Annualization is the process of determining if employees are eligible for a tax refund or need to pay additional tax at the end of a period. Salarium provides automatic computation of tax annualization for the following:

• End-of-Year Annualization

• End-of-Month Annualization

• Annualization upon Termination

This document presents how Salarium computes for the Annualized Tax for the different scenarios.

A. End of the Year Annualization

Example of Employee’s Payroll:

In the table, we need to determine if the withholding tax of Php 11,299.00 is a refund or deficit after Annualization. To obtain the tax adjustment for December, we need to compute how much tax the employee should pay for his total taxable income.

Note: Since Salarium keeps track of the taxable income of each employee per payroll, we can skip totaling the Gross Income and then deducting non-taxable income (such as non-taxable allowances) which is common when manually computing Annualization.

STEPS TO COMPUTE TAX ADJUSTMENT

Step 1: Compute the total taxable income of the employee.

Step 2: Compute the total withholding tax the employee should have paid for the entire year.

Based on our example, we take a look at the tax table for the month of December.

Note: This table takes into account the P50k plus P25k per dependent exceptions,Based on the employee’s tax status, the employee’s taxable income falls under 4 dependents, bracket 6. Therefore, the tax base is Php 290,000. Also, it will have a Tax Rate of 25% and Php 22,500. Following the formula above, the computed withholding tax is: (340,850.19 - 290,000) * (25%) + (22,500) = 35,212.5475

Step 3: Compute the total tax withheld for the entire year.

Step 4: Deduct the amount from Step 2 from the amount from Step 3.

Php 40,597.70 – Php 35,212.5475 = Php 5,385.15

Tax Adjustment

If the Total Tax Withheld for the entire year is a positive number, it will be refunded.  If the Total Tax Withheld for the entire year is a negative number, the employee has a tax deficit and it will be deducted from his or her net pay.

In our example, the Total Tax Withheld for the entire year is more than what the employee should have actually paid.In the Salarium system, the tax adjustments will be deducted or added to current payroll’s withholding tax. Since the Tax Adjustment calculated above is positive, it will be deducted from that payroll’s withholding tax.

In this case, for the month of December, the employee will only be withheld an amount of Php 5,843.84 after deducting Php 5,385.15 from Php 11,228.99 in taxes. Therefore, in our example, the following table will explain the difference.  

Before Annualization:

AFTER ANNUALIZATION:

B. End of Month Annualization

Example of Employee’s Payroll:

In the table, we need to determine if the withholding tax for the month of July (mid-year) of Php 819.78 is a refund or deficit after Annualization. To determine the tax adjustment, we need to compute how much tax the employee should pay for his total taxable income.

Note: Since Salarium keeps track of the taxable income of each employee per payroll, we can skip totaling the Gross Income and then deducting non-taxable income such as non-taxable allowances, which is common when manually computing Annualization.

STEPS TO COMPUTE THE TAX ADJUSTMENT

Step 1: Compute the total taxable income of the employee.

 Step 2: Compute the total withholding tax the employee should have paid for the entire year. To do so, we take a look at the tax table for the month of August.

Note: This table takes into account the Php 50,000 plus Php 25,000 per dependent exceptions.

The employee’s taxable income falls under 3 dependents, bracket 4. Therefore, the Tax Base is Php 155,000. Also, it will have a Tax Rate of 15% and Php 2,500. Following the formula, the new withholding tax to be paid for the entire year will be:

(173,881.01 - 155,000) * ( 0.15) + 2,500 = 5,332.15

Step 3: Compute the total tax withheld for the entire year.

Step 4: Deduct the amount from Step 2 from the amount from Step 3.

18,213.74 - 5,332.15 = 12,881.59

Tax Adjustment

If the Total Tax Withheld for the entire year is a positive number, it will be refunded.  If the Total Tax Withheld for the entire year is a negative number, the employee has a tax deficit and it will be deducted from his or her net pay.

In the example, the positive number means that the tax withheld for the entire year is more than what the employee should have actually paid.In the Salarium system, the tax adjustments will be deducted or added to current payroll’s withholding tax. Since the Tax Adjustment calculated above is positive, it will be deducted from that payroll’s withholding tax.

In this case, for the month of August, the employee will not be withheld any taxes, but will also get a tax refund that will be added to his Net Pay. The increase in his Net Pay will be (12,881.59 - 819.78) Php 12,061.81.