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
