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Normal vs. Pre-Annualized Tax Computation

 

Understanding the difference between Normal and Pre-Annualized tax computation methods is important for setting up payroll correctly.

To check how your tax computation is currently set up, navigate to Setup > Company > Profile > Tax Computation. This section shows whether your company is using the Normal or Pre-Annualized tax table.

 

 

What is Normal Tax Computation?

With the Normal tax computation method, the system calculates tax based only on the taxable income of the current payroll run. Taxes are computed per run and are not consolidated or averaged across multiple periods.

This setup works best for companies that prefer per-period tax calculations based strictly on income earned during that specific run, without forecasting or adjusting for income throughout the year.

To understand how the system calculates tax, you’ll need to check two main settings:

1. Go to Setup > Company > Profile > Payroll Computation

    • Check the Periods Per Month setting. This defines how many payroll runs occur in a month.
    • The number of periods determines which version of the tax table the system uses.

2. Go to Setup > References > Tax Table

    • Here, you can view the tax brackets used for each payroll frequency (e.g., monthly, semi-monthly, weekly).
    • The system matches your payroll frequency to the corresponding tax table to determine the withholding amount.

Example: Semi-Monthly Tax Computation

When running payroll, the system:

  1. Calculates the taxable income for the current payroll run (e.g., base salary + allowances – mandatory government contributions).

  2. Refers to the semi-monthly tax table to determine the appropriate withholding amount based on the taxable income range.

  3. Applies the corresponding tax rate and fixed amount from the tax table to compute the withholding tax.

What is Pre-Annualized Tax Computation?

Pre-Annualized tax computation works differently. It forecasts an employee’s income from the current period through the end of the calendar year, then uses the annual tax table to compute the total annual tax due. This total is then evenly distributed over the remaining payroll periods for the year.
For more details, you can also check this KB article: Pre-Annualized Tax Computation

Pre-Annualization Report

This section explains how pre-annualized tax is calculated in the Pre-Annualization Report.

 

Basic Salary and Recurring Income

  • Taxable Income in Current Payroll Run – The total taxable earnings an employee receives during the current payroll period.

  • Taxable YTD (Previous Runs & YTD Upload) – The cumulative taxable income from previous payroll runs and any uploaded YTD data.

  • Assumed Taxable Income (Future Payroll Runs) – The projected taxable income for the remaining payroll periods based on current earnings.

  • 13th Month and Bonus (Assumed and Actual) – The combined total of actual bonuses received and actual or assumed 13th month pay.

  • Taxable 13th Month and Bonus (Exceeds ₱90,000 Limit) – The portion of the "13th Month and Bonus (Assumed and Actual)" that exceeds the ₱90,000 tax-exempt limit.

  • Gross Taxable Basic and Other Recurring Income for the Year – The sum of all other components listed above, excluding the "13th Month and Bonus (Assumed and Actual)" column. (Formula: K = F + G + H + J)

Government Contributions

  • Actual Government Contributions (Current and Previous Run, Previous Employer, and YTD Upload) – The total of all government contributions made in the current payroll run, previous payroll runs, previous employer records, and any manually uploaded YTD data.

  • Assumed Government Contributions (Future Payroll Runs) – The estimated government contributions for the remaining payroll periods of the year, based on current contribution patterns.

  • Gross Government Contributions for the Year – The total government contributions for the year, calculated as the sum of both actual and assumed government contributions. (Formula: N = L + M)

Withholding Tax on Basic and Recurring Income

  • Net Taxable Basic and Recurring for the Year (Less Government Contributions) – The remaining taxable income after deducting government contributions from gross taxable income.
    (Formula: O = K – N)

  • Annual Tax Table Bracket – The tax bracket assigned based on the employee’s net taxable annual income using the annual tax table.

  • Tax Percentage – The applicable tax rate based on the employee’s annual tax bracket.

  • Fixed Tax – A fixed tax amount based on the tax bracket, added to the computed tax.

  • Tax Due Using Annual Tax Table – The total annual tax due based on the employee’s tax bracket and projected income. (Formula: V = ((O – P) × Q) + R)

  • Withholding Tax (from Previous Payroll and YTD) – The total tax already withheld from the employee’s previous payroll runs and YTD uploads.

  • Number of Remaining Periods for the Year – The total number of payroll runs left in the current calendar year.

  • Withholding Tax on Basic and Recurring Income for the Current Period – The tax to be withheld in the current payroll period based on annual tax due minus already withheld tax.
    (Formula: V = (S – T) / U)

Overtime, Absences, Undertime and One-time Adjustments
(Current Payroll Run only)

  • Overtime – Taxable overtime pay, including both system-calculated and manually entered one-time adjustments.

  • Absent and Undertime Deductions – Deductions for absences and undertime, including both system-calculated and one-time adjustments.

  • One-time Adjustments – Taxable one-time earnings or deductions manually added to the payroll.

  • Total Taxable Overtime, Absences, Undertime, and One-time – The combined total of taxable overtime, absences, undertime, and one-time adjustments.
    (Formula: Z = W + X + Y)

  • Withholding Tax for OT, Absences, Undertime, and One-time in the Current Period (using percentage) – Tax on the above total using the same tax percentage from the annual tax table.
    (Formula: AA = Z × Q)
    Note: The system does not currently reflect negative or refund amounts.

  • Total Withholding Tax for Current Period – The total tax to be withheld for the current payroll period, including both regular and variable components.
    (Formula: AB = V + AA)

Comparison Summary

Key Differences Between Normal and Pre-Annualized Tax Computation

Feature Normal Computation Pre-Annualized Computation
Tax Based On Current payroll run only Projected income until year-end
Tax Table Used Per-period (e.g., semi-monthly) Annual tax table
Tax Deduction Pattern Varies per run Evenly spread across remaining periods
One-time Earnings & Deductions Taxed in current run Taxed in current run only and considered in taxable YTD on next payroll run

 

Advantages & Disadvantages of Normal vs. Pre-Annualized Tax Computation

Computation Method Advantages Disadvantages
Normal
  • Simple and easy to understand per run
  • Tax is based only on actual income in that period
  • Tax deductions may fluctuate per payroll
  • May result in higher withholding in months with added income
  • Previous employer taxable income and tax deductions are only factored in at year-end or during final pay
Pre-Annualized
  • Tax is evenly distributed across remaining pay periods
  • More consistent withholding per payroll run
  • Helps avoid underpaying (which could lead to penalties) or overpaying
  • Factors in taxable income and tax withheld from previous employer
  • Requires accurate forecasting of annual income
  • More complex to understand and manage

 

Now that you understand the difference between Normal and Pre-Annualized Tax Computation methods, you can confidently set up your payroll. Just make sure you choose the right method based on your needs and keep track of all the relevant data. This way, you’ll avoid any surprises when it comes to tax deductions and stay on top of everything throughout the year.

 

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