In handling payroll, it is important to be very well informed about payroll tax rates. Each individual has different salaries. There are also different tax brackets. This means that everyone can have different tax rates. Thus, a good knowledge of payroll tax rates is important. This will help you understand how to compute taxes properly.
What is income tax?
It is a tax levied on a person’s salary. A percentage of an employee’s income is being deducted and is contributed to the government. The rate may go up when an employee’s taxable income goes up. Apart from the taxable income, it is also important to note that the rate may also differ based on the tax payer type.
Let’s talk about tax rates. There are 7 brackets in the tax category here in the Philippines. First consider the employee’s net taxable income, so you can identify the corresponding rate.
Here’s a helpful guide:
Amount of Net Taxable Income
But Not Over
P500 + 10% of the Excess over P10,000
P2,500 + 15% of the Excess over P30,000
P8,500 + 20% of the Excess over P70,000
P22,500 + 25% of the Excess over P140,000
P50,000 + 30% of the Excess over P250,000
P125,000 + 32% of the Excess over P500,000 in 2000 and onward
Income Tax Exemption for Minimum Wage Earners
Despite imposing tax, the government aims to still preserve living standards in the state. Republic Act No. 9504 covers a regulation that waves minimum wage earners from income tax.
Compensation income covers the following:
- Basic salary
- Holiday pay (including both regular and special holiday)
- Hazard pay
- Overtime pay (hours rendered beyond the eight hour shift)
- Night shift differential for employees who work in the evening
The question now is how to know if your employees are part of this category. This branches out into two groups – employees who are paid daily and employees who are paid monthly.
Employees who are paid daily
Compare the rate per day VS the minimum wage of those in NCR. If the employee’s rate is higher, the wage is taxable.
Employees who are paid monthly
You need to know if the employee’s monthly salary is the same with statutory daily rate. There are two ways to find out:
- First, you have to know the denominator that cover’s an employee’s monthly wage. Is it 20 working days in a month or a full 30? Once you have the number, multiply the denominator with the minimum wage rate. Compare if the product is equivalent to your employee’s wage.
- Compute the employee’s daily rate and compare it with the minimum wage.
The tricky part in converting a monthly to a daily rate is that you have to know the employee’s number of working days in a year. This varies per employee as there are those who don’t work weekends and those who only have 1 rest day in week.
Tax Status: What you need to know
According to the Bureau of Internal Revenue’s (BIR) Regulation 10-2008, all employees now enjoy a PHP 50,000 personal exemption in their income tax.
Here are other factors that affect a tax payer’s rate:
What can make a difference in the tax you’re paying is whether or not you have dependents enrolled. This is regardless if you’re married or single. Individuals can enroll a maximum of four dependents and can get an exemption of PHP 25,000 per head.
Qualified dependent are as follows:
- Children who may be legitimate, illegitimate, or legally adopted. Said children must be living with the taxpayer. The child must be below 21 years old, unemployed and unmarried.
- Siblings who are below 21 years of age can only be qualified if they are legally adopted by the tax payer.
- Dependents who are not capable of supporting themself due to a mental or physical defect can be qualified, given that there’s a supporting medical document.
2) Basic pay and other benefits
This includes your basic salary, your overtime pay, and other earnings such as holiday and night differential. This also includes incentives and bonuses.
3) SSS / Philhealth and Pag ibig
These are individual contributions of employees that are deducted to the gross income.
How to Compute Income Tax
Now we’re getting to the good part! How do you compute income tax?
First, you need to have the following information from your employee:
- Number of dependents
- SSS / Philhealth and Pagibig contributions
- Applicable allowances and benefits
The computation is:
Once you have the taxable income amount, check the BIR Tax table to see the percentage of your tax. You can view the tax table here.
Let’s do a sample computation.
Say you’re computing for the tax of Linda, one of the employees under your payroll who is on a monthly wage.
- Linda’s basic salary is at PHP 26,000.
- She is single and does not have any dependents.
- Her overtime pay is at PHP 1,500.
- She has no lates or absences.
- She is being deducted PHP 500.00 for her SSS, PHP 250.00 for Philhealth and PHP 150.00 for Pagibig.
This means she earned PHP 27,500 gross income and will have a total of PHP 900.00 deductions. The amount remaining, PHP 26,600.00 serves as her taxable income.
Looking at the BIR Tax Table, the nearest figure to Linda’s taxable income is 25,000. The corresponding tax is PHP 4,166.67 + 30% of whatever is excess.
The difference of Linda’s taxable income and 25,000 is 1600. The 30% of 1600 is 480.
Thus, Linda’s income tax for that month is PHP 4,166.67 + PHP 480 = PHP 4,646.67. Linda’s net income will then be PHP 21,953.55.