Withholding Tax 101 (or, ‘Why Is My Pay Less Than What My Client Said It Would Be?’)

How withholding tax feels like, sometimes: someone taking a bite out of your favorite doughnut before you can eat it. (Then again, lessening calories can be good for you.)

If you’re a freelancer with local clients, you must be familiar with withholding tax. 

Simply put, it’s the amount of money that your client deducts from the amount you’re supposed to receive. So if you’re expecting, say, Php 3,000, you might end up getting Php 2,700 instead.

Where did that missing Php 300 go?

It went to your withholding tax. 

Withholding tax: What Is It?

Withholding tax is an advance payment on income tax. In other words, withholding tax is income tax paid in advance.

The big difference between withholding tax and “regular” income tax is that, with the latter, we compute and file it ourselves. 

The Withholding Tax Law requires your clients/payors to immediately take your taxes out of the income you earned from them. They report that income and remit the taxes to the BIR on your behalf.  In other words, they become deputy tax collectors whether they like it or not every time they issue a payment to you.

Since your payor is declaring your income to the BIR for you, you cannot deny to the BIR that you earned that income, and you cannot get out of paying taxes on it.

As we would say in Filipino, “Wala kang kawala (There is no escape).”

Clever, isn’t it?

The Good News

Now for some good news: Because withholding tax is an advance payment on your income tax, whatever tax is withheld from you becomes deductible from your total payable when you file your annual income tax.

In other words, the more withholding tax you have been subjected to during the year, the less cash you’ll have to lay out come Annual Income Tax Return filing time.

Of course, you’ll need to be able to prove to the BIR that taxes have been withheld from you.

This is where Form 2307, our favorite BIR form, comes into the picture.

Form 2307

Form 2307, or the Certificate of Creditable Income Tax Withheld, contains information on how much tax each client had withheld from you either per payment or per year. (It really depends on how often you ask your client to provide that form. The payee can request the client to provide a form 2307. 

So let’s say your client should have paid you Php 3,000 but only paid you Php 2,700. That missing Php 300 should show up in your Form 2307.

You attach that  Form 2307 to your filing when the time comes to file and pay your Annual Income Tax Return.

Now let’s say your Total Income Tax Due is Php 1,000. Because you have a Form 2307 to prove that you’ve already paid Php 300 in advance, you can put that Php 300 in your Total Tax Credits.

Presuming you have no penalties, your Total Amount Payable will just be Php 700, which is the difference between your total tax due and your tax credits (a.k.a.,  your withholding tax).

So far so good? We’ll talk more about withholding tax and the BMBE-registered business next time.

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