Withholding tax is one of the most misunderstood obligations for Philippine business owners — especially for SMEs and online sellers who hire freelancers, pay rent, or contract professional services. Get it wrong and you face BIR penalties. Get it right and it becomes a routine part of your accounting.

This guide covers everything: what withholding tax is, the three types you need to know, the current EWT rates table, how to compute it step by step, and how Philippine online sellers are affected.

What is withholding tax?

Withholding tax is a mechanism by which the government collects income tax at the source of a payment rather than waiting for the recipient to file and pay at year-end. The payor — a business, employer, or individual making a payment — deducts a prescribed percentage from the gross amount before releasing funds, and remits that deducted amount directly to the Bureau of Internal Revenue (BIR). The payee receives the net amount and can use the withheld tax as a credit against their own income tax liability.

In the Philippines, withholding tax is governed by the National Internal Revenue Code (NIRC), as amended by the Tax Reform for Acceleration and Inclusion Act (TRAIN Law, Republic Act No. 10963). The BIR administers withholding tax through a system of Revenue Regulations, the most relevant of which for businesses are RR 2-98 (EWT) and the TRAIN Law implementing regulations.

The key point: withholding tax is not an additional tax. It is income tax collected earlier, at the time of payment. For the payee, the amount withheld reduces what they owe when they file their annual income tax return.

Types of withholding tax in the Philippines

There are three main types of withholding tax that Philippine businesses encounter. Understanding which applies to which transaction is the starting point for compliance.

1. Withholding Tax on Compensation (WTC)

Withholding Tax on Compensation applies to employee salaries, wages, and other compensation paid by an employer. The employer withholds the tax from each payroll run and remits it to the BIR on the employee’s behalf. The amount withheld is computed using the graduated income tax table under the TRAIN Law.

WTC is the most straightforward type for businesses with employees: you apply the tax table to the employee’s taxable monthly compensation, withhold that amount, and remit it using BIR Form 1601-C (monthly) and 1604-C (annual).

Under TRAIN Law, individuals earning ₱250,000 or less annually pay zero income tax — meaning many low-income employees have no WTC withheld at all.

2. Expanded Withholding Tax (EWT / Creditable Withholding Tax)

Expanded Withholding Tax (EWT) — also called Creditable Withholding Tax (CWT) — applies to business payments made to suppliers, professionals, contractors, landlords, and other non-employee service providers. The payor withholds a percentage of the gross payment before releasing it.

EWT is called “creditable” because the withheld amount is not the final tax — the payee can claim it as a tax credit when they file their own income tax return. If too much was withheld across the year, the payee can apply for a refund or carryover.

This is the type most relevant to SMEs: every time you pay a freelancer, lawyer, accountant, landlord, or contractor, you are likely required to withhold EWT.

3. Final Withholding Tax (FWT)

Final Withholding Tax applies to passive income — dividends, interest on deposits, royalties, prizes, and certain payments to non-residents. Unlike EWT, the withheld amount is the final tax on that income — the payee does not report it separately in their income tax return and cannot claim a refund for over-withholding.

Examples: A Philippine corporation paying cash dividends to individual shareholders withholds 10% FWT. A bank paying interest on a peso deposit withholds 20% FWT (under CMEPA/RR 21-2025, effective July 1, 2025).

Withholding tax rates and 2025 table

Expanded Withholding Tax (EWT) rates

The following rates are the most common EWT categories for Philippine SMEs. Source: BIR Revenue Regulations, as updated through 2025.

Important: To qualify for the lower rate (e.g., 5% instead of 10% for individual professionals), the payee must submit a Sworn Declaration of Gross Receipts/Sales to the withholding agent by January 15 of each year. Without this declaration, the payor must apply the higher rate regardless of the payee’s actual income.

Withholding Tax on Compensation (WTC) brackets

Under the TRAIN Law, the following monthly graduated tax rates apply to employee compensation (effective from 2023 onward):

Annual equivalent: an employee earning ₱250,000 or less per year pays zero income tax, and accordingly has zero WTC withheld.

Final Withholding Tax (FWT) rates

How to compute withholding tax

Step-by-step for EWT (most common scenario for SMEs)

Computing EWT follows a straightforward formula:

EWT amount = Gross payment × Applicable EWT rate

The result is deducted from the gross payment before releasing funds to the payee. The payor remits the withheld amount to BIR; the payee receives the balance.

Key rule: Apply the EWT rate to the amount before VAT. If the supplier charges ₱10,000 + ₱1,200 VAT, the EWT base is ₱10,000 — not ₱11,200.

Example 1: Freelance writer (individual, professional fee)

A business hires a freelance copywriter for a one-time project billed at ₱20,000 (exclusive of VAT). The writer has submitted a Sworn Declaration confirming annual gross income does not exceed ₱3,000,000.

• EWT rate: 5% (individual professional, income ≤ ₱3M)

• EWT amount: ₱20,000 × 5% = ₱1,000

• Net payment to writer: ₱20,000 − ₱1,000 = ₱19,000

• Amount remitted to BIR: ₱1,000

The business issues BIR Form 2307 (Certificate of Creditable Tax Withheld) to the writer, who uses it to claim the ₱1,000 as a tax credit when filing their annual income tax return.

Example 2: Law firm retainer (corporation)

A business pays a corporate law firm ₱50,000 per month for retained legal services. The law firm’s annual gross receipts exceed ₱720,000.

• EWT rate: 15% (corporate professional, income > ₱720K)

• EWT amount: ₱50,000 × 15% = ₱7,500

• Net payment to law firm: ₱50,000 − ₱7,500 = ₱42,500

• Amount remitted to BIR: ₱7,500 quarterly via BIR Form 1601-EQ

Example 3: Office rental

A business pays ₱30,000 monthly rent to an individual landlord for commercial space.

• EWT rate: 5% (rental of real property)

• EWT amount: ₱30,000 × 5% = ₱1,500

• Net rent paid: ₱30,000 − ₱1,500 = ₱28,500

• Remittance: ₱1,500 per month, filed quarterly via BIR Form 1601-EQ

Filing and remittance deadlines

Withholding tax for online sellers and SMEs

One of the most common sources of confusion in the Philippine SME community is whether online sellers need to withhold tax — and from whom.

The short answer: Most online sellers do not withhold tax from customers. But they may be required to withhold from the suppliers and freelancers they pay.

Here is how it breaks down:

You do NOT withhold from customers. When a customer buys from your online store, there is no withholding obligation on your part as the seller. You collect the gross price; the customer pays nothing less. This is often confused with VAT, which is a separate matter.

You DO withhold from professional service providers. If you are an online seller running a business and you hire a graphic designer, photographer, social media manager, accountant, or any other professional as a contractor — you are generally required to withhold EWT from the payment. The rates and rules above apply.

Top Withholding Agents have broader obligations. The BIR designates certain large taxpayers as “Top Withholding Agents,” which requires them to withhold from a wider range of supplier payments — including goods. Most small online sellers will not be classified as Top Withholding Agents.

E-commerce platform remittances. Under BIR rules, e-commerce platforms and digital marketplaces are required to withhold 0.5% from seller remittances as a creditable withholding tax. If you sell on a marketplace platform, check whether they are withholding on your behalf.

VAT registration threshold. Businesses with annual gross sales or receipts exceeding ₱3,000,000 must register as VAT-registered taxpayers. Once VAT-registered, different invoicing and withholding obligations apply.

The practical starting point for SMEs:

1. Check whether you are making any payments to professionals, contractors, or landlords — if yes, EWT applies

2. Confirm the payee’s income level (via Sworn Declaration) to apply the correct rate

3. Issue BIR Form 2307 to every payee for amounts withheld

4. File quarterly via BIR Form 1601-EQ — even if the amount is zero for the quarter

How HitPay helps track payments and records

BIR compliance requires clean, timestamped records of every payment you receive and every transaction in your business. For Philippine SMEs accepting digital payments — via GCash, QR Ph, Maya, or online checkout — maintaining an accurate audit trail is non-negotiable.

HitPay gives Philippine merchants a unified payment and invoicing platform that makes record-keeping significantly easier.

Invoicing with automatic receipts. Every invoice you issue through HitPay invoicing generates a timestamped receipt on payment. These records are searchable, exportable, and organised by date — exactly the format you need for quarterly BIR filings.

Payment records across all methods. Whether a customer pays by GCash, QR Ph, Maya, or card, HitPay logs every transaction in a single dashboard. No need to reconcile across separate wallets or bank statements.

Export for BIR filing. Transaction data can be exported to CSV for your accountant or bookkeeper to use in preparing BIR filings. The export includes date, amount, payment method, and reference number — the key data points for income documentation.

Audit trail for professional fees. If you receive payment for professional services (e.g., you are a consultant or freelancer), HitPay payment links and invoices create a digital paper trail that documents when and how much each client paid you — supporting your own EWT credit claims.

HitPay does not compute withholding tax or prepare BIR forms — for that, you need a qualified accountant. But it eliminates the common SME problem of missing receipts and incomplete payment records at tax time.

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More resources for Philippine businesses

• How to accept GCash payments →

• Accept QR Ph payments in the Philippines →

• HitPay invoicing for the Philippines →

• Philippines pricing →

• Get started with HitPay Philippines →

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*For withholding tax computation and BIR filing, consult a qualified Philippine accountant. BIR rates referenced in this guide are current as of July 2026; verify current rates at bir.gov.ph.*

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