What is Annualization?
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:
Annualization upon Termination
How to annualize payroll using Salarium?
1. Go to the Payroll Page and click on Generate Regular Payroll.
2. Choose the Payroll Group and the Payroll Period. Usually, Payroll is annualized at the last payroll period of the year.
3. Unlike the other payroll period processed, when annualizing payroll, you have to switch ON the Annualize Payroll? toggle.
4. Click on the Generate Payroll button.
5. Click on the Import button.
6.a. If you're subscribed to both Time & Attendance, and Payroll, simply switch on the Get Attendance toggle.
6.b. If you're only subscribed to Payroll, you have to download the attendance template, accomplish it with the employees' records, then upload the file.
7. Once attendance has been fetched, click on the Finish Import button for the system to start computing for the annualized payroll.
When the Annualize Payroll button is enabled, the system will automatically base the computation on the Annual Tax Table as indicated in the TRAIN LAW.
How does Annualization work?
When payroll is processed every pay period, there is tax being withheld based on the total taxable income of the employee. There is a table released by BIR which is being followed and applied to Salarium. The monthly and annual tax tables have both the same floor and ceiling amounts, it's just that the annual tax table is a cumulative amount for the whole year.
At the end of the year, the tax will just be likely the same. However, there are different instances that the tax computation can change because of the following:
- The employee received a salary increase/adjustment within the year;
- Variable pay to the employees such as Additional premiums - OT, Night, Holiday;
- Attendance-based deductions;
- Hired in the middle of the year without a previous employer;
- Hired in the middle of the year, with or without tax refund from the previous employer;
- Hired with a big jump in compensation from the previous employer.
Annualization is important to allow employers to correctly compute the compensation of employees within the year to properly fulfill the employees' tax requirements.
If the taxes withheld were more than the tax computed when the payroll is annualized, the employee will receive a tax refund. On the other hand, after annualizing the payroll and the system sees that the taxes withheld were less than the amount that should be deducted from the employee's previous payroll, the employee is still tax liable/due, meaning, the tax differential will be deducted from the employee's pay.
How does the system compute the annualized payroll?
Salarium follows the tax table released by the Bureau of Internal Revenue.
#1 Payroll Data from Previous Months are being collected.
#2 The system then determines all taxable and non-taxable income of the employee. Non-taxable income are excluded, such as:
- De Minimis Benefits
- 13th-month pay and Other Benefits (Other benefits are De Minimis benefits that are beyond the prescribed limit) maximum of Php90,000
- Social Insurances (SSS, Philhealth and HDMF) employee share only
- Separation Pay
- Salaries of Minimum Wage Earners
#3 The system will compute the Total Withholding Tax For the Year.
Below is the annual tax table followed by Salarium.
NOTE: This Tax Table is only valid until the end of 2022. Under the TRAIN Law, a new tax table will be used starting in 2023 onwards.
#4 The Total Annual Tax Due will be subtracted from the Total Taxes Withheld.
*We'll then know if the employee will receive a tax refund or if the employee is still tax liable.
Tax annualization is usually conducted at the end of the year to collect accurate tax dues for their employees. If you decide to conduct them earlier, it is best to ensure that your calculations are close to the ones provided in previous months as tax rates per employee may change throughout the course of the year.