One of the key responsibilities of both employers and employees in the Philippines is to comply with tax regulations. The employee tax rate in the Philippines follows a progressive system, which means the more you earn, the higher the percentage of your income you pay in taxes. The current income tax rates, as outlined in the Tax Reform for Acceleration and Inclusion (TRAIN) law, apply to all income-earning individuals, with exceptions for minimum wage earners who are exempt from income tax.

Here’s a quick overview of the tax rates:

• For annual incomes up to PHP 250,000, there is no tax applied.
• Incomes between PHP 250,000 and PHP 400,000 are taxed at 20% on the excess over PHP 250,000.
• Incomes between PHP 400,000 and PHP 800,000 are taxed at 25% on the excess over PHP 400,000.
• Higher income brackets, such as those earning over PHP 8 million annually, are taxed at 35%.

These rates apply to both regular employees and contractual employees. However, the calculation of taxes and how they are remitted slightly differ depending on the employment status.

Withholding Tax for Employees in the Philippines

Employers are required by law to withhold a portion of their employees’ income to cover taxes. This is known as withholding tax, and it’s deducted every payroll period, ensuring employees don’t need to make a lump-sum payment at the end of the year. The withholding tax acts as an advance payment of the employee’s income tax liability to the government.

To determine how much to withhold, employers use the Bureau of Internal Revenue (BIR) withholding tax tables. The tables categorize employees based on their income levels and civil status (whether they are single, married, or have dependents).

Here’s a simplified guide on how to compute employee withholding tax:

1. Identify the gross income of the employee. This includes the basic salary and any additional income such as bonuses, allowances, or commissions.
2. Subtract the non-taxable benefits, such as the 13th-month pay (up to PHP 90,000 is non-taxable) and mandatory contributions like SSS, PhilHealth, and Pag-IBIG.
3. Consult the BIR withholding tax table for the corresponding tax bracket. The table provides the percentage of tax to be withheld based on the employee’s monthly income and civil status.
4. Apply the tax rate to the taxable income and subtract the result from the employee’s paycheck.

For example, if an employee’s monthly income is PHP 35,000, and after subtracting non-taxable items they are left with PHP 30,000 in taxable income, the applicable withholding tax is determined using the BIR tables. The calculated tax is withheld and reported to the BIR each month by the employer.

Taxes for Contractual Employees in the Philippines

In the case of contractual employees, the tax system is largely the same as for regular employees, though there are some key differences. Contractual workers may not enjoy the same benefits (such as 13th-month pay or leave entitlements) but are still subject to income tax and withholding tax.

Unlike regular employees, many contractual workers or freelancers are responsible for remitting their own taxes to the BIR. They are classified as self-employed individuals and are taxed based on their earnings. Depending on the arrangement, contractual employees may either:

• Have their income tax automatically withheld by the employer (if the company employs them on a contract-of-service basis), or
• Be responsible for paying quarterly tax declarations if they are self-employed or independent contractors.

Contractual workers are taxed based on the same progressive rates as regular employees. If their income exceeds PHP 250,000 annually, they are required to file tax returns and pay accordingly.

How Much Is the Tax of Employees in the Philippines?

Employee tax in the Philippines depends on various factors, such as the employee's gross income, civil status, and any applicable non-taxable benefits. As mentioned earlier, the income tax rates start from 0% for those earning below PHP 250,000 annually, and increase progressively as income levels rise.

For example:

• If an employee earns PHP 300,000 a year, their tax would be calculated as 20% on the amount exceeding PHP 250,000 (in this case, 20% of PHP 50,000, resulting in PHP 10,000 in tax).
• For higher earners, the tax rate will increase based on their income, as outlined in the progressive tax brackets.

Staying Compliant with Employee Taxes

Understanding the withholding tax for employees and the employee tax rate in the Philippines is important for staying compliant with the law. Whether you’re a regular employee or a contractual worker, it's important to regularly check that your employer is remitting the correct amount of withholding tax. For employers, compliance with tax laws ensures a smooth payroll process and helps maintain a good relationship with the BIR.