Year-End Withholding Tax Adjustment: How Employers Reconcile Compensation Withholding Before Issuing BIR Form 2316

The year-end withholding tax adjustment is the computation every employer must perform in the last payroll period of December, comparing each employee’s actual income tax due on total annual compensation against the tax already withheld monthly, then collecting any deficiency or refunding any excess — before completing that employee’s BIR Form 2316. It is required under Revenue Regulations (RR) No. 2-98, Section 2.79(B), as amended, and is the step most small employers skip or get wrong.

This guide covers the annualization step specifically — the reconciliation that happens between the last monthly withholding and the year-end certificate. For the monthly return that remits what’s withheld each month, see BIR Form 1601-C; for how each month’s withholding is computed in the first place, see How to Compute Withholding Tax Using the BIR Withholding Tax Table; for the certificate this adjustment feeds into, see How to Fill Out BIR Form 2316.

What is the year-end withholding tax adjustment? #

The year-end adjustment (commonly called “annualization”) is the employer’s once-a-year recomputation of an employee’s true income tax liability, using the employee’s actual total taxable compensation for the entire calendar year instead of the period-by-period amounts used in monthly payroll withholding. Monthly withholding is only an estimate of what each employee will owe; the year-end adjustment corrects that estimate to the real annual figure required by law.

Monthly withholding under the BIR’s withholding tax table (Annex E of RR No. 11-2018) is computed period by period, applying that period’s bracket to that period’s pay. It works reasonably well when compensation is flat all year, but a mid-year raise, promotion, bonus, or a switch between employers changes the mix of brackets an employee actually falls into across the full year — which is exactly why the law requires a single reconciling computation at year-end rather than trusting the sum of monthly withholding to land on the correct figure.

When must employers perform the adjustment, and against what standard? #

Employers must complete the year-end adjustment before paying compensation for the last payroll period of the calendar year — in practice, the December payroll run — comparing the employee’s actual annual tax due against cumulative tax withheld from January through the prior month. This timing is set directly in the regulation, not left to employer discretion.

Section 2.79(B)(5)(b) of RR No. 2-98, as amended, states:

“On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.”

Two things follow directly from that text. First, the “tax due for the entire year” is computed using Section 24(A) of the Tax Code — the same graduated individual income tax brackets used for the annual withholding table, applied once to the employee’s full-year taxable compensation rather than period by period. Second, the comparison is against cumulative withholding, including amounts withheld by a previous employer that year if the employee changed jobs, not just what the current employer withheld.

How do you actually compute it? #

The computation has four steps performed once per employee, per year: total the year’s taxable compensation, apply the annual tax table, total what’s already been withheld, and take the difference. Each step uses figures the employer already has in its payroll and 1601-C remittance records — nothing is invented for this step.

1. Add up taxable compensation for the full calendar year — basic pay, taxable allowances, and any 13th-month pay/bonuses in excess of the ₱90,000 exemption ceiling, net of mandatory SSS/PhilHealth/Pag-IBIG contributions and exempt de minimis benefits. Include compensation from a previous employer that year, sourced from that employer’s BIR Form 2316, if the employee transferred jobs mid-year.
2. Apply the annual graduated tax table under Section 24(A) to that total to get the employee’s actual tax due for the year — the same bracket schedule set out in the withholding tax table guide.
3. Total the tax already withheld for the employee from January through the prior payroll period (through November, if computing at the final December run), reconciled against the employer’s monthly BIR Form 1601-C remittances.
4. Subtract step 3 from step 2. A positive result is a deficiency to collect from the last payroll; a negative result is an excess to refund.

What happens with a deficiency or an excess? #

A deficiency is withheld from the employee’s last compensation for the year; an excess is refunded, no later than January 25 of the following year. Which direction the adjustment runs depends entirely on whether monthly withholding under- or over-collected relative to the annualized figure — there’s no employer discretion in which way to correct it.

• Deficiency (under-withholding): Collected from the employee’s last payment of compensation for the year. If the shortfall is larger than what remains payable in that final period, the employer must still collect and remit the full deficiency — commonly by agreement with the employee on how the balance is recovered — rather than writing it off.
• Excess (over-withholding): Refunded to the employee, ordinarily through the December payroll itself, and no later than January 25 of the succeeding year in any case. Employers who have already remitted the over-withheld amount to the BIR may deduct the refunded amount from remittances of withholding tax collected from other employees, so the correction doesn’t require the employer to be out of pocket twice.
• Failure to do either exposes the employer to the same withholding-agent liability that applies to any other failure to withhold, remit, or refund correctly under the Tax Code — the BIR reiterated this obligation and the associated penalties for employers who skip the year-end adjustment or refuse to refund excess withholding in Revenue Memorandum Circular No. 21-2010.

Worked example: a mid-year promotion #

An employee’s monthly basic pay rises partway through the year — the single most common reason monthly withholding drifts away from the true annual figure, since each month is taxed at that month’s own bracket rather than the year’s blended rate.

Facts: Taxable compensation was ₱30,000/month from January through June, then rose to ₱38,000/month from July through November after a promotion, with no other taxable bonuses that year.

Without the year-end adjustment, this employee would have been over-withheld by ₱998 for the year (₱25,098 collected against a true ₱24,100 liability) — a direct result of applying each month’s own bracket to a mid-year raise rather than the blended annual rate. Performing the adjustment corrects December’s withholding from ₱2,808 down to ₱1,810, refunds the ₱998 difference through that December payslip, and means the employee’s BIR Form 2316 reports total compensation of ₱408,000 and total tax withheld of exactly ₱24,100 — matching the employee’s actual annual liability to the peso, with the refund noted rather than silently absorbed.

How does this connect to BIR Form 2316? #

BIR Form 2316 is where the year-end adjustment becomes visible on paper — it certifies the employee’s total compensation and total tax withheld for the full calendar year, which must already reflect any December refund or additional collection from the annualization step, not the pre-adjustment monthly totals.

An employer that fills out BIR Form 2316 directly from monthly 1601-C figures without first annualizing will produce a certificate that doesn’t match the employee’s actual tax due — a mismatch that surfaces either at BIR audit or, for employees not qualified for substituted filing, when they file their own annual income tax return and the certificate’s figures don’t reconcile. See How to Fill Out BIR Form 2316 for the line-by-line walkthrough that follows once the annualized totals are in hand.

Frequently asked questions #

What is the year-end withholding tax adjustment? #

The year-end withholding tax adjustment (also called annualization) is the employer’s computation, made in the last payroll period of the calendar year, of each employee’s actual income tax due on total annual compensation, compared against the total tax already withheld from January through the prior month, with any deficiency withheld or excess refunded before BIR Form 2316 is issued.

When must employers perform the year-end adjustment? #

Under Section 2.79(B)(5)(b) of Revenue Regulations No. 2-98, as amended, the employer must determine the tax due on or before the end of the calendar year but prior to paying compensation for the last payroll period, so the adjustment is reflected in that final December payroll run.

What happens if an employee was over-withheld during the year? #

The excess is refunded to the employee, ordinarily through the December payroll, and no later than January 25 of the following year. Employers may then deduct amounts they refund from their remittances of withholding taxes collected from other employees, so the government is not out the money the employer already remitted.

What happens if an employee was under-withheld during the year? #

The deficiency is withheld from the employee’s last compensation for the year. If the deficiency is larger than what remains to be paid in the last payroll period, the employer must still collect and remit the shortfall, subject to the employee agreeing to a payment arrangement where full one-time collection is not feasible.

Does the year-end adjustment replace BIR Form 2316? #

No. The year-end adjustment is the computation employers perform first; BIR Form 2316 is the certificate that documents the result — the employee’s total compensation, total tax withheld for the full year (including the December adjustment), and any refund or additional collection — issued to the employee on or before January 31 of the following year.

Summary #

The year-end withholding tax adjustment is not optional paperwork — it’s the computation required by RR No. 2-98, Section 2.79(B), that turns twelve months of estimated monthly withholding into the employee’s actual annual tax liability, corrected in the December payroll before BIR Form 2316 is finalized. Get the four steps right — total annual compensation, apply the Section 24(A) table, total cumulative withholding, and take the difference — and the certificate you issue by January 31 will already reconcile. For the monthly filing this reconciles against, see BIR Form 1601-C; for the bracket table behind both the monthly and annual figures, see the withholding tax table guide; for completing the certificate itself, see How to Fill Out BIR Form 2316.