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:

Pay Settings

Basic Pay:

28,000

Pay Rate Type:

By Month

Payroll Group

Monthly

Tax Status:

Married - 4 Dependents

Date Hired:

2/3/2014

Date Ended:

 

Bonus (13th month)

100% - Monthly Gross Salary

Allowances:

1500 (per month)

Loans:

0

Deductions:

2000 (per month)

Pay Adjustment Amount

32000

Pay Adjustment Effectivity Date

11/18/2014

Payroll Date

Gross Income

Taxable Income

Withholding Tax

2/28/2014

27,346.15

26,314.85

2,411.96

3/30/2014

29,500.00

28,468.70

2,950.43

4/30/2014

29,500.00

28,468.70

2,950.43

5/31/2014

29,500.00

28,468.70

2,950.43

06/31/2014

29,500.00

28,468.70

2,950.43

7/30/2014

29,500.00

28,468.70

2,950.43

8/30/2014

29,500.00

28,468.70

2,950.43

09/31/2014

29,500.00

28,468.70

2,950.43

10/30/2014

29,500.00

28,468.70

2,950.43

11/30/2014

31,161.54

30,080.24

3,353.31

12/31/2014

57,786.80

56,705.50

11,229.99*


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.

Payroll Date

Taxable Income

2/28/2014

26,314.85

3/30/2014

28,468.70

4/30/2014

28,468.70

5/31/2014

28,468.70

06/31/2014

28,468.70

7/30/2014

28,468.70

8/30/2014

28,468.70

09/31/2014

28,468.70

10/30/2014

28,468.70

11/30/2014

30,080.24

12/31/2014

56,705.50

TOTAL

340,850.19

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.


 

exemption

tax rate

Z_exemption

S_ME

1 dependent

2 dependents

3 dependents

4 dependents

                 

1

0

0

1

1

1

1

1

1

2

0

0.05

0

50000

75000

100000

125000

150000

3

500

0.1

10000

60000

85000

110000

135000

160000

4

2500

0.15

30000

80000

105000

130000

155000

180000

5

8500

0.2

70000

120000

145000

170000

195000

220000

6

22500

0.25

140000

190000

215000

240000

265000

290000

7

50000

0.3

250000

300000

325000

350000

375000

400000

8

125000

0.32

500000

550000

575000

600000

625000

650000

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.

Payroll Date

Withholding Tax

2/28/2014

2,411.96

3/30/2014

2,950.43

4/30/2014

2,950.43

5/31/2014

2,950.43

06/31/2014

2,950.43

7/30/2014

2,950.43

8/30/2014

2,950.43

09/31/2014

2,950.43

10/30/2014

2,950.43

11/30/2014

3,353.31

12/31/2014

11,228.99

TOTAL

40,597.70

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:

Payroll Date

Gross Income

Taxable Income

Withholding Tax (without adjustment)

12/31/2014

57,786.80

56,705.50

11,229.99*

AFTER ANNUALIZATION:

Payroll Date

Gross Income

Taxable Income

Withholding Tax (with adjustment)

12/31/2014

57,786.80

56,705.50

5,843.84


B. End of Month Annualization

Example of Employee’s Payroll:

Pay Settings

Basic Pay:

28,000

Pay Rate Type:

By Month

Payroll Group

Monthly

Tax Status:

Married - 3 Dependents

Date Hired:

2/5/2014

Date Ended:

 

Bonus (13th month)

-

Allowances:

3500 (per month)

Loans:

0

Deductions:

0

Pay Adjustment Amount

-

Pay Adjustment Effectivity Date

-

       
       

Payroll Date

Gross Income

Taxable Income

Withholding Tax

1/31/2014

28,000.00

22,230.24

1,911.81

2/28/2014

28,000.00

26,968.70

3,096.43

3/31/2014

28,000.00

26,968.70

3,096.43

4/30/2014

28,000.00

26,968.70

3,096.43

05/31/2014

28,000.00

26,968.70

3,096.43

06/30/2014

28,000.00

26,968.70

3,096.43

07/31/2014

17,838.57

16,807.27

819.78

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.

Payroll Date

Taxable Income

2/28/2014

22,230.24

3/30/2014

26,968.70

4/30/2014

26,968.70

5/31/2014

26,968.70

06/31/2014

26,968.70

7/30/2014

26,968.70

8/30/2014

16,807.27

TOTAL

173,881.01

 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.


 

exemption

tax rate

Z_exemption

S_ME

1 dependent

2 dependents

3 dependents

4 dependents

1

0

0

1

1

1

1

1

1

2

0

0.05

0

50000

75000

100000

125000

150000

3

500

0.1

10000

60000

85000

110000

135000

160000

4

2500

0.15

30000

80000

105000

130000

155000

180000

5

8500

0.2

70000

120000

145000

170000

195000

220000

6

22500

0.25

140000

190000

215000

240000

265000

290000

7

50000

0.3

250000

300000

325000

350000

375000

400000

8

125000

0.32

500000

550000

575000

600000

625000

650000

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.

Payroll Date

Withholding Tax

2/28/2014

1,911.81

3/30/2014

3,096.43

4/30/2014

3,096.43

5/31/2014

3,096.43

06/31/2014

3,096.43

7/30/2014

3,096.43

8/30/2014

819.78

        TOTAL

18,213.74

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.

Note: The tax that should be paid for the August payroll will be offset by the Tax Refund. The refund will not only cover the withholding tax for that payroll, but will also be additional pay for the employee since he was deducted more tax than he should have been.