2,500 per month (or one 50 kg sack of rice worth no more than ₱2,500), a uniform and clothing allowance of up to ₱8,000 per year, a laundry allowance of up to ₱400 per month, actual medical assistance of up to ₱12,000 per year, and employee achievement awards of up to ₱12,000 per year, among others. De minimis limits are separate from the ₱90,000 ceiling on 13th month pay and other benefits. Benefits that exceed their limit may not qualify for the exemption, so ask your employer how any excess is treated.

Step 2 — Subtract Mandatory Government Contributions

Before the BIR tax table is applied, you are allowed to deduct your mandatory contributions to SSS, PhilHealth, and Pag-IBIG from your gross compensation. These deductions reduce your taxable income, which in turn lowers your withholding tax. This is one of the few deductions still available to employees under the TRAIN Law, since the old personal exemptions and additional exemptions were abolished.

• SSS (Social Security System): The contribution schedule effective January 2025 is 15% of the monthly salary credit (MSC), of which the employer pays 10% and the employee pays 5%. The MSC runs from ₱5,000 to ₱35,000, so the maximum employee share is ₱1,750 per month. At a ₱38,000 salary the MSC is capped at ₱35,000, so the employee share is ₱1,750.
• PhilHealth: The premium is 5% of the monthly basic salary, split equally (2.5% each), with an income floor of ₱10,000 and a ceiling of ₱100,000. PhilHealth computes on basic salary, which excludes allowances, overtime pay, commissions, 13th month pay, and bonuses. In our example the basic salary is ₱35,000, so the employee share is ₱35,000 × 2.5% = ₱875 even though gross compensation is ₱38,000.
• Pag-IBIG (HDMF): The employee contribution is 2% of monthly compensation (1% if it is ₱1,500 or less), computed on a maximum fund salary of ₱10,000 since February 2024 (HDMF Circular No. 460). The maximum employee share is therefore ₱200 per month, and most employees earning above ₱10,000 contribute ₱200.

Continuing our example: ₱38,000 gross compensation minus ₱1,750 (SSS employee share) minus ₱875 (PhilHealth employee share, on the ₱35,000 basic salary) minus ₱200 (Pag-IBIG employee share) equals ₱35,175 in monthly taxable compensation. This is the figure used to compute your withholding tax.

Step 3 — Compute Your Monthly Taxable Compensation

Your monthly taxable compensation is simply your gross compensation minus your mandatory government contributions and any other BIR-allowed deductions. In the example above, that figure is ₱35,175 per month. There is no additional personal exemption to subtract — under the TRAIN Law, the ₱250,000 zero-tax threshold is already built into the graduated tax tables, so you do not separately deduct it before applying the table.

Payroll does not need to annualize your pay: the BIR publishes a withholding table for each payroll frequency (Annex E of Revenue Regulations No. 11-2018, effective January 1, 2023), and you look up your taxable compensation for the period directly. For monthly pay, bring ₱35,175 to the monthly table. (Annualizing — multiplying by 12 and applying the annual TRAIN brackets — is a useful cross-check, and gives the same answer to within a few centavos, but it is not how the published table is built.)

Step 4 — Apply the BIR Tax Table to Compute the Tax

Now comes the actual tax computation. A monthly taxable compensation of ₱35,175 falls in the ₱33,333 to ₱66,666 row of the BIR monthly withholding table. The prescribed withholding for that row is ₱1,875.00 plus 20% of the excess over ₱33,333.

1. 1Determine the excess over ₱33,333: ₱35,175 − ₱33,333 = ₱1,842
2. 2Compute 20% of the excess: 20% × ₱1,842 = ₱368.40
3. 3Add the fixed amount for the row: ₱1,875.00 + ₱368.40 = ₱2,243.40 monthly withholding tax
4. 4Cross-check (optional): annualized taxable income of ₱422,100 gives an annual TRAIN tax of ₱26,920; ÷ 12 = ₱2,243.33

Your employer should be withholding about ₱2,243.40 per month from your salary. The annualized cross-check differs by only a few centavos because the official table is rounded differently from the annual formula. Employers use the official tables for each payroll frequency (daily, weekly, semi-monthly, or monthly), which makes it straightforward for payroll departments to apply the correct amount.

Using the BIR Withholding Tax Tables vs. Manual Computation

The annual TRAIN brackets above explain where the tax comes from, but most employers rely on the BIR's official withholding tax tables rather than annualizing every employee's pay every period. The tables — published in Annex E of Revenue Regulations No. 11-2018 — list the exact tax to withhold for specific compensation ranges across four payroll frequencies: daily, weekly, semi-monthly, and monthly. Your HR team simply looks up your taxable compensation in the column for your pay frequency and applies the prescribed amount.

The practical benefit of understanding the underlying formula, however, is that you can verify your own payslip. If the numbers on your payslip do not match what the formula produces — or what the PesoHub calculator shows — that is a signal worth investigating. Errors can happen in payroll software configurations, especially after salary increases or changes in contribution rates. If too little tax is withheld throughout the year, you will owe a balance when you file your annual income tax return (ITR). If too much is withheld, you are entitled to a refund — but only if you file. For a broader explanation of how the system works in practice, visit the PesoHub guide on how withholding tax works.

Special Cases That Affect Withholding Tax

The standard computation above applies to most salaried employees, but several situations require adjustments or special handling:

• 13th Month Pay and Other Bonuses: The first ₱90,000 of your 13th month pay and qualifying bonuses is completely tax-exempt. Any amount above ₱90,000 is added to your taxable compensation for the year and must be factored into your withholding. If your total bonuses and 13th month pay are ₱110,000, the taxable portion is ₱20,000.
• Mid-Year Salary Increases or Promotions: When your salary changes mid-year, your employer must re-compute your withholding tax for the remaining months to ensure the correct annual total is collected. Failure to do this often leads to a tax deficiency at year-end.
• Two or More Employers in the Same Year: The Philippine tax system does not automatically combine income from multiple employers. Each employer withholds based only on what they pay you, so the combined income may push you into a higher bracket and each employer may under-withhold. Under BIR Revenue Memorandum Circular No. 20-2026 (guidelines for the 2025 annual returns), employees with purely compensation income from two or more employers, whether at the same time or one after another during the taxable year, are not covered by substituted filing and must file their own annual income tax return — BIR Form 1700 when all of your income is compensation.
• Mixed Income Earners (Compensation Plus Freelance or Business Income): If you earn both employment income and income from freelance work, a business, or a profession, you are required to file an annual income tax return that reports all of it, and your employer's withholding covers only your compensation income. BIR Form 1700 is for purely compensation income; BIR's forms page lists Form 1701 for individuals engaged in trade, business, or the practice of a profession, including mixed-income earners. Individual business taxpayers classified as micro or small have extra options for the 2025 returns under RMC No. 20-2026, as amended by RMC No. 37-2026: they may file any of the prescribed annual returns for individuals, including Form 1701-MS, which can be filed manually (to an Authorized Agent Bank if there is tax payable, or to any Revenue District Office if not) or electronically through the Offline eBIRForms Package v7.9.6. Form 1701-MS is not available to every mixed-income earner, so confirm the right form with your Revenue District Office. Self-employed individuals also file quarterly returns (Form 1701Q).
• Resigned or Separated Employees: When an employee leaves, the employer must compute the final withholding tax, settle any under- or over-withholding through the last paycheck, and issue BIR Form 2316 on or before the date of separation or within 30 days thereafter.

BIR Form 2316: Your Certificate of Withholding

BIR Form 2316 is one of the most important tax documents a Philippine employee will encounter. It is the Certificate of Compensation Payment/Tax Withheld — an official document your employer must issue to you annually on or before January 31 of the following year, or within 30 days after your last day of employment if you resign or are separated. Form 2316 shows your total gross compensation received during the year and the total income tax withheld by your employer.

For employees who have only one employer during the entire year, have had the correct tax withheld, and earn purely compensation income, BIR Form 2316 can serve as a substitute for filing your own annual income tax return — this is called substituted filing. Your employer files a certified copy with the BIR, and your signed copy serves as your ITR, so you do not need to file BIR Form 1700 separately. Per RMC No. 20-2026, an employee with a single employer whose spouse is not entitled to substituted filing must still file a return, and an employee who qualifies for substituted filing may also choose to file one (for example, for a promotion, loan, scholarship, or foreign travel requirement).

However, you should always keep your Form 2316 because it is required in multiple practical situations: when you apply for a new job and the new employer needs to compute your withholding for the remaining months of the year; when you apply for a bank loan or credit card and financial institutions ask for proof of income; and when you need to file your own annual ITR because you have multiple employers or additional income sources.

Common Mistakes Employees Make With Withholding Tax

Understanding your withholding tax also means knowing the pitfalls that catch many Filipino employees off guard. Here are the most common errors to avoid:

• Assuming zero withholding means zero tax liability. Some small employers — particularly micro-businesses, informal setups, or employers who are simply non-compliant — do not withhold any income tax at all. If this is your situation, you may still owe income tax at year-end. The BIR can assess you for unpaid taxes, and the burden of proof falls on you to show you were unaware of the shortfall.
• Not verifying whether your allowances are taxable or non-taxable. Some employers lump all compensation into a single pay item, making it unclear which portions are subject to tax. If a taxable allowance is mistakenly treated as non-taxable, your withholding will be too low — and you may face a year-end deficiency.
• Ignoring the ₱90,000 tax-exempt ceiling on bonuses. If your employer pays you a performance bonus of ₱50,000 on top of your ₱90,000 13th month pay, that additional ₱50,000 is fully taxable and should be included in your compensation income for the year.
• Failing to notify your employer about a second job or additional income. Your employer computes your withholding based solely on what they pay you. If you have another source of income, the combined amount could place you in a higher bracket — but your primary employer has no way of knowing this unless you tell them.
• Not requesting or safekeeping your BIR Form 2316. This document is irreplaceable for loan applications, job changes, and annual ITR filing. If you lose it, you must request a replacement from your former employer, which can be time-consuming, especially if the company has closed or downsized.

How to Check If Your Employer Is Withholding the Correct Amount

You have every right to understand and verify your own withholding tax computation. Here is how to do it practically:

1. 1Request a detailed breakdown from your HR or payroll department. They are obligated to explain how your withholding tax was computed. Ask them to show you the gross compensation figure used, the government contributions deducted, the taxable compensation, and the applicable BIR tax table.
2. 2Use the PesoHub Withholding Tax Calculator. Enter your current gross monthly salary, your SSS, PhilHealth, and Pag-IBIG contributions, and any other relevant inputs. Compare the result to what appears on your payslip.
3. 3Check your BIR Form 2316 at year-end. The annual total tax withheld shown on Form 2316 should match the sum of all monthly deductions on your payslips. If there is a significant discrepancy, raise it with HR before the January 31 deadline.
4. 4If you suspect under-withholding, ask your employer to adjust the withholding for the remaining months of the year. It is much easier to address a shortfall gradually during the year than to pay a lump-sum tax deficiency when you file your ITR.
5. 5If your employer refuses to withhold or is not remitting the tax to the BIR, report this to the BIR through their official channels (bir.gov.ph or the BIR contact center). Non-remitting employers expose themselves to penalties and surcharges — and in certain circumstances, employees who knew about non-withholding and failed to report it could also face complications.

Disclaimer

This article is intended for general educational purposes only and does not constitute professional tax, legal, or financial advice. The figures, rates, and contribution schedules referenced in this article are based on information available at the time of writing and are subject to change through BIR Revenue Regulations, SSS circulars, PhilHealth issuances, and Pag-IBIG advisories. Always verify current rates and rules directly with the BIR (bir.gov.ph), SSS (sss.gov.ph), PhilHealth (philhealth.gov.ph), and Pag-IBIG Fund (pagibigfund.gov.ph) before making financial or tax decisions. For complex situations — including multiple employers, mixed income sources, tax disputes, or questions about specific tax treatment of benefits — consult a licensed Certified Public Accountant (CPA) or a BIR-accredited tax agent.