Under TRAIN Law (RA 10963), employees earning ₱250,000 or below annually pay 0% income tax. Above that, graduated rates apply up to 35% for income over ₱8M/year. Compute monthly withholding by annualizing the monthly salary, finding the annual tax from the TRAIN table, then dividing by 12. File BIR Form 1601-C by the 10th of the following month (or 15th if eFPS filer).
What Is BIR Withholding Tax on Compensation?
Withholding tax on compensation (also called compensation tax or income tax) is the income tax on an employee's wages that the employer deducts every payroll period and remits to the Bureau of Internal Revenue (BIR). Under the TRAIN Law (Republic Act 10963), which took effect in January 2018, the tax brackets and exemptions changed significantly — and Philippine employers must use the TRAIN Law tables for all employees.
As an employer, you are a withholding agent. The law makes you personally liable for the correct computation and timely remittance of the tax your employees owe. Getting this wrong is not just an employee problem — it is your problem.
TRAIN Law Tax Brackets (2025)
The following annual income brackets apply to compensation income:
| Annual Taxable Income | Tax Rate | Formula |
|---|---|---|
| ₱0 – ₱250,000 | 0% | No tax |
| ₱250,001 – ₱400,000 | 15% | 15% of excess over ₱250,000 |
| ₱400,001 – ₱800,000 | 20% | ₱22,500 + 20% of excess over ₱400,000 |
| ₱800,001 – ₱2,000,000 | 25% | ₱102,500 + 25% of excess over ₱800,000 |
| ₱2,000,001 – ₱8,000,000 | 30% | ₱402,500 + 30% of excess over ₱2,000,000 |
| Above ₱8,000,000 | 35% | ₱2,202,500 + 35% of excess over ₱8,000,000 |
What Is "Taxable Income" for an Employee?
Taxable compensation income is gross compensation minus non-taxable items. Non-taxable items include:
- SSS, PhilHealth, and Pag-IBIG employee shares (these reduce the tax base)
- 13th month pay and other benefits up to ₱90,000
- De minimis benefits within BIR-prescribed limits
The BIR personal exemption was eliminated under TRAIN Law — there is no longer a ₱50,000 personal exemption or ₱25,000 per-dependent exemption. Only the above non-taxable items apply.
The Annualized Computation Method
The BIR requires the annualized method for computing monthly withholding. Here is the step-by-step process:
- Get monthly taxable compensation = Monthly gross pay − SSS employee share − PhilHealth employee share − Pag-IBIG employee share − any non-taxable allowances
- Annualize: Multiply the monthly taxable compensation by 12
- Compute the annual tax using the TRAIN Law brackets above
- De-annualize: Divide the annual tax by 12 to get the monthly withholding
Worked Example
Employee with:
- Basic salary: ₱35,000/month
- SSS employee share: ₱1,750 (5% × MSC ₱35,000)
- PhilHealth employee share: ₱875 (₱35,000 × 2.5%)
- Pag-IBIG employee share: ₱200
- Monthly taxable income: ₱35,000 − ₱1,750 − ₱875 − ₱200 = ₱32,175
- Annualized: ₱32,175 × 12 = ₱386,100
- Annual tax (bracket ₱250,001–₱400,000): 15% × (₱386,100 − ₱250,000) = 15% × ₱136,100 = ₱20,415 annual tax
- Monthly withholding: ₱20,415 ÷ 12 = ₱1,701.25
Year-End Reconciliation: The Annualized Adjustment
At year-end (typically December), you must reconcile the total year's withholding against the actual annual tax. If you withheld too much, you refund the excess to the employee. If too little, you collect the balance — either in the December payroll or no later than January 25.
This reconciliation is why tracking YTD (year-to-date) withholding throughout the year matters. Without YTD tracking, year-end adjustments become guesswork.
BIR Form 1601-C: Monthly Filing Obligation
Employers must file and pay BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation):
- Filing deadline: 10th of the following month (non-eFPS filers) or 15th (eFPS filers)
- Filing channels: eBIRForms, eFPS, or over-the-counter at authorized agent banks
- Payment: Must accompany the filing — the return and payment are simultaneous
Penalties for Late or Incorrect Filing
- Surcharge: 25% of the tax due for late filing
- Interest: 12% per year on unpaid tax from the due date
- Compromise penalty: Additional fixed fine based on the amount of tax due
Frequently Asked Questions
Yes. Under TRAIN Law, minimum wage earners (MWEs) are exempt from income tax on their minimum wage, holiday pay, overtime pay, night shift differential, and hazard pay. Any income above the minimum wage (e.g., regular overtime on top of minimum wage) may be subject to tax.
Substituted filing means the employee does not need to file their own annual income tax return (ITR). They qualify if: (1) they receive income from a single employer only, (2) their income is purely compensation, and (3) the employer correctly withheld taxes. The employer's BIR Form 2316 serves as the substitute ITR.
Always — the employee shares of SSS, PhilHealth, and Pag-IBIG are non-taxable under TRAIN Law and must be deducted from gross compensation before computing the taxable income for withholding tax purposes. Not subtracting these is a common error that causes over-withholding.
The employer must refund the excess withholding to the employee — either through an adjustment in the December payroll or as a separate refund no later than January 25 of the following year. The excess cannot simply be remitted to BIR and forgotten; the employee is entitled to a refund.
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