How Withholding Tax Works in the Philippines

1. What is withholding tax?

Withholding tax is the Philippine government's method of collecting income tax at the source. Instead of paying your entire annual tax bill in one lump sum, your employer deducts a portion of your salary every payday and sends it directly to the Bureau of Internal Revenue (BIR).

Think of it as a “pay-as-you-earn” system. By the end of the year, most of your income tax obligation has already been collected through these regular deductions.

3. TRAIN Law tax brackets (2023 onwards)

The Tax Reform for Acceleration and Inclusion (TRAIN) Law, or Republic Act No. 10963, revised the Philippine income tax brackets. The table below shows the graduated rates effective January 1, 2023:

4. How to compute your withholding tax

There are two related calculations. Payroll withholding is the amount your employer deducts each pay period, read from the BIR withholding table for your pay frequency. Annual income tax is the tax due on your whole year's taxable income, and is what year-end annualization compares your withholding against.

A. Payroll withholding (what your employer deducts)

• 1Start with your gross compensation for the pay period (monthly, semi-monthly, weekly, or daily) and add any taxable benefits for that period.
• 2Subtract your employee share of SSS, PhilHealth, and Pag-IBIG for the period. The result is your taxable compensation for that pay period.
• 3Open the BIR Revised Withholding Tax Table for your pay frequency (RR 11-2018, Annex E) and find the row that matches your taxable compensation.
• 4Withholding = the fixed amount for that row + the row's percentage × the amount your taxable compensation is over the row's threshold. That is the prescribed amount for the period; you do not divide an annual figure.

B. Estimated annual income tax (for estimates and year-end reconciliation)

The TRAIN Law annual formula is:

• 1Determine annual taxable income: your annual gross compensation (monthly basic salary × 12, plus other taxable benefits) minus the year's SSS, PhilHealth, and Pag-IBIG employee shares.
• 2Locate your bracket in the TRAIN Law annual table above.
• 3Apply the formula: the base tax for your bracket plus the tax rate multiplied by the amount your income exceeds the bracket floor.

Dividing the annual tax by 12 gives a rough monthly estimate, but it is not the prescribed payroll amount. The BIR tables can differ from it by a few centavos to a few pesos.

5. How employers withhold tax

Employers use the BIR's Revised Withholding Tax Table to determine how much to deduct from each payroll. The amount depends on the employee's pay frequency (monthly, semi-monthly, weekly, or daily) and their taxable compensation for that period.

At year-end (usually in December), the employer performs an annualization: they compute the actual annual tax based on total compensation, compare it to the total amount already withheld, and either refund the excess or collect the shortfall through the final payroll.

Worked example: ₱35,000 monthly salary

Steps 1–5 show where the estimated annual income tax comes from. Step 6 shows what payroll actually withholds each month, which comes from the BIR monthly table.

The annual income tax is the TRAIN Law liability on annualized taxable income; monthly withholding follows the BIR table, so twelve months of withholding can differ from the annual figure by a few centavos or pesos. Actual withholding also varies with employer annualization adjustments.

Common mistakes to avoid

• Forgetting to subtract mandatory contributions. Your taxable income is your gross pay minus SSS, PhilHealth, and Pag-IBIG. Using gross pay directly will overestimate your tax.
• Confusing the tax rate with the effective tax rate. If you fall in the 15% bracket, it does not mean 15% of your entire income goes to tax. Only the amount exceeding ₱250,000 is taxed at 15%.
• Not accounting for 13th-month pay and bonuses. Under the TRAIN Law, the first ₱90,000 of 13th-month pay and other benefits is tax-exempt. Any excess is added to your taxable income.
• Not getting and checking your BIR Form 2316. Your employer prepares and issues the Certificate of Compensation Payment/Tax Withheld (BIR Form 2316); you do not file it yourself. Ask for your copy every year, check that the compensation and tax withheld match your payslips, and keep it for your records, your annual income tax return if you need to file one, and future job or loan applications.
• Assuming minimum wage = automatic tax exemption. The exemption covers a minimum wage earner's statutory minimum wage and the holiday pay, overtime, night shift differential, and qualifying hazard pay received for that work. Other compensation, such as a taxable allowance or a bonus above the ₱90,000 ceiling, is not covered and is taxed normally. Receiving it does not by itself make a worker paid the statutory minimum wage lose minimum wage earner status (Supreme Court, Soriano v. Secretary of Finance), but an employee whose basic pay is above the statutory minimum wage is generally not a minimum wage earner. If your basic pay increases above the statutory minimum wage during the year, you stop qualifying as a minimum wage earner from that point forward. Income you earned while you qualified remains exempt. Compensation earned afterward is subject to the normal income-tax rules and applicable exemptions.