How to Compute Your Withholding Tax in the Philippines (Step-by-Step)

Every payday, your employer quietly deducts a portion of your salary before it ever reaches your bank account. That deduction is your withholding tax on compensation — and understanding how it is computed can save you from year-end surprises, tax deficiencies, or simply the nagging feeling that you are being charged something you do not understand. This step-by-step guide breaks down exactly how Philippine employers compute your withholding tax, what the current rates are under the TRAIN Law, and how you can verify that your payslip is correct.

What Is Withholding Tax on Compensation?

Withholding tax on compensation is the advance income tax that your employer deducts from your salary or wages every payroll period and remits directly to the Bureau of Internal Revenue (BIR) on your behalf. Think of it as a pay-as-you-earn system: instead of waiting until the end of the year to collect your entire income tax in one lump sum, the government collects it gradually throughout the year through your employer.

This system is governed by the National Internal Revenue Code (NIRC), as significantly amended by the Tax Reform for Acceleration and Inclusion Law — commonly known as the TRAIN Law (Republic Act 10963), which took effect in 2018 and introduced lower income tax rates for most individual taxpayers. The amount withheld is not an extra charge on top of your income. It is a prepayment of your annual income tax liability. At the end of the year, the total amount withheld is credited against whatever income tax you actually owe — if too much was withheld, you get a refund; if too little, you pay the difference.

It is important to distinguish this from expanded withholding tax (EWT), which applies to self-employed individuals, professionals, and certain business transactions. Withholding tax on compensation applies specifically to employees who receive income from an employer-employee relationship. Your employer is legally required to withhold the correct amount and file BIR Form 1601-C every month to remit what was collected.

Who Is Required to Have Tax Withheld?

In the Philippines, virtually every employee receiving compensation income from a Philippine employer is subject to withholding tax — whether you are rank-and-file, supervisory, or managerial. This includes both full-time and part-time employees, probationary employees, and even those on fixed-term contracts, as long as their compensation exceeds the tax-exempt threshold under the TRAIN Law.

Overseas Filipino Workers (OFWs) working and earning income abroad are generally not subject to Philippine withholding tax on their foreign-sourced income — the Philippines taxes its residents on worldwide income, but OFWs are treated as non-resident citizens during their time abroad. However, any locally sourced income they receive (for example, from a part-time local employer) would be subject to withholding in the normal way.

Understanding the TRAIN Law Tax Rates (2023 Onwards)

Effective January 1, 2023, the TRAIN Law's second set of reduced income tax rates took effect. These are the rates your employer must use today when computing your withholding tax. The rates are applied on a graduated basis — meaning different portions of your income are taxed at different rates, not your entire income at one flat rate.

• ₱0 to ₱250,000 annual taxable income — 0% (no income tax)
• Over ₱250,000 to ₱400,000 — 15% on the excess over ₱250,000
• Over ₱400,000 to ₱800,000 — ₱22,500 plus 20% on the excess over ₱400,000
• Over ₱800,000 to ₱2,000,000 — ₱102,500 plus 25% on the excess over ₱800,000
• Over ₱2,000,000 to ₱8,000,000 — ₱402,500 plus 30% on the excess over ₱2,000,000
• Over ₱8,000,000 — ₱2,202,500 plus 35% on the excess over ₱8,000,000

These rates apply to your annualized taxable compensation. Because payroll is processed monthly, semi-monthly, weekly, or daily depending on your employer, the BIR publishes official withholding tax tables for each payroll frequency. These tables convert the annual tax into smaller per-period deductions so employers can apply the correct withholding without manually annualizing every pay cycle. You can ask your HR or payroll team which specific table applies to your payroll setup. For a fast automated result, use the PesoHub Withholding Tax Calculator at /calculators/tax/withholding-tax-calculator-philippines.

Step 1 — Identify Your Gross Compensation Income

The first step in computing your withholding tax is knowing exactly what counts as taxable gross compensation. This is broader than just your basic salary. Gross compensation includes your basic monthly pay, cost-of-living allowances (COLA) that are not specifically exempted, fixed monthly allowances, commissions, honoraria, and any other taxable benefits you receive as part of your employment arrangement.

Not everything on your payslip is taxable, however. The following items are excluded from gross taxable compensation: mandatory SSS, PhilHealth, and Pag-IBIG contributions; the first ₱90,000 of your 13th month pay and other qualifying bonuses per year; and de minimis benefits within BIR-prescribed limits (things like rice allowances up to ₱2,000 per month, uniform and clothing allowances up to ₱6,000 per year, and similar small employer-provided benefits). Only amounts beyond these thresholds are added back to taxable income.

Step 2 — Subtract Mandatory Government Contributions

Before the BIR tax table is applied, you are allowed to deduct your mandatory contributions to SSS, PhilHealth, and Pag-IBIG from your gross compensation. These deductions reduce your taxable income, which in turn lowers your withholding tax. This is one of the few deductions still available to employees under the TRAIN Law, since the old personal exemptions and additional exemptions were abolished.

• SSS (Social Security System): For private sector employees, contributions are based on the current SSS contribution table. As of 2024–2025, the total contribution rate is 14% of the monthly salary credit (MSC), with the employee shouldering 4.5% of that. For an employee with a ₱38,000 monthly salary, the applicable MSC under the current SSS table would result in an employee share of approximately ₱1,710 per month — though you should verify the exact amount using the current SSS contribution table since MSC brackets are updated periodically.
• PhilHealth: The current premium rate is 5% of the basic monthly salary, split equally between employer and employee at 2.5% each. PhilHealth sets a floor (minimum) and ceiling (maximum) on the salary base. For a ₱38,000 salary, the employee's PhilHealth share is ₱38,000 × 2.5% = ₱950 per month.
• Pag-IBIG (HDMF): For employees earning more than ₱1,500 per month, the employee contribution rate is 2% of monthly compensation, but the employee share is capped based on a ₱5,000 salary ceiling — meaning the maximum employee contribution is ₱100 per month (₱5,000 × 2%). Most employees simply contribute ₱100 per month regardless of how much they earn above ₱5,000.

Continuing our example: ₱38,000 gross compensation minus ₱1,710 (SSS employee share) minus ₱950 (PhilHealth employee share) minus ₱100 (Pag-IBIG employee share) equals ₱35,240 in monthly taxable compensation. This is the figure that will be used to compute your withholding tax.

Step 3 — Compute Your Monthly Taxable Compensation

Your monthly taxable compensation is simply your gross compensation minus your mandatory government contributions and any other BIR-allowed deductions. In the example above, that figure is ₱35,240 per month. There is no additional personal exemption to manually subtract — under the TRAIN Law, the ₱250,000 zero-tax threshold is already factored into the graduated tax table itself, so you do not need to separately deduct it from your taxable income before applying the table.

To apply the annual tax table to a monthly figure, you need to annualize your taxable compensation. Multiply your monthly taxable compensation by 12. In our example: ₱35,240 × 12 = ₱422,880 annualized taxable compensation. This is the figure you bring to the tax table to determine where you fall in the graduated brackets.

Step 4 — Apply the BIR Tax Table to Compute the Tax

Now comes the actual tax computation. With an annualized taxable compensation of ₱422,880, you fall into the third bracket of the TRAIN Law tax table: over ₱400,000 to ₱800,000. The formula for this bracket is: ₱22,500 (fixed tax on the first ₱400,000, representing 15% on the ₱150,000 between ₱250,000 and ₱400,000) plus 20% on the excess over ₱400,000.

1. 1.Determine the excess over ₱400,000: ₱422,880 − ₱400,000 = ₱22,880
2. 2.Compute 20% of the excess: 20% × ₱22,880 = ₱4,576
3. 3.Add the fixed base tax: ₱22,500 + ₱4,576 = ₱27,076 annual income tax
4. 4.Divide by 12 to get the monthly withholding tax: ₱27,076 ÷ 12 = ₱2,256.33

Your employer should be withholding approximately ₱2,256 per month from your salary. In practice, employers typically round per BIR rules and use the official withholding tax tables published through Revenue Memorandum Circulars (RMCs) to avoid rounding and manual computation errors. These tables list exact withholding amounts for specific income brackets for each payroll frequency (daily, weekly, semi-monthly, or monthly), making it straightforward for payroll departments to apply correctly.

Using the BIR Withholding Tax Tables vs. Manual Computation

While the annualization method above is useful for understanding the mechanics, most employers rely on the BIR's official withholding tax tables rather than performing manual annual computations for every employee every month. These tables — which the BIR issues through Revenue Memorandum Circulars — list the exact tax to withhold for specific compensation ranges across four payroll frequencies: daily, weekly, semi-monthly, and monthly. Your HR team simply looks up your taxable compensation in the appropriate column and applies the prescribed amount.

The practical benefit of understanding the underlying formula, however, is that you can verify your own payslip. If the numbers on your payslip do not match what the formula produces — or what the PesoHub calculator shows — that is a signal worth investigating. Errors can happen in payroll software configurations, especially after salary increases or changes in contribution rates. If too little tax is withheld throughout the year, you will owe a balance when you file your annual income tax return (ITR). If too much is withheld, you are entitled to a refund — but only if you file. For a broader explanation of how the system works in practice, visit the PesoHub guide at /guides/tax/how-withholding-tax-works-philippines.

Special Cases That Affect Withholding Tax

The standard computation above applies to most salaried employees, but several situations require adjustments or special handling:

• 13th Month Pay and Other Bonuses: The first ₱90,000 of your 13th month pay and qualifying bonuses is completely tax-exempt. Any amount above ₱90,000 is added to your taxable compensation for the year and must be factored into your withholding. If your total bonuses and 13th month pay are ₱110,000, the taxable portion is ₱20,000.
• Mid-Year Salary Increases or Promotions: When your salary changes mid-year, your employer must re-compute your withholding tax for the remaining months to ensure the correct annual total is collected. Failure to do this often leads to a tax deficiency at year-end.
• Two or More Simultaneous Employers: The Philippine tax system does not automatically combine income from multiple employers. Each employer withholds based only on what they pay you. The combined income may push you into a higher tax bracket, meaning each employer individually under-withholds. You must file an annual ITR (BIR Form 1700) to reconcile the correct total tax.
• Mixed Income Earners (Compensation Plus Freelance or Business Income): If you earn both employment income and income from freelance work, a business, or a profession, you are required to file an annual ITR and pay any additional tax due on your total combined income. Your employer's withholding covers only your compensation income.
• Resigned or Separated Employees: When an employee leaves, the employer must compute the final withholding tax, settle any under- or over-withholding through the last paycheck, and issue BIR Form 2316 on or before the date of separation or within 30 days thereafter.

BIR Form 2316: Your Certificate of Withholding

BIR Form 2316 is one of the most important tax documents a Philippine employee will encounter. It is the Certificate of Compensation Payment/Tax Withheld — an official document your employer must issue to you annually on or before January 31 of the following year, or within 30 days after your last day of employment if you resign or are separated. Form 2316 shows your total gross compensation received during the year and the total income tax withheld by your employer.

For employees with a single employer who have been correctly subjected to withholding throughout the year, BIR Form 2316 can serve as a substitute for filing your own annual income tax return — this is called substituted filing. Your employer files a certified copy with the BIR, and your signed copy serves as your ITR. You do not need to file BIR Form 1700 separately in this case, which simplifies your obligations significantly.

However, you should always keep your Form 2316 because it is required in multiple practical situations: when you apply for a new job and the new employer needs to compute your withholding for the remaining months of the year; when you apply for a bank loan or credit card and financial institutions ask for proof of income; and when you need to file your own annual ITR because you have multiple employers or additional income sources.

Common Mistakes Employees Make With Withholding Tax

Understanding your withholding tax also means knowing the pitfalls that catch many Filipino employees off guard. Here are the most common errors to avoid:

• Assuming zero withholding means zero tax liability. Some small employers — particularly micro-businesses, informal setups, or employers who are simply non-compliant — do not withhold any income tax at all. If this is your situation, you may still owe income tax at year-end. The BIR can assess you for unpaid taxes, and the burden of proof falls on you to show you were unaware of the shortfall.
• Not verifying whether your allowances are taxable or non-taxable. Some employers lump all compensation into a single pay item, making it unclear which portions are subject to tax. If a taxable allowance is mistakenly treated as non-taxable, your withholding will be too low — and you may face a year-end deficiency.
• Ignoring the ₱90,000 tax-exempt ceiling on bonuses. If your employer pays you a performance bonus of ₱50,000 on top of your ₱90,000 13th month pay, that additional ₱50,000 is fully taxable and should be included in your compensation income for the year.
• Failing to notify your employer about a second job or additional income. Your employer computes your withholding based solely on what they pay you. If you have another source of income, the combined amount could place you in a higher bracket — but your primary employer has no way of knowing this unless you tell them.
• Not requesting or safekeeping your BIR Form 2316. This document is irreplaceable for loan applications, job changes, and annual ITR filing. If you lose it, you must request a replacement from your former employer, which can be time-consuming, especially if the company has closed or downsized.

How to Check If Your Employer Is Withholding the Correct Amount

You have every right to understand and verify your own withholding tax computation. Here is how to do it practically:

1. 1.Request a detailed breakdown from your HR or payroll department. They are obligated to explain how your withholding tax was computed. Ask them to show you the gross compensation figure used, the government contributions deducted, the taxable compensation, and the applicable BIR tax table.
2. 2.Use the PesoHub Withholding Tax Calculator at /calculators/tax/withholding-tax-calculator-philippines. Enter your current gross monthly salary, your SSS, PhilHealth, and Pag-IBIG contributions, and any other relevant inputs. Compare the result to what appears on your payslip.
3. 3.Check your BIR Form 2316 at year-end. The annual total tax withheld shown on Form 2316 should match the sum of all monthly deductions on your payslips. If there is a significant discrepancy, raise it with HR before the January 31 deadline.
4. 4.If you suspect under-withholding, ask your employer to adjust the withholding for the remaining months of the year. It is much easier to address a shortfall gradually during the year than to pay a lump-sum tax deficiency when you file your ITR.
5. 5.If your employer refuses to withhold or is not remitting the tax to the BIR, report this to the BIR through their official channels (bir.gov.ph or the BIR contact center). Non-remitting employers expose themselves to penalties and surcharges — and in certain circumstances, employees who knew about non-withholding and failed to report it could also face complications.

Disclaimer

This article is intended for general educational purposes only and does not constitute professional tax, legal, or financial advice. The figures, rates, and contribution schedules referenced in this article are based on information available at the time of writing and are subject to change through BIR Revenue Regulations, SSS circulars, PhilHealth issuances, and Pag-IBIG advisories. Always verify current rates and rules directly with the BIR (bir.gov.ph), SSS (sss.gov.ph), PhilHealth (philhealth.gov.ph), and Pag-IBIG Fund (pagibigfund.gov.ph) before making financial or tax decisions. For complex situations — including multiple employers, mixed income sources, tax disputes, or questions about specific tax treatment of benefits — consult a licensed Certified Public Accountant (CPA) or a BIR-accredited tax agent.