Withholding Tax for Compensation Income Under the Gross Income Tax System

December 16, 1981 REVENUE REGULATIONS NO. 20-81 SUBJECT : Withholding Tax for Compensation Income Under the Gross Income Tax System TO : All Internal Revenue Officers and Others Concerned SECTION 1 . Scope . Pursuant to Section 326 in relation to Section 91 of the National Internal Revenue Code, as amended, these Regulations are promulgated to prescribe the withholding tax tables and necessary guidelines to implement the provisions of Section 21 of the Tax Code, as amended by Batas Pambansa Blg. 135. SECTION 2 . Compensation Income . A. Gross Compensation Income Subject to Withholding . Income arising from an employer-employee relationship, whether monetary or non-monetary, such as those enumerated below shall be included in the computation of gross compensation income: 1. In General . a) Salaries, wages, compensation, emoluments and honoraria; b) Bonuses; c) Allowances (such as transportation, representation, entertainment and the like); d) Fringe benefits, monetary and non-monetary; (e) Fees, including director's fees paid to a director who is at the same time an employee of the payor; (f) Taxable pensions; and (g) Other income of a similar nature. 2. Guidelines for determining gross compensation income . Gross compensation income shall be determined in accordance with the rules and definitions prescribed under Section 2 of Revenue Regulations V-8, as amended, which are quoted hereunder for ready reference. "a) The term " wages " means all remuneration for services performed by an employee for his employer unless specifically excepted under Section 90 of Title II of the National Internal Revenue Code. "The name by which the remuneration for services is designated is immaterial. Thus, salaries, fees, bonuses, commissions on sales or on insurance premiums, pensions, and retired pay are wages within the meaning of the statute if paid as compensation for services performed by the employee for his employer. "The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes wages. Thus, it may be paid on the basis of piecework, or a percentage of profits; and may be paid hourly, daily, weekly, monthly, or annually. "Wages may be paid in money or in some medium other than money, as, for example, stocks, bonds, or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as wages subject to withholding. If the services were rendered at a stipulated price in the absence of evidence to the contrary such price will be presumed to be the fair value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time of the transfer. If a person receives as remuneration for services rendered a salary and in addition thereto living quarters or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of wages subject to withholding. If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as wages subject to withholding. "Ordinarily, facilities or privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as wages subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, good will, contentment, or efficiency of his employees. "Where wages are paid in property other than money, the employer should make necessary arrangements to insure that the amount of the tax required to be withheld is available for payment to the Collector COMMISSIONER of Internal Revenue. "Tips or gratuities paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer, are not subject to withholding. "Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them. "b) Pensions and retired RETIREMENT pay . In general, pensions and retired retirement pay are wages subject to withholding. So-called pensions awarded by one to whom no services have been rendered are mere gifts or gratuities and do not constitute wages. "c) Traveling and other expenses . Amounts paid specifically either as advances or reimbursements for traveling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages and are not subject to withholding. Traveling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment. "d) Vacation allowances . Amounts of so-called "vacation allowances" paid to an employee constitute wages. Thus, the salary of an employee on vacation, paid notwithstanding his absence from work, constitutes wages. "e) Dismissal payments . Any payment made by an employer to an employee on account of dismissal, that is, involuntary separation from the services of the employer, constitute wages regardless of whether the employer is legally bound by contract, statute, or otherwise to make such payment. "f) Deductions by employer from wages of employee . The amount of any tax which is required by law to be deducted by the employer from the wages of an employee is considered to be a part of the employee's wages and is deemed to be paid to the employee as wages at the time the deduction is made. It is immaterial that the National Internal Revenue Code requires such deductions and the payment of the amounts thereof to the Government. "g) Remuneration for services as employee of non-resident alien individual or foreign entity . The term "wages" includes remuneration for services performed by a citizen or resident of the Philippines, as an employee of a non-resident alien individual, foreign partnership or foreign entity engaged in trade or business within the Philippines. Any person, paying wages on behalf of a non-resident alien individual, foreign partnership, or foreign corporation not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable with respect to an employer." B. Gross Compensation Income Not Subject to Withholding . The following are some of the income payments not subject to withholding tax on salaries and wages: 1. " Damages . Actual, moral, exemplary and nominal damages received by the employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employer-employee relationship; 2. " Life Insurance . The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income; 3. " Amount received by insured as a return of premium . The amount received by the insured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; 4. " Compensation for injuries or sickness . Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness; 5. " Income exempt under treaty . Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines; 6. " Retirement benefits, pensions, gratuities, etc . a) "Retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided , That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement: Provided, further , That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this subsection, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to any purpose other than for the exclusive benefit of the said officials and employees; b) "Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; c) "The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public; d) "Payments of benefits due or become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administrations; aisa dc e) "Payments of benefits made under the Social Security Act of 1954, as amended; f) "Benefits received from the GSIS and the retirement gratuity received by government officials and employees; 7. " Fees paid to a public official . Authorized fees paid to public officials such as notaries public, clerks of courts, sheriffs, etc. for services rendered in the performance of their official duties are excepted from the definition of the term "wages" and hence are not subject to withholding. However, salaries paid such officials by the Government, or government agency or instrumentality, are subject to withholding. 8. " Remuneration paid for agricultural labor . a) "In general The term "wages" does not include remuneration for services which constitute agricultural labor and paid entirely in products of the farm where the labor is performed. "In general, however, the term "agricultural labor" does not include services performed in connection with forestry, lumbering or landscaping; b) "Services constituting agricultural labor Remuneration paid entirely in products of the farm where the labor is performed for services performed on a farm by an employee of any person in connection with any of the following activities is excepted as remuneration for agricultural labor: (i) "The cultivation of the soil; (ii) "The raising, shearing, feeding, caring for, training, or management of livestock, bees, poultry or wildlife; or (iii) "The raising or harvesting of any other agricultural or horticultural commodity. "The term "farm" as used in this subsection includes stock, dairy, poultry, fruit, and truck farms, plantations, ranches, nurseries, ranges, orchards, and such greenhouses and other similar structures as are used primarily for the raising of agricultural or horticultural commodities. c) "The remuneration paid entirely in products of the farm where labor is performed for the following services performed by an employee in the employ of the owner or tenant or other operator of one or more farms is excepted as remuneration for agricultural labor, provided the major part of such services is performed on a farm: (i) "Services performed in connection with the operation, management, conservation, improvement, or maintenance of any such farms or its tools or equipment; or (ii) "Services performed in salvaging timber, or clearing land of brush and other debris, left by a hurricane or typhoon. "The services described in (i) may include, for example, services performed by carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers, and other skilled or semi-skilled workers which contribute in any way to the conduct of the farm or farms, as such, operated by the person employing them, as distinguished from any other enterprise in which such person may be engaged. Since the services described in this paragraph must be performed in the employ of the owner or tenant or other operator of the farm, the exception does not extend to remuneration paid for services performed by employees of a commercial painting concern, for example, which contracts with a farmer to renovate his farm properties. d) "Remuneration paid entirely in products of the farm where labor is performed for services performed by an employee in the employ of any person in connection with any of the following operations is excepted as remuneration for agricultural labor without regard to the place where such services are performed: (i) "The making of copra, stripping of abaca, etc.; (ii) "The hatching of poultry; (iii) "The raising of fish; (iv) "The operation or maintenance of ditches, canals, reservoirs, or waterways used exclusively for supplying or storing water for farming purposes; (v) "The production or harvesting of crude gum from a living tree or the processing of such crude gum into gum spirits of turpentine and gum resin, provided such processing is carried on by the original producer of such crude gum. e) "Remuneration paid entirely in products of the farm where labor is performed for services performed by an employee in the employ of a farmer or a farmer's cooperative organization or group in the handling, planting, drying, packing, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to a carrier for transportation to market, of any agricultural or horticultural commodity, produced by such farmer or farmer-members of such organization or group, is excepted as remuneration for agricultural labor. Services performed by employees of such farmer or farmer's organization or group in the handling, planting, drying, packing, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to a carrier for transportation to market, of commodities produced by persons other than such farmer or members of such farmer's organization or group are not performed "as an incident to ordinary farming operations." "All payments made in cash or other forms other than products of the farm where labor is performed, for services constituting agricultural labor as explained above, are not within the exception. 9. " Remuneration for private service in a private home . Remuneration paid for services of a household nature performed by an employee in or about the private home of the person by whom he is employed is excepted from the term "wages." "A private home is the fixed place of abode of an individual family. "If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and the remuneration paid for services performed therein is not excepted. "In general, services of a household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use. "The remuneration paid for the services above enumerated is not within the exception if performed in or about rooming or lodging houses, boardinghouses, clubs, hotels, hospitals, or commercial offices or establishments. "Remuneration paid for services performed as a private secretary, even though performed in the employer's home, is not within the exception. 10. " Remuneration for casual labor not in the course of employer's trade or business . The term "casual labor" includes labor which is occasional, incidental or irregular. "The expression: "not in the course of the employer's trade or business" includes labor that does not promote or advance the trade or business of the employer. "Thus, remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is excepted." " Example : A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly wage to repair his home. B works irregularly and spends the greater part of two days in completing the work. Since B's labor is casual and is not in the course of A's trade or business, the remuneration paid for such services is excepted. "The remuneration paid for casual labor, that is, labor which is occasional, incidental, or irregular, but which is in the course of the employer's trade or business, does not come within the above exception. " Example (1) . C's business is that of operating a sawmill. He employs D for two hours, at an hourly wage, to remove sawdust from his mill. D's labor is casual since it is occasional, incidental or irregular, but it is in the course of C's trade or business and the remuneration paid for such labor is not excepted. " Example (2) . E is engaged in the business of operating a department store. He employs additional clerks for short periods. While the services of the clerks may be casual, they are in the course of the employer's trade or business and, therefore, the remuneration paid for such services is not excepted." SECTION 3 . Nature of the Withholding Tax . A . Final Withholding Tax . The taxes withheld from the following employees deriving compensation income from only one employer shall be deemed as a final withholding tax: 1. Single or married individuals but legally separated; 2. Heads of family; 3. Married individuals when not legally separated and only one of the spouses receives compensation income; and 4. Married individuals when not legally separated and both spouses receive compensation income from the same employer. In this case, the employer shall treat the spouses as a single taxable unit by aggregating their joint compensation income in determining the correct withholding tax. Any under-withholding or over-withholding of taxes not exceeding P3.00 shall no longer be collected or refunded. B. Creditable Withholding Tax . Taxes withheld by more than one employer from individuals, whether single, head of family or married, shall not be deemed final but may be applied against the tax due per income tax return required to be filed under Section 45 a(2) of the Tax Code. SECTION 4 . Filing of Return . A. Employees whose withholding tax are deemed final under Sec. 3 paragraph A, hereof, shall file the revised W-2 form to be accomplished by both the employer and the employee and shall be filed with the Bureau of Internal Revenue on the due date for the filing of income tax returns for fixed income earners. B. Employees whose withholding tax are deemed not final shall file the income tax returns required to be filed under Sec. 45(a) 2 of the Tax Code. cdt SECTION 5 . Withholding Tax Exemptions . Every employee receiving wages shall file with his employer a signed withholding exemption certificate, in triplicate, containing a written declaration that it is made under the penalties of perjury in lieu of any oath otherwise required, on Form W-4, relating to the number of withholding exemptions claimed which in no case shall exceed the number to which he is legally entitled. Every employee shall file the revised exemption certificate not later than January 20, 1982. A new withholding exemption certificate shall be filed within ten (10) days from the time a change in his personal status and number of dependents occur. New employees shall file with their employers the required certificate within five (5) days from the start of employment. If an employee fails or refuses to file the withholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table. The personal exemption to which an employee is entitled depends upon his status as single, married, head of family, and the number of his qualified dependents (i.e., legitimate, recognized natural or adopted children in accordance with Section 23 of the Tax Code, as amended.) The amount withheld shall be deemed a final tax if the employee is one of those enumerated under Sec. 3 paragraph A hereof, otherwise, the same shall only be creditable. Each employee is entitled to the following personal and additional exemptions: A. P3,000 for single or married but legally separated; B. P4,500 for head of family; C. P6,000 for married but not legally separated; D. P2,000 for each qualified dependent child but limited up to four (4) dependents only; and E. P1,000 for each child who otherwise qualified as dependent having been born prior to 1973. SECTION 6 . Repealing Clause . Any provision of existing regulations or orders which are inconsistent herewith are hereby repealed or modified accordingly. SECTION 7 . Effectivity . These Regulations shall take effect beginning January 1, 1982. CESAR VIRATA Minister of Finance Recommended by: RUBEN B. ANCHETA Acting Commissioner ANNEX A HEAD OF FAMILY : Monthly : Annual : Annual : Monthly : Annual : Annual : Diffe- : Gross : Gross : Taxable : Withholding : Withholding : Tax : rence : Compen- : Compen- : Compen- : Tax : Tax : Due : : sation : sation : sation : (a) : (b) : (a-b) : : Income : Income : Income : : : : HEAD OF FAMILY : : : : : : : WITH FIVE (5) : : : : : : : DEPENDENTS : : : : : : : I : P 1,333 : P 15,996 : P 2,496 : P 0 : P 0 : P 0 : P 0 II : 1,500 : 18,000 : 4,500 : 1.67 : 20.04 : 20.00 : 0.04 III : 43,000 : 516,000 : 502,500 : 10,254.40 : 123,052.80 : 123,050.00 : 2.80 : : : : : : : HEAD OF FAMILY : : : : : : : WITH SIX (6) : : : : : : : DEPENDENTS : : : : : : : I : P 1,417 : P 17,004 : P 2,504 : P 0 : P 0 : P 0.04 : P (0.04) II : 1,600 : 19,200 : 4,700 : 1.83 : 21.96 : 22.00 : (0.40) III : 43,000 : 516,000 : 501,500 : 10,225.00 : 122,700.00 : 122,700.00 : 0 : : : : : : : HEAD OF FAMILY : : : : : : : WITH SEVEN (7) : : : : : : : DEPENDENTS : : : : : : : I : P 1,500 : P 18,000 : P 2,500 : P 0 : P 0 : P 0 : P 0 II : 1,700 : 20,400 : 4,900 : 2.00 : 24.00 : 24.00 : 0 III : 43,000 : 516,000 : 500,500 : 10,195.95 : 122,351.40 : 122,350.00 : 1.40 : : : : : : : MARRIED WITH : : : : : : : SEVEN (7) DEPEN- : : : : : : : DENTS : : : : : : : I : P 1,625 : P 19,500 : P 0 : P 0 : P 0 : P 0 : P 0 II : 1,700 : 20,400 : 3,400 : 0.75 : 9.00 : 9.00 : 0 III : 44,000 : 528,000 : 511,000 : 10,502.20 : 126,026.00 : 126,025.00 : 1.40 : : : : : : : HEAD OF FAMILY : : : : : : : WITHOUT DEPEN- : : : : : : : DENTS : : : : : : : I : P 583 : P 6,996 : P 2,496 : P 0 : P 0 : P 0 : P 0 II : 600 : 7,200 : 2,700 : 0.17 : 2.04 : 2.00 : 0.04 III : 43,000 : 516,000 : 511,500 : 10,516.90 : 126,202.80 : 126,200.00 : 2.80 : : : : : : : HEAD OF FAMILY : : : : : : : WITH ONE (1) : : : : : : : DEPENDENT : : : : : : : I : P 750 : P 9,000 : P 2,500 : P 0 : P 0 : P 0 : P 0 II : 800 : 9,600 : 3,100 : 0.50 : 0.60 : 0.60 : 0 III : 43,000 : 516,000 : 509,500 : 10,458.45 : 125,501.40 : 125,500.00 : 1.40 : : : : : : : MARRIED WITH : : : : : : : FOUR (4) : : : : : : : DEPENDENTS : : : : : : : I : P 1,375 : P 16,500 : P 2,500 : P 0 : P 0 : P 0 : P 0 II : 1,500 : 18,000 : 4,000 : 1.25 : 15.00 : 15.00 : 0 III : 45,000 : 540,000 : 526,000 : 10,939.70 : 131,276.40 : 131,275.00 : 1.40 : : : : : : : MARRIED WITH : : : : : : : FIVE (5) : : : : : : : DEPENDENTS : : : : : : : I : P 1,458 : P 17,496 : P 2,496 : P 0 : P 0 : P 0 : P 0 II : 1,600 : 19,200 : 4,200 : 1.42 : 17.04 : 17.00 : P 0 III : 43,000 : 516,000 : 501,000 : 10,210.65 : 122,527.80 : 122,525.00 : 2.80 : : : : : : : MARRIED WITH : : : : : : : SIX (6) : : : : : : : DEPENDENTS : : : : : : : I : P 1,542 : P 18,504 : P 2,504 : P 0 : P 0 : P .04 : P (0.04) II : 1,600 : 19,200 : 3,200 : 0.58 : 6.96 : 7.00 : (0.04) III : 44,000 : 528,000 : 512,000 : 10,531.25 : 126,375.00 : 126,375.00 : 0 : : : : : : : MARRIED WITH : : : : : : : ONE (1) : : : : : : : DEPENDENT : : : : : : : I : P 875 : P 10,500 : P 2,000 : P 0 : P 0 : P 0 : P 0 II : 900 : 10,800 : 2,800 : 0.25 : 3.00 : 3.00 : 0 III : 45,000 : 540,000 : 532,000 : 11,114.70 : 133,376.40 : 133,375.00 : 1.40 : : : : : : : MARRIED WITH : : : : : : : TWO (2) : : : : : : : DEPENDENTS : : : : : : : I : P 1,042 : P 12,504 : P 2,504 : P 0 : P 0 : P 0.04 : P (0.04) II : 1,100 : 13,200 : 3,200 : 0.58 : 6.96 : 7.00 : (0.04) III : 45,000 : 540,000 : 530,000 : 11,056.25 : 132,675.00 : 132,675.00 : 0 : : : : : : : MARRIED WITH : : : : : : : THREE (3) : : : : : : : DEPENDENTS : : : : : : : I : P 1,208 : P 14,496 : P2,496 : P 0 : P 0 : P 0 : P 0 II : 1,300 : 15,600 : 3,600 : 0.92 : 11.04 : 11.00 : 0.04 III : 45,000 : 540,000 : 528,000 : 10,998.15 : 131,977.80 : 131,975.00 : 2.80 : : : : : : : HEAD OF FAMILY : : : : : : : WITH TWO (2) : : : : : : : DEPENDENTS : : : : : : : I : P 917 : P 11,004 : P 2,504 : P 0 : P 0 : P .04 : P (0.04) II : 1,000 : 12,000 : 3,500 : 0.83 : 9.96 : 10.00 : (0.04) III : 43,000 : 516,000 : 507,500 : 10,400.00 : 124,800.00 : 124,800.00 : 0 : : : : : : : HEAD OF FAMILY : : : : : : : WITH THREE (3) : : : : : : : DEPENDENTS : : : : : : : I : P 1,083 : P 12,996 : P 2,496 : P 0 : P 0 : P 0 : P 0 II : 1,200 : 14,400 : 3,900 : 1.17 : 14.04 : 14.00 : 0.04 III : 43,000 : 516,000 : 505,500 : 10,341.90 : 124,102.80 : 124,100.00 : 2.80 : : : : : : : HEAD OF FAMILY : : : : : : : WITH FOUR (4) : : : : : : : DEPENDENTS : : : : : : : I : P 1,250 : P 15,000 : P 2,500 : P 0 : P 0 : P 0 : P 0 II : 1,300 : 15,600 : 3,100 : 0.50 : 6.00 : 6.00 : 0 III : 43,000 : 516,000 : 503,500 : 10,283.45 : 123,401.40 : 123,400.00 : 1.40