BIR Form 2307 for HR and Payroll Outsourcing Companies

A business that outsources payroll processing or HR administration to a third-party provider withholds 2% expanded withholding tax (EWT) under RR No. 2-98, Section 2.57.2(E), and issues BIR Form 2307 — the same general contractor bracket that covers other outsourced back-office functions, distinct from the 5%/10% bracket reserved for individually engaged named professionals.

This guide is part of the BIR Form 2307 series. It covers who withholds on a payroll or HR outsourcing payment, why the rate differs from a freelance bookkeeper’s professional fee, how pass-through payroll funds are treated, and a worked monthly retainer example.

Who withholds on an HR or payroll outsourcing payment? #

The obligation follows the same payor-status test this series applies to every business-service supplier: a corporation or business-connected individual withholds, a private individual generally does not. RR No. 2-98 sets the test this way:

“(A) In general, any juridical person, whether or not engaged in trade or business; (B) An individual, with respect to payments made in connection with his trade or business…”

— RR No. 2-98, Section 2.57.3(A)–(B)

A company engaging a payroll outsourcing firm to compute withholding tax, SSS, PhilHealth, and Pag-IBIG contributions for its staff, or an employer contracting an HR administration provider to manage 201 files and leave records, is a withholding agent under clause (A) or (B).

What EWT rate applies, and how does it differ from a bookkeeper’s professional fee? #

HR and payroll outsourcing is not named as its own line item in RR No. 2-98 — it falls under the same flat 2% general contractor/business-services catch-all covered in BIR Form 2307 for Contractors and Subcontractors.

This is a different bracket from the 5%/10% rate that can apply to an individually engaged accountant or bookkeeper, as this series covers in BIR Form 2307 for Freelance Bookkeepers: Professional Fee, Even Without a CPA License. A named individual professional personally performing accounting-type work sits in the professional-fee enumeration; a payroll outsourcing company delivering the same function as a corporate service provider generally sits in the general 2% catch-all instead.

Amounts the provider merely disburses as employees’ net pay, drawn from the client’s own payroll funds, are not the provider’s income and stay outside the withholding base. Only the provider’s processing or administration fee is withholdable — the same pass-through logic this series applies to a courier’s collected cash-on-delivery remittances in BIR Form 2307 for Courier and Last-Mile Delivery Providers.

Worked example: a monthly payroll processing retainer #

Solara Manufacturing Inc. engages PayFlow HR Solutions Corp. to process payroll for its 60 employees under a fixed monthly retainer, with net pay funded and disbursed from Solara’s own payroll account.

Solara withholds ₱700 each month on PayFlow’s service fee alone, issues a BIR Form 2307 each quarter summarizing the cumulative fees and EWT, and remains the employer of record responsible for filing its own compensation withholding returns and issuing BIR Form 2316 to its employees, even though PayFlow performs the underlying computations.

Frequently asked questions #

Does a business have to withhold tax when paying an HR or payroll outsourcing provider? #

Yes, if the payor is a corporation or a business-registered individual. A business that engages a third-party provider to process payroll or handle HR administration is a withholding agent under RR No. 2-98, Section 2.57.3(A)-(B), and must withhold expanded withholding tax and issue BIR Form 2307.

What withholding tax rate applies to HR and payroll outsourcing fees? #

An HR or payroll outsourcing provider’s service fee generally falls under the 2% general contractor/business-services bracket under RR No. 2-98, Section 2.57.2(E), as amended by RR No. 11-2018 — ATC WI120 for an individually run provider or WC120 for one organized as a corporation.

Is payroll outsourcing withheld at the same rate as a freelance bookkeeper’s professional fee? #

Not automatically. An individually licensed accountant or bookkeeper providing personal professional services can fall under the 5%/10% professional-fee bracket, as covered in this series’ freelance bookkeepers guide. A payroll outsourcing company delivering the service as a corporate provider, rather than an individually engaged professional, generally withholds instead at the 2% general business-services rate.

Does the fee change if the provider also disburses net pay to the client’s employees on the client’s behalf? #

No, provided the amounts disbursed as employee net pay are the client’s own payroll funds passed through the provider, not the provider’s income. Only the provider’s own processing or administration fee is withholdable; funds the provider merely routes to the client’s employees on the client’s payroll account are not the provider’s income.

Does a company still need to issue BIR Form 2316 to its own employees if it outsources payroll? #

Yes. Outsourcing payroll processing to a third party doesn’t shift the employer’s own statutory obligations — the client company remains the employer of record and must still issue BIR Form 2316 to its employees and file its own withholding tax on compensation returns, even though a provider handles the computations.

Summary #

An HR or payroll outsourcing provider’s fee sits in the flat 2% general business-services bracket (ATC WI120/WC120) under RR No. 2-98, Section 2.57.2(E), distinct from the 5%/10% professional-fee bracket that can apply to an individually engaged accountant. See BIR Form 2307 for Freelance Bookkeepers for the professional-fee comparison, and BIR Form 2307 for Contractors and Subcontractors for the general 2% bracket this rate draws from.