Let’s COMPly... Withholding Tax on Compensation

IN ANCIENT Rome, soldiers received salarium, known as salary in our time, as a form of compensation for work rendered. It is believed that salarium originated from the term for "salt", sal, because the wages were either used to purchase salt or were salt itself. Hence, this gave rise to the common expression "being worth one’s own salt".

To maximize tax savings, employees and employers alike must take stock of requirements covering compensation tax.

Here are a few reminders for employees receiving purely compensation income and for employers in relation to withholding tax on compensation.

FOR EMPLOYEES
Update your tax exemption status. Employees should keep their tax exemption status updated by filing BIR Form 2305 (Certificate of Update of Exemption and of Employer’s and Employee’s Information) with the BIR within 10 days after a change in status or event (e.g., marriage, childbirth, previous qualified dependent children reaching 21 years of age), and thereafter furnishing their employers with a copy of the duly filed form.

Failure to update one’s tax exemption status could cause an employee to lose tax benefits. For instance, failing to claim an additional qualified dependent child, would mean foregone savings of P8,000 (P25,000 x 32%).

Any increase in tax exemption may be claimed in the same taxable year, while a decrease (e.g., death of a dependent) will only take effect in the next taxable year.

Submit BIR Form 2316 from previous employers. Those with previous employers during the year should submit the withholding tax certificates (BIR Form 2316) issued by their previous employers to their new employer for proper calculation of their annual taxes. This helps avoid underwithholding of tax by the current employer and the need for the employee to recalculate his income tax due when he files his annual income tax return on or before April 15 of the following year.

Note that employees with multiple employers during the year are not qualified for substituted filing and are required to file BIR Form 1700 (Annual Income Tax Return for Individuals Earning Purely Compensation). Under the substituted filing concept, an individual taxpayer is not required to file an income tax return since the employer’s annual information return and the duplicate copy of the employee’s BIR Form 2316 filed with the BIR serve as the "substitute" income tax return.

FOR EMPLOYERS
Calculate employee’s withholding taxes accurately. To ensure accurate calculation of compensation tax, a number of factors must be considered, namely:

• Tax exemption status of employees. Tax exemption status should be based on information reflected in BIR Form 1902 (Application for Registration for Individuals Earning Purely Compensation Income) or BIR Form 2305 duly filed with the BIR.

Regardless of marital status, personal tax exemption is pegged at P50,000 with additional tax exemption of P25,000 for every qualified dependent child not to exceed four children.

• Taxable income. Taxable income is equal to gross compensation income less non-taxable earnings (e.g., de minimis benefits and mandatory contributions to SSS, PHIC and HDMF), personal and additional tax exemptions. Sounds easy right? But, have you considered employee benefits not processed through the regular payroll that could be subject to withholding tax on compensation?

Take, for example, health insurance benefits given to dependents of rank-and-file employees. If these are paid for by the employer, the grossed-up monetary value (i.e. withholding tax is shouldered by the employer in the same manner as fringe benefit tax) of medical benefits, less P1,500 representing de minimis benefit, should be treated as compensation subject to withholding tax.

• Tax rates. Withholding taxes every payroll period are calculated based on the revised withholding tax tables that took effect on Jan. 1, 2009.

However, in calculating for the last withholding tax covering the month of December, the tax rates to be used should be the annual graduated tax rates of 5% to 32% while the net taxable income should be based on the annual compensation of the employees.

Determine if employees are qualified as substituted filers. Employers are required to issue BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld for Compensation) for all active employees on or before Jan. 31 of the following year (for resigned employees, when the last wage is paid).

Effective this taxable year 2013, employers are also required to submit to the BIR the duplicate hard copy of the duly accomplished BIR Form 2316 of all employees qualified as substituted filer not later than Feb. 28 of the following year. The duplicate copy must be signed by both the employer and the employee declaring the truthfulness of the information under the penalty of perjury.

It is important for employers to determine employees who are qualified as substituted filers prior to the February deadline. A good way to do this is to send a survey to all employees early on to determine whether they fully satisfy the following conditions and thus qualify as substituted filers:

• Employee should be receiving purely compensation income regardless of amount;

• Employee should be working for only one employer in the Philippines for the calendar year;

• Withholding tax has been withheld correctly by the employer (tax due equals tax withheld);

• The employee’s spouse also complies with all three conditions stated above;

• The employer files the annual information return (BIR Form 1604CF);

• The employer issues BIR Form 2316 to each employee; and

• File compensation tax returns on time.

The monthly remittance returns (BIR Form 1601C) should be filed on or before the 10th day after the end of each month, except for the month of December, which must be filed on or before Jan. 15. For e-filers, the deadline is on the 11th to 15th day after the end of each month depending on the employer’s industry classification.

Failure to file and/or remit the tax due on time will result to imposition of 25% or 50% surcharge, 20% interest per annum and compromise penalty. Further, it can result in disallowance of the related salary expense in the employer’s calculation of corporate income tax liability.

The deadline for filing the annual information return (BIR Form 1604CF), together with the required alphalist, is on or before Jan. 31 for both manual and e-filers.

Failure to file on time will result in maximum penalty of P25,000 for a taxable year.

Just as salary is the bread and butter of every employee, taxes too are the lifeblood of the government. Both are sources of income that ensure sustainable existence. Only in an enabling environment that bears compliance of tax laws and upholds equitable distribution of wages can the government and its citizens reap optimal advantage of its economic fruits.

The author is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may send feedback to floredee.t.odulio@ph.pwc.com.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article.

source:  Businessoworld