Taxation Rules for Annualized Income in the Philippines

September 28, 2023

Taxation rules in the Philippines can be complex and intimidating. This is true with annualized income computation. Businesses need to understand these rules around it for proper annualiztion.

Ensure compliance with tax regulations. Delve into the taxation rules for annualized income in the Philippines, and find out what you need to navigate this aspect of payroll management.

Understanding Annualized Income

Annualized income is the total taxable income of an individual earned in the current year. This includes ALL income or any amount that comes in one’s payroll. 

Learn how to distinguish annualized income from monthly income, as tax calculations and deductions differ between the two.

Tax Rates and Thresholds

As of my last knowledge update in September 2021, here are the tax rates and thresholds for annualized income in the Philippines:

Taxable Income Below PHP 250,000:

Tax Rate: 0%

Taxable Income Over PHP 250,000 but Not Over PHP 400,000:

Tax Rate: 20% of the excess over PHP 250,000

Taxable Income Over PHP 400,000 but Not Over PHP 800,000:

Tax Rate: PHP 30,000 + 25% of the excess over PHP 400,000

Taxable Income Over PHP 800,000 but Not Over PHP 2,000,000:

Tax Rate: PHP 130,000 + 30% of the excess over PHP 800,000

Taxable Income Over PHP 2,000,000 but Not Over PHP 5,000,000:

Tax Rate: PHP 490,000 + 32% of the excess over PHP 2,000,000

Taxable Income Over PHP 5,000,000:

Tax Rate: PHP 1,450,000 + 35% of the excess over PHP 5,000,000

Note: Rates are subject to change, and need to be checked from the Bureau of Internal Revenue (BIR).

Annualized Tax Calculation

Here are the steps in calculating for the annual tax:

Determine Annualized Income: Add up all sources of income for the year, including salary, bonuses, and other taxable benefits.

Deductions: Consider allowable deductions such as the Personal Exemption, Premium Payments for Health and/or HMO, and Premium Payments for Life Insurance.

Compute Taxable Income: Subtract the deductions from the annualized income to arrive at the taxable income.

Apply Tax Rates: Use the appropriate tax rate based on the taxable income to compute the annual income tax due.

Withholding Tax: Employers are required to withhold a portion of the employee's salary each month based on the estimated annual income tax.

Understanding the taxation rules for annualized income in the Philippines is vital for both employers and employees. Compliance not only ensures that individuals pay the correct amount of taxes. It also helps in avoiding any possible penalties and legal issues.

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