How to Compute Withholding Tax Based on the Newly Enacted TRAIN Law (Tax Reform for Acceleration and Inclusion)

 

On December 19, 2017, President Rodrigo Duterte enacted into law the Republic Act no. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion or the TRAIN law as it is commonly referred to in daily parlance. With the advent of this bill's signing into law, the government aims to address the decades-long inequity in the taxation policies from past administrations that hurt the poor and the middle class. Personal income tax was diminished and in some cases, even completely removed.

Naturally, as comes with every bit of change, there is a corresponding need to adjust our older ways and adapt to changing times. From the broad perspective of running a company and managing employee payroll, the new taxation policies affected by the government would mean drastic changes in the manner in which computations are made in terms of employee deductions and contributions. The government is not amiss in providing tabular presentations of these new rates and deductions for various income brackets, and of course, so is Sprout.

Below is a table showing the new matrix for computing withholding tax:

The preceding table is available for viewing on Sprout Payroll through the Setup tab, under References. Click on Tax Table, and you will be able to see this.  The computation of the deductible tax depends on whether an employee is paid daily, weekly, semi-monthly, or monthly. It is given by the following formula:

Taxable Income = Taxable Earnings - Nontaxable Deductions

Taxable Earnings include the following:

Basic Pay + Overtime Pay + Night Differential - Late and Undertime - Absences + Taxable Allowances +/- Salary Adjustments (largely, the Taxable Earnings refer to one's gross salary, except that it doesn't include the deductions)

Nontaxable Deductions are comprised of the following:

SSS contribution + PhilHealth contribution + Pag-IBIG contribution (the mandatory amount only for HDMF contribution)

Once the taxable income is already known, you can now compute the withholding tax based on the table above.

TAX COMPUTATION FOR VARIOUS PAY-OUT TYPES

Let's now do some sample computations of Tax deductions for each of the different kinds of pay-outs. First, let's try doing the computation for daily wage earners. For instance, the employee’s daily taxable earnings for the payroll period is P2,500.00. The non-taxable deductions, for instance, would be SSS (P90.80), Philhealth (P68.75), and HDMF (P100.00). Hence, the total non-taxable deductions will be P259.55.

Basing on the general formula given above, taxable earnings of P2,500 less non-taxable deductions of P259.55 results to a taxable income of P2,240.45. Now, based on the new tax table under daily wages, the compensation range will be covered by column number 4 (the P2,192.00 - P5,478.00 range).

This is where it may get a little tricky. The taxable income of P2,240.45  will be deducted by the lower end of the compensation range, that is, P2,192.00. The result is P48.45. This excess amount of P48.45 will be multiplied by 25% tax rate and added to the standard P280.85 as indicated in the table. Thus, the withholding tax to be deducted from the employee shall be P292.96 (P280.85 + [P48.45 x  0.25]). Please refer to the illustration below for daily wage tax deduction:

Withholding Tax shall be computed as follows:

Total Taxable Compensation	P 2,240.45
Less: Compensation Range under Column 4	P 2,192.00
Excess	P      48.45 x         0.25 P      12.11
Fixed Amount - 25% Percentage Tax	P  280.85
Tax on excess (P48.45 x 25%)	P    12.11
Total daily withholding tax	P 292.96

Now let's move on to the computation for weekly wage earners. For instance, an employee’s weekly taxable earnings for the payroll period is P10,000.00. The non-taxable deductions would amount to the following: SSS (P363.30), Philhealth (P125.00), and HDMF (P100.00). Hence, the total for non-taxable deductions will be P588.30.

We revert to the formula from above to compute the withholding tax. Taxable earnings of P10,000.00 less non-taxable deductions of P588.30 results in P9,411.70. Now, based on the new tax table under weekly wages, the compensation range will be covered by column number 3. The taxable income of P9,411.70 deducted by the lower end of the compensation range given by the amount P7,692.00 results in P1,719.70. This excess amount of P1,719.70 will again be multiplied by 20% tax rate and added to the standard value P432.60 as provided by the table. Thus, the withholding tax to be deducted from the employee shall be P776.54 (P432.60 + [P1,719.70 x 0.20]). Please refer to the illustration below for weekly wage computations:

Withholding Tax shall be computed as follows:

Total Taxable Compensation	P 9,411.70
Less: Compensation Range under Column 3	P 7,692.00
Excess	P 1,719.70 x        0.20 P    343.94
Tax on P7,692.00	P     432.60
Tax on excess (P1,719.70 x 20%)	P     343.94
Total weekly withholding tax	P 776.54

This time, let's try solving for the standard semi-monthly payout. Let's say an employee’s semi-monthly basic salary is P10,000, plus overtime amount of P1,000 less absences of P500 and additional salary adjustment amounting to P500. This would amount to total taxable earnings for the payroll period of P11,000.00. The non-taxable deductions, on the other hand, would be SSS (P290.65), Philhealth (P137.50), and HDMF (P50.00). Hence, the total for non-taxable deductions will be P478.15.

Based on the table above, taxable earnings of P11,000.00 less non-taxable deductions of P478.15 taxable income will be P10,521.85. Now, based on the new tax table under semi-monthly, the compensation range will be covered by column number 2. The taxable income of P10,521.85 less the lower end of the compensation range, that is P10,417.00. This results to P104.85. This excess amount of P104.85 will be multiplied by 15% tax rate, not adding it to anything this time (as per the table). Thus, the withholding tax to be deducted from the employee shall be P15.73 (P104.85 x0.15). Please refer to the illustration below for semi-monthly:

Withholding Tax shall be computed as follows:

Total Taxable Compensation	P 10,521.85
Less: Compensation Range under Column 2	P 10,417.00
Excess	P      104.85 x          0.15          15.73
Tax on P10,417.00	P    0.00
Tax on excess (P104.85 x 20%)	P  15.73
Total semi-monthly withholding tax	P 15.73

Lastly, let's try computing for the tax deduction for monthly wage earners. Let's project that the employee’s monthly taxable earnings for the payroll period are P100,000.00. The non-taxable deductions would be SSS (P1,350.00), Philhealth (P1,600.00), and HDMF (P100.00). Hence, the total for non-taxable deductions will amount to P3,050.00.

Still based on our main formula above, taxable earnings of P100,000.00 less the non-taxable deductions of P3,050.00 will result to a taxable income of P96,950.00. Based on the new tax table under monthly wages, the compensation range is covered by column number 4. Taxable income of P96,950.00 less the lower end of the compensation range of P66,667.00 will result to P30,283.00. This excess amount of P30,283.00 will be multiplied by 25% tax rate and then added to a standard P8,541.80 as provided by the table. Thus, the withholding tax to be deducted from the employee shall be P16,112.55 (P8,541.80 + [P30,283.00 x 0.25]). Please refer to the illustration below for monthly:

Withholding Tax shall be computed as follows:

Total Taxable Compensation	P 96,950.00
Less: Compensation Range under Column 4	P 66,667.00
Excess	P  30,283.00 x            0.25 P    7,570.75
Tax on P66,667.00	P   8,541.80
Tax on excess (P30,283.00 x 25%)	P     7,570.75
Total monthly withholding tax	P  16,112.55

Well, that was quite long-winded, but it is important to know how to compute for these things, especially for those at the forefront of payroll services. At any rate, the tax computation table is available via Sprout Payroll to provide a reference for those who need it, and those who may occasionally find the need to quench their curiosity as to how tax deductions are computed for their pay-out. At best, this article can only serve as a template and guide as to how the computations are done, and doing them on one's own is all in all a different experience -- perhaps, an experience we should have at least once, and an experience we can keep right up our sleeves.