Year-end tax annualization: how it works and what changes in December payroll
Tax annualization compares the total tax due on annual taxable income against the total tax withheld across all pay periods. The difference is either refunded to the employee or collected as an additional deduction in the December payroll run.
What annualization computes
Throughout the year, payroll withholds tax each period using a monthly tax table based on that period's earnings. The monthly table is an estimate — it does not know what the employee will earn in future months.
At year end, OneHRIS takes the employee's actual total taxable compensation for January to December, applies the annual tax rates, and arrives at the exact tax due for the full year.
If tax due < total withheld: over-withheld. Refund in December.
If tax due > total withheld: under-withheld. Additional collection in December.
Annual tax rates (TRAIN Law)
| Annual taxable income | Tax |
|---|---|
| Up to ₱250,000 | 0% |
| Over ₱250,000 to ₱400,000 | 15% of the excess over ₱250,000 |
| Over ₱400,000 to ₱800,000 | ₱22,500 plus 20% of the excess over ₱400,000 |
| Over ₱800,000 to ₱2,000,000 | ₱102,500 plus 25% of the excess over ₱800,000 |
| Over ₱2,000,000 to ₱8,000,000 | ₱402,500 plus 30% of the excess over ₱2,000,000 |
| Over ₱8,000,000 | ₱2,202,500 plus 35% of the excess over ₱8,000,000 |
See how withholding tax on compensation is computed for the monthly formula.
The 13th month and ₱90,000 ceiling
The annualization step accounts for 13th month pay and other benefits. Only the excess above ₱90,000 (combined 13th month + other benefits) is included in taxable income. This exclusion reduces annual taxable income and often produces a small refund. See is 13th month pay taxable? the ₱90,000 ceiling.
What OneHRIS does in December payroll
- Sums all taxable compensation from January to November plus the December period.
- Adds the 13th month pay and other benefits, then subtracts the non-taxable portion (up to ₱90,000).
- Applies the annual tax table to the total annual taxable income.
- Compares the annual tax due against the total tax already withheld January to November.
- The difference is the December tax adjustment — shown as a line item on the December payslip and on BIR Form 2316.
Substituted filing
Employees who have only one employer for the full year and whose employer performs the year-end adjustment are not required to file their own annual income tax return. The employer's December payroll and Form 2316 are the final record. Employees who changed jobs during the year, have other income sources, or earned above certain thresholds must file their own return. See BIR Form 2316: complete employer's guide.
Questions people ask
Why does December payroll look different from other months?
December payroll includes the year-end tax adjustment. After computing the actual annual taxable income, the system recalculates how much tax should have been withheld for the whole year and compares it to what was actually deducted. The difference is added or refunded in December.
Can the tax adjustment result in a refund?
Yes. Monthly withholding tables are projections. If the actual annual income is lower than projected, or if deductions like mandatory contributions pushed taxable income down, the total tax due may be less than what was withheld. The refund appears as a negative tax line in December pay.
What if an employee joined mid-year from another employer?
The employee must submit their BIR Form 2316 from the previous employer. OneHRIS adds the prior employer's income and tax withheld to the year-to-date figures before running annualization. See how to enter prior employer income.
Does the annualization run automatically?
Yes. When December payroll is run, OneHRIS performs the annualization automatically as part of the payroll computation. No separate step is needed.
Sources
- BIR Revenue Regulations No. 11-2018, year-end adjustment and Form 2316
- Republic Act No. 10963, TRAIN Law, annual income tax rates