As the name would suggest, a withholding tax in general is a tax withheld on income derived by taxpayers either through trade or in the practice of their profession. This is further subdivided into several types, specifically:
Withholding tax on compensation
This is probably the most familiar type of withholding tax, which is withheld from the income of an individual in an employer-employee relationship.
Withholding tax on compensation is filed monthly using BIR Form 1601-C, and constitutes a part of BIR Form 1604-CF (Alphalist of Employees/Payees), which is filed annually.
Depending on the industry classification you fall under, you may file for this type of withholding tax via the Electronic Filing and Payment System (EFPS), every month and any time from 11 to 15 following the end of the month.
Payments, meanwhile, may be made until the 15th of the month following the month the withholding was made except for those withheld in December, which must be paid on or before the 20th of January the following year. If paying via eBIRForms, it must be made on or before the 10th day of the following month, except taxes withheld in December, which has a deadline of the 15th of January the following year.
Expanded withholding tax
This type of withholding tax applies to certain income payments, including professional/talent fees, rentals, payments to contractors, and commission for services rendered, just to name a few.
Those required to file this type of tax must file BIR Form 1601-E (Monthly Remittance Return of Income Taxes Withheld (Expanded)) and BIR Form 1604-E (Annual Information Return of Creditable Income Taxes Withheld (Expanded)).
With the exception of transactions that involve ‘onerous transfer of real property classified as ordinary asset’, the monthly payment of expanded withholding taxes follows a similar schedule as the filing of withholding taxes on compensation. Filing via EFPS must be made 11 to 15 days following the end of the month depending on your industry classification, and must be paid via EFPS on or before the 15th day of the month after the month the tax was withheld, or on the 20th of January for tax withheld in December.
Final withholding tax
This covers withholding taxes outside an individual’s gross income. Covered in the final withholding tax are income such as interest on bank deposits, royalties, fringe benefits, capital gains from the sale of a share of stock, and capital gains from the sale of real property.
This is filed monthly by the individual or an entity using the BIR Form 1601-F, and annually as part of BIR Form 1604-CF.
Monthly filing and payment may be made via an Authorized Agent Bank within your Revenue District Office (RDO), your city or municipality’s authorized treasurer in your RDO, a Revenue Collection Officer in your registered RDO, or via EFPS. When filing or paying via EFPS, please follow the same deadlines as withholding tax on compensation or the expanded withholding tax.
There are also taxes withheld by National Government Agencies and instrumentalities on income for VAT-registered payees for services they rendered or products they sold. But since these are out of the scope of this article, we will not discuss those here.
Understanding the Withholding Tax Better
To help you understand the withholding tax better, we cover some of frequently asked questions about the subject:
Is the payment of withholding taxes compulsory?
The payment of withholding taxes are compulsory for certain types of income, such as income received by an individual in an employer-employee relationship, as well as professional fees, rentals, and payments to contractors.
With regards to withholding tax on compensation, the compensation that will be taxed includes both the individual’s regular compensation (i.e. basic salary and allowances), and their supplemental compensation (e.g. overtime pay, commissions, 13th month pay above the non-taxable threshold, fringe benefits).
What are exempt from withholding taxes?
There is a long list of exemptions from withholding taxes, including:
- Social security benefits
- Benefits an employee or their heirs receive because of sickness, physical disability, death, or other causes beyond the control of the employee, such as retrenchment, redundancy, and the cessation of their employer’s business
- Remuneration for agricultural labor paid entirely in products from the same farm
- Remuneration for domestic services
- Thirteenth month pay within the non-taxable threshold
- Social security and medicare contributions
- De minimis benefits, e.g. rice subsidies, clothing allowances, monetized unused vacation leave credits of private employees (note: many of these benefits must be within the prescribed limit per benefit type to be considered de minimis)
An Easier Way to File and Pay Withholding Taxes
With the various sub classes of withholding taxes as well as payment schedules, it can be downright confusing to withhold and remit the correct tax amount. A tax compliance services firm composed of professional accountants can make this easier. Here at Beyond D Numbers, we help businesses file the right tax conveniently with our professional tax services and solutions. To find out more about how we can assist you, please contact us today.
Disclaimer: Information contained in this article may become outdated and is therefore meant as general guidance only. It is not intended as professional accounting or tax advice.