Tax Articles

Income Tax Obligations of Employed Individuals

By: Atty. Donato U. Vergara, III

As the end of the year is drawing near, a number of individuals, including friends working in government, are asking regarding their income tax obligations. Specifically, they want to know if they have the duty to file income tax return after the year ends and whether the non-filing of tax returns in the previous years affect their continued employment in government or their intention to join the government service in the future. My simple answer is – no worries.

Let me put this in a question – is an individual employed by a single employer in a year required to file income tax return? May he be penalized under the Tax Code if he fails to do so?

There are a number of crimes and offenses enumerated in the National Internal Revenue Code (“NIRC”) that may be committed by taxpayers for violation of specific tax obligations. The first (Section 254 of the 1997 NIRC) of these enumerated offenses is tax evasion. This is committed by any person who willfully attempts in any manner to evade or defeat any tax imposed or its payment. The second offense (Section 255 of the 1997 NIRC) is the failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund excess taxes withheld on compensation which can be imposed upon persons who are tasked to do these obligations but willfully fail to do so.

Now, with respect to income from employment services, can an employee commit tax evasion and/or failure to file tax returns with respect to the taxes due on such income?

As so provided in the NIRC, except in the instances where the income of the employee is exempt from taxes, every employer paying wages shall deduct and withhold the corresponding taxes on such wages. The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld. If the employer fails to do so, such tax shall be collected from the employer together with the penalties applicable to such failure to withhold and remit. The taxes withheld shall be covered by a tax return and paid with the authorized agent of the Bureau of Internal Revenue (“BIR”). For government employees, the return of the amount deducted and withheld on wages shall be made by the officer or employee of the government office having control of the payment of such wage or by any designated officer or employee.

In other words, the taxes due on compensation is already collected at source – by the employer – before the employee even gets hold of his compensation. And this is done for every taxable compensation paid to an employee. In fact, based on the rules of the BIR, the employer is also required to annualize the compensation and the taxes withheld, whenever an employee resigns or at the end of the year if the employee remains with the employer by the end of the calendar year. Any excess of the taxes withheld from the previous periods over the supposed taxes due shall be refunded to the employee. On the other hand, any deficiency in the taxes withheld in the previous periods shall be withheld from the last compensation or December payroll. The employer is even made personally liable for the deficiency in the amount of cumulative taxes withheld if the last compensation is not sufficient to cover the deficiency in the amount of cumulative withholding taxes.

All these information are required to be included in the annual information return, which an employer needs to accomplish and file with the BIR after the end of the calendar year (on or before January 31 of the succeeding year).

With these procedures, I believe that an employee (whether in the government or private sector) may not commit the crime of tax evasion with respect to his compensation income. This is so because the responsibility for the withholding and remittance of tax on compensation rests with the employer. If there is non-payment or underpayment, that is not willful on the part of the employee, precisely because the obligation rests with the employer. Willfulness is an element of the offense.

The requirement to file income tax returns for employed individuals had also long been discarded by earlier laws and carried to the current version of the NIRC. An individual, with respect to pure compensation income for which the tax has been correctly withheld, is not required to file income tax return if he has only one employer during the year. That rule had also long been allowed under the concept of substituted filing sanctioned through administrative issuances. It is now even made more clear with the incorporation in the NIRC of the concept of substituted filing, by Republic Act No. 10963 (TRAIN Law). This concept reiterates the same rule. The certificate of withholding filed by the employer is tantamount to a substituted filing by the employee. The elimination of the filing requirement for these individuals is precisely because the tax due is collected and remitted by the employer even before the employee takes hold of his compensation. Thus, the filing of tax return is not necessary as any filing is not for the purpose of paying taxes but only for information purposes. The certificates and information returns filed by the employer already serves that purpose.

Lastly, there was a proviso in Section 73 of the 1977 NIRC, as amended by BP 135, which provides that an individual with compensation income where the tax withheld from such compensation income is final shall be exempt from the penalty for failure to pay the tax on such compensation income and to file a return thereon at the designated period. While this is not specifically carried in the present Code, I believe the spirit remains applicable.