AT THE turn of each year, many employees are eager to find out whether they will receive a tax refund, or whether additional taxes will be withheld from their December paychecks. This concern arises from the annualization of compensation that every employer does at year’s end. Thus, it is important that employee taxes are properly computed to ensure that employees pay only what is due from them for the entire year and that no issues emerge during a Bureau if Internal Revenue (BIR) audit of employers.
Ideally, annualization should be done on or before the end of the calendar year, but prior to the payment of compensation for the last payroll period. Nonetheless, should this not be done yet, the employer still has the time to do the annualization prior to the January 25 deadline of refunding any over-withheld tax from the employee.
Here are some common issues on annualization of withholding taxes of employees and reminders on filing:
• Basic personal and additional exemptions -- Every individual, regardless of tax status, is entitled to a P50,000 basic personal exemption. In addition, for every qualified dependent child, an additional exemption of P25,000 shall be available to the husband, unless a waiver in favor of the wife is executed. In case the husband is unemployed or working abroad, the wife automatically claims the additional exemption, provided required documents have been duly submitted.
In case a child was born or adopted within the year, such child can already be claimed as qualified dependent for the year, so long as necessary documents have been updated and properly filed with the BIR. If the employee fails to update his information, the excess tax withheld will not be refunded and will be forfeited in favor of the government. Employees should, therefore, properly submit certificates of update of exemption to be entitled to the additional exemption of P25,000.
On the other hand, in case a qualified dependent changes status during the year, such that his status shall no longer qualify him for exemption, an additional exemption of P25,000 can still be claimed during the year. It is only on the following year when the employee can no longer claim the exemption.
Considering the above rules on additional exemption, employers are then reminded to properly check the tax status of the employee prior to computing the tax due for the year. Any additional exemption not considered will definitely impact the employee’s net take home pay. Of course, employees can opt to file an annual income tax return and apply for refund. However, considering the cost and hassle of doing so, this recourse may no longer be an option for some employees.
• Employees with previous employers -- Employers are required to annualize the employee’s compensation including that from previous employer (if employed within the same year). Thus, it is necessary that BIR Form 2316 issued by previous employer be provided by the employees to their current employer. Note that tax due of employees who failed to submit the same shall be computed only based on the compensation paid by the current employer. Hence, failure to provide the same may significantly result to higher tax payable upon filing of their individual annual income tax return. Employees with previous employers cannot qualify for substituted filing and are required to file their annual income tax return on or before April 15.
• Taxable vs. non-taxable income -- Under existing revenue regulations, certain types of compensation income can be considered non-taxable and exempt from withholding. However, recent issuances/rulings by the BIR provide that those benefits considered non-taxable should be limited only to those specifically provided in the law as non-taxable (e.g. P30,000 tax exempt bonus, statutory contributions, de minimis benefits). In recent years, the BIR issued clarifications on the taxability of stock option plans, de minimis benefits, among others.
Hence, it is recommended that employers revisit their classification of employee benefits.
• Tax returns and certificates -- Currently, employers who are considered withholding agents are required to submit monthly remittance return of income taxes withheld on compensation (BIR Form 1601-C), annual information return of income taxes withheld on compensation (BIR Form 1601-CF), together with the alphabetical lists (alphalists) of employees, and employee’s certificate of compensation payment/taxes withheld (BIR Form 2316). A copy of the latter is also required to be submitted to the BIR RDO where the company is registered on or before Feb. 28.
As of calendar year 2013, alphalists of employees are to be submitted either as attachments to the electronic Filing and Payment System (eFPS) or through e-submission/e-mail. Manual submission of diskettes, CDs or hard copies shall no longer be allowed.
Prior to filing, among other things, it must be ensured that the amount of compensation income and taxes withheld per monthly returns, annual returns, alphalist of employees, and employees’ BIR Form 2316 tie up. Also, such compensation income as reported in the returns must also tie up, or at least be reconcilable with the totals in the company’s books.
The above list includes only some of the reminders on employee withholding taxes. Other issues may arise considering the many rules on employee taxes.
At the end of the day, it is the employers who shall be subjected to audit by the BIR. Any taxable compensation income payment not subjected to withholding tax shall result in deficiency withholding tax and disallowance of expense. Thus, following the old adage “prevention is better than the cure”, a thorough review is highly recommended prior to filing.
Ma. Lourdes A. Politado-Aclan
Let’s Talk Tax
Punongbayan and Araullo