Year-end payroll tax compliance reminders

To fully comply with these obligations, employers are reminded of the following procedures:

13TH MONTH PAY AND OTHER BENEFITS

Based on the Labor Code of the Philippines, employees are entitled to mandatory 13th month pay, which must be paid not later than Dec. 24 of every year to all rank-and-file employees, provided they worked for at least one month during the calendar year.

A P90,000 annual tax exemption may be taken against the aggregate 13th month pay and other benefits for the year in calculating the income tax due. Other benefits as defined under Section 2.78,1 (B) (11) (b) includes Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. 

YEAR-END ADJUSTMENT OR ANNUALIZATION

In December, being the last payroll month of the year, employers must carry out year-end payroll adjustments or the annualization as part of their withholding agent obligation. It is the process of determining the annual income tax due of each employee for all the salary and other supplementary income received, including those from any previous employer, and comparing it with the total monthly taxes withheld to arrive at the adjusted withholding tax due.

If the annualization results in any excess withholding tax, the employer should credit or refund such excess to all affected employees on or before Jan. 25 of the following year. On the other hand, if the annualization shows that additional taxes must be withheld in December which can happen particularly for employees with more than one employer for the year, the employer must withhold such amounts from the employees. Some employers remit these taxes in advance for the employees, particularly if the amount is too big, and eventually recover them as a deduction in the succeeding payroll.

It would be wise to do an interim annualization to project the annual tax due of the employees. It helps manage the employees’ cash flow during the holiday season by spreading out the tax deductions/payments equally over the last two months of the year.

SUBSTITUTED FILING

In substituted filing, annual income tax returns need not be filed by individual taxpayers, provided they received purely compensation income from only one employer in the Philippines for the calendar year, regardless of amount, and the corresponding income tax has been withheld correctly by the employer (i.e., tax due equals tax withheld). The BIR Form 2316 (Certificate of Compensation Payment/Taxes Withheld) filed by their employers serves as their Annual Income Tax Return.

However, individuals not qualified for substituted filing are still required to file an annual income tax return and attach the corresponding BIR Form 2316 signed by both employee and employer.

As a good practice, employers may consider sending out a substituted filing survey which serves as their reference when indicating in the alphabetical lists whether or not an employee is qualified.

The employer should distribute BIR Form 2316 to the employees on or before Jan. 31, and have the qualified employees return the signed duplicate copy for submission to the concerned Revenue District Office of the Bureau of Internal Revenue (BIR) no later than Feb. 28 of the succeeding year.

OTHER YEAR-END REPORTING REQUIREMENTS

As for the filing and payment of the taxes withheld through BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation) for December, including those arising from the annualization calculation, remittance must be made on or before Jan. 15 for manual filers. However, for eFPS filers, the filing of returns based on industry classification shall be staggered, and payment must be done on or before Jan. 20.

Moreover, on or before Jan. 31, the employer should file the annual BIR Form 1604-C (Annual Information Return of Income Taxes Withheld on Compensation) with the attachments in the form of schedules called the alphabetical lists (or alphalist) of employees. The alphalist declares the total amount of compensation income of each employee, the total amount of taxes withheld during the year, and such other information or attachments as may be deemed necessary by the BIR.

It is advisable for the employer to reconcile the salaries and the withholding taxes reported in the BIR Forms 1601-C filed from January to December against the salaries expense recorded in the books and the figures in the attached alphabetical lists. Such practice aids the employer in ensuring that all the benefits of the employees are properly subject to withholding tax on compensation.

The duty of withholding agents/employers to withhold the correct amount of tax cannot be over-emphasized. The Bureau penalizes employers who fail to remit the correct amount of withholding tax with a 12% interest per annum, 25% surcharge, and a compromise penalty not exceeding P25,000. Moreover, for salaries to be allowed as a corporate tax deduction, the corresponding taxes should have been properly withheld and remitted.

I hope the above pointers will help employers with their withholding tax compliance at year’s end. When crunch time kicks in, nothing beats early planning and good old diligence.