(Updated March 22, 2017)
Most people will agree that seeing your tax in your payslip does not create happy thoughts.
How can you be sure that the right amount has been deducted from your hard-earned salary?
To set it straight:
Withholding tax is the tax deducted by your employer from your salary every payday or every month depending on what you have agreed on. The withholding tax is simply the partial payment of your income tax.
Income tax is your tax annually which you have to file to avoid penalties.
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How to Compute Withholding Tax?
Step 1: Know the formula to finding your taxable income
Monthly Basic Pay + Overtime Pay + Holiday Pay + Night Differential – Tardiness- Absences – SSS/Philhealth/PagIbig deductions = Taxable income
Your taxable income is your total income minus the deductibles.
The deductibles are expenses which the BIR allows to be deducted from your salary so you will have a lower taxable income. These can be (but not limited to) SSS, GSIS, Philhealth, HDMF and Other Contributions.
Step 2: List down the amount you have earned and the amount deducted from your income.
Let’s say you are earning a basic pay of P15,000 without any other additional income:
- Monthly Basic Pay = P15,000
- Overtime Pay = none
- Holiday Pay = none
- Night Differential = none
- Tardiness = none
- Absences = none
- SSS = P545
- PhilHealth = P187.5
- Pag-IBIG deductions = P100
Total Deductions: P832.50
Taxable Income: P14,167.50
Step 3: Understand the BIR Tax table and compute the withholding tax based on it
BIR Income Tax table
BIR tax table is the reference used by the company’s HR or accountant. You can easily find a copy online.
The BIR Income Tax Table tells you how much will be your tax but it is not so simple since you still have to compute based on your civil status, dependents and income frequency.
Define your salary frequency. Is your salary based on daily, weekly, semi-weekly or monthly?
Then define your civil status. Table A is for single and married individuals without any children. Table B is for single and married individuals with dependent children.
- Status ME1/S1 – has 1 qualified dependent
- Status ME2/S2 – has 2 qualified dependent
- Status ME3/S3 – has 3 qualified dependent
- Status ME4/S4 – has 4 qualified dependent
Based on the table you belong to, find the highest amount which does not exceed your taxable income.
Going back to the example above:
- Monthly Basic Pay = P15,000
- Total Deductions = P832.50
- Taxable Income = P14,167.50
- Civil Status: Single or S/ME
- Dependent: none
- Income: Monthly
The 10,000 is the highest amount not exceeding the taxable income. It falls in the 5th column.
- 708.33 + [(P14,167.50 – 10,000) X 20%]
- 708.33 + [(4, 167.50) x 20%)]
- 708.33 + 833.4
Let’s have another example:
You are earning P7,000 every two weeks without any deductions. Therefore your taxable income is still P7,000. You are married with one child.
- Semi-Weekly Basic Pay = P7,000
- Total Deductions = none
- Taxable Income = P7,000
- Civil Status: Married with 0ne (1) dependent
The 6,042 is the highest amount not exceeding the taxable income. It falls in the 5th column.
- 354.17 + [(P7,000 – 6,042) X 20%]
- 354.17 + [(958) x 20%)]
- 354.17 + 191.6
How to Compute Income Tax
Assuming that every month you have the same taxable income, then your withholding tax will also be constant. Add all your withholding tax and you will get your income tax.
Never forget to file your income tax returns. If your company HR does not do it for you, then you can do it on your own via online or personal.
It may be heartbreaking to see the amount of your tax, but it is a duty of every taxpayer.