Tax Annualization in the Philippines: An Employer's FAQ (and How Upcloud Accounting Can Help)
Published Date: September 29, 2025
Published By: Jac Cantos, Upcloud Accounting
As December approaches, Philippine employers face the critical task of year-end payroll adjustments, also known as tax annualization. This ensures accurate computation and filing of employee taxes with the Bureau of Internal Revenue (BIR).
For SMEs, founders, and HR/Payroll managers, this process can be stressful, requiring meticulous attention to detail and strict adherence to Philippine tax law and BIR deadlines. Mistakes can lead to penalties, payroll disputes, and employee dissatisfaction.
To help you navigate tax annualization, Upcloud Accounting has compiled answers to the most frequently asked questions, along with insights into how our services can simplify the process.
What is Tax Annualization?
Tax annualization is the process of calculating each employee's actual income tax due for the entire year and reconciling it with the taxes already withheld from their salaries.
At year-end, employers must:
Adjust employee tax withholdings to reflect their actual income.
Determine if an employee has overpaid (eligible for a refund) or underpaid (requiring additional withholding).
Tax annualization ensures full BIR compliance, protects your business from penalties, and maintains employee trust.
Why Do Employees Receive Large Deductions or Refunds at Year-End?
Year-end adjustments may result in additional tax deductions or refunds if:
The employee received salary increases, bonuses, or commissions.
The employee transferred employers mid-year.
Incorrect withholding tax brackets were applied earlier in the year.
Proactive and accurate annualization ensures BIR compliance while maintaining transparency and employee trust.
How Do I Compute Annualized Tax?
Employers must:
Consolidate the employee's total taxable income for the year.
Apply the BIR's latest income tax table to determine the total annual tax due.
Deduct the tax already withheld during the year.
Collect any shortfall or release refunds in the December payroll.
Formula: Annual Tax Due = (Total Net Taxable Income × Applicable Tax Rate)
Taxable Income Includes:
Regular salary
13th-month pay (above the ₱90,000 exemption)
Commissions, allowances, other benefits
Philippine Income Tax Table (as of 2024):
Example:
If the net taxable income is Php 450,000 for the entire year, the annual tax due will be Php 32,500.
Computation:
Net Taxable Income: Php 450,000
Lower Limit (Php 400,000–800,000): Php 400,000
Excess: Php 50,000
Additional Tax Rate: 20%
Additional Tax Due (Excess × Tax Rate): Php 50,000 × 20% = Php 10,000
Annual Tax Due (Base Tax + Additional Tax): Php 22,500 + 10,000 = Php 32,500
Which Employees Are Covered, and What Should Employers File?
Correct employee classification is critical. Misclassification can lead to penalties and disputes.
Substituted Employees: Employees with only one employer for the entire year and no other income source. Employers file BIR Form 2316 on their behalf. Employees don’t need to file their own income tax returns.
Non-Substituted Employees: Employees with two or more employers or other income sources. Employers must issue Form 2316. Employees must file their own Annual ITR (BIR Form 1700/1701).
What is BIR Form 2316?
BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) summarizes each employee's total income and taxes withheld.
Employers must:
Issue signed copies to employees by January 31 of the following year.
Submit certified copies to the BIR by February 28 (for substituted employees only).
What Are the Important Deadlines?
December: Conduct tax annualization adjustments in the last payroll cycle.
January 31: Issue signed BIR Form 2316 to employees.
February 28: Submit signed Form 2316 for substituted employees to the BIR.
At Upcloud Accounting, we proactively prepare for tax annualization, ensuring a smooth, penalty-free process for our clients.
Our Proactive Timeline:
August 16 – December 15: Consolidation of previous Form 2316 from current and former employers.
September – December: Implement tax adjustments for employees with additional dues.
December 30: Finalize annualization adjustments in the last payroll cycle.
January 9: File BIR Form 1601C (December withholding tax return).
January 23: Release employee tax refunds (can also be released as early as December 30).
January 31: Issue Form 2316 to all employees.
February 28: Submit signed Form 2316 for substituted employees to the BIR.
This structured timeline ensures compliance, timely refunds, and stronger employee trust.
Upcloud Accounting: Virtual Outsourced Accounting and Bookkeeping Services in the Philippines
Upcloud Accounting offers accounting, bookkeeping, tax compliance, and business licensing services specializing with startups and SMEs in the Philippines.
Our goal is to increase efficiency, automation, and transparency across the accounting and finance functions of our clients with our cutting-edge technology. If you want to move your company’s finance function online, contact our Team of Expert Accountants and Bookkeepers directly via [email protected] or visit www.upcloudaccounting.com to learn more about how Upcloud Accounting accounting services can support your PH business!
Disclaimer: This article or blog is only for general knowledge and guidance and is not a substitute for an expert opinion. For technical advice, please consult your tax / legal advisor for your specific business concerns. For comments, suggestions, and feedback, feel free to email us at [email protected].
