What are the different kinds of withholding tax in the Philippines?
- Withholding tax on compensation
- Expanded withholding tax
- Final withholding tax
Many Filipinos receive huge help from tax calculators in the Philippines. These tools allow them to correctly compute the taxes they owe the government. But only a few people are aware of the fact that there are two groups of taxes in the country: national taxes and local taxes.
National taxes are fees or charges imposed by local government units (i.e. cities, barangays, and municipalities). Local taxes, on the other hand, are what the registered taxpayer pays to the government through the Bureau of Internal Revenue (BIR). Under these are several types of taxes that are applicable to different entities, individuals, products, and services.
In this article, we’re going to focus more on a specific kind of national taxes which is the withholding tax. In the Philippines, it is the most basic type of tax that individuals and entities engaged in trade, business, or practice of profession must understand.
The withholding tax comes in three sub-classifications: withholding tax on compensation, expanded withholding tax, and final withholding tax. Let’s discuss them one by one below.
Withholding Tax on Compensation
The withholding tax at source is being used as a structural device by the government to prevent noncompliance of tax obligations. Through it, employers take on the responsibility of collecting and paying the payees’ taxes. They only need to file the BIR Form no. 1601E.
Withholding tax on compensation is the amount deducted from an employee’s income. The employer will then remit this amount to the BIR. Essentially, this means that an employee’s income has already been reduced way before it reaches their pockets.
Many favor this collection scheme as it is convenient for both the taxpayers and the government. It also helps avoid the problem of inability to pay since tax is properly collected before employees get the chance to spend all their income.
Expanded Withholding Tax
Expanded withholding tax is a certain type of withholding tax prescribed only on specific incomes. Some examples of these are professional or talent fees rendered by engaging in the practice of profession. Other examples include rental income on property used in business, and payment to contractors.
Fees rendered through the practice of profession also fall under this type. But unlike withholding tax on compensation, the individual offering his talents or services does not have an employee-employer relationship. In addition, these fees are also creditable against the tax due of the payee.
It is important to note, however, that this person could have a legal employer while practicing his profession outside of work. If this is the case, then he needs to file both the withholding tax on compensation (BIR Form 1601E ) and expanded withholding tax (BIR Form 0619E). Of course, this can easily be done with the help of a tax calculator in the Philippines!
Final Withholding Tax
Final withholding tax is similar to expanded withholding tax in the sense that it is prescribed or applicable only to certain payers or income. However, the final withholding tax is not creditable against an individual’s income tax due. In short, it does not lessen your overall tax due for the taxable year. When submitting this, look for the BIR Form 1601F.
It applies to many types of income – all of which are identified in tax laws. A few examples are royalties from literary or musical compositions, interest on bank deposits, income from deposit substitutes, trust funds, capital gains from stocks that are not found on the stock exchange, and profit from the sale of real property. Specific tax rates are imposed on these types of income like 10% for royalties and 20% on bank deposits. These things are important to know so you can avoid over- or underpaying.
There are several kinds of withholding taxes in the Philippines that people must know about to be able to dutifully file their taxes. It may take a bit of time and effort to understand them, but doing so is sure to save anyone from the heavy penalties that come with failing to pay taxes. Hopefully, this article serves as a starting point for you and others in the road to gaining knowledge about taxes in the Philippines!