Income tax withheld by employers from employees' monthly salaries based on the graduated withholding tax table, remitted monthly to the BIR.
Withholding Tax on Compensation (WTC) is the Philippines' pay-as-you-earn income tax system for employees. Employers are legally required to compute, withhold, and remit the income tax on their employees' salaries each month using the BIR's prescribed withholding tax table. The employee effectively pays income tax gradually throughout the year rather than in a lump sum come April.
The monthly withholding is computed based on the employee's monthly taxable compensation (basic pay plus taxable allowances, minus mandatory deductions like SSS, PhilHealth, Pag-IBIG contributions). The employer uses the graduated withholding tax table published by the BIR to determine how much to withhold.
In practice: Pedro Reyes earns ₱35,000 per month at Bagong Simula Enterprises. His taxable compensation after mandatory deductions is approximately ₱32,000/month. Using the BIR table, the monthly withholding is around ₱2,500. Bagong Simula remits this ₱2,500 monthly via BIR Form 1601C. Pedro receives ₱32,500 net (₱35,000 − ₱2,500).
Why it matters: Employers are fully liable for the WTC they should have withheld but did not. If an employer fails to withhold — or withholds less than required — the BIR can assess the employer for the full shortfall plus penalties, even if the employee separately pays their own tax. Run a year-end reconciliation every December to catch any under- or over-withholding before the January 31 1604CF deadline.
Employees whose sole income is compensation and whose employer correctly withheld the right taxes qualify for "substituted filing" — they do not need to file their own ITR. BIR Form 2316 (issued by the employer) serves as their return.