Business Taxation
- The meaning of business taxation refers to the
taxes that businesses must pay as a normal part of
business operations.3 min read
The meaning of business taxation refers to the taxes
that businesses must pay as a normal part of business
operations. Whether you are a sole proprietor,
partner, part of a limited liability company, or a
corporation, your business is responsible for adhering
to tax regulations. Each type of business will produce
distinct tax consequences. Consider your business' tax
concerns along with its non-tax concerns, so that you'll
know which type of entity will help your business
prosper and grow, or make it easier to pass on to heirs.
Types of Business Taxes
There are five major kinds of business taxes. They are:
Gross-receipts tax.
Corporate franchise tax.
Employment withholding tax.
Excise tax.
Value-added tax (VAT).
Five major types of business taxes are: (1) corporate
franchise tax, (2) employment (withholding) tax, (3)
excise tax, (4) gross-receipts tax, and (5) value added
tax (VAT). Some types of firms (such as insurance,
mining, and petroleum extraction companies) pay
additional taxes peculiar to their industries. While
firms too pay income, property, and sales taxes, such
taxes are not specific to businesses. In terms of
economic impact, however, all taxes are 'people taxes'
because they affect human beings and not some
abstraction labeled 'business.' Also called business
activity tax.
In some industries, such as mining and insurance,
companies will need to pay additional taxes. While
businesses pay income tax, property tax, and sales tax,
these taxes are not specific to business and are thus
not generally considered business taxes. The reality of
economic impact is that all taxes are "people taxes," as
they impact people on a personal level.
Tax Liability
As a small business owner, you need to manage many
different expenses, including your business' taxes.
Several aspects of your company will require taxation,
as enforced by the government. The amount of money
you owe to federal, state, and local tax authorities is
your tax liability. Tax money will be used by the
government to fund administration and social
programs.
As tax liability is a legally binding debt, you are required
to pay the taxes you owe or you may face government
penalties. Tax liability is a short-term liability, which
means that you must pay it within a year. Short-term
liabilities, such as tax liability, may be recorded
together in your accounting workbook or balance
sheet.
Any transaction that has a tax consequence is called a
"taxable event". The government has the authority to
determine which events are taxable. Any time a
taxable event takes place at your business, you'll need
to pay the associated tax authority. Taxable income,
issuing payroll, and making sales are all taxable events.
Different taxable events will require different amounts
of tax liability, which are calculated as a percentage of
the total event.
Selling a product is a taxable event for which the
government may charge you sales tax. Instead of
paying sales tax out of your own pocket, you can
include the amount in the total price that you charge a
customer. After you collect sales tax, you'll need to
report it and send it to the appropriate government
agencies. You can pay sales tax on a regular basis
(quarterly or monthly). Earning income is another
taxable event. Federal and state income tax liability is
based on a percentage of your earned income.
Calculating Business Taxes
It's important to understand taxation processes and to
know exactly when and how to perform business and
personal transactions, in order to reduce your tax
obligations. As a business owner and a taxpayer, there
are typically multiple ways to complete a taxable
transaction, one of which will result in the lowest legal
tax liability. Remember, it's smart to avoid taxes, but
it's illegal to evade them through concealment or
deceit.
You may be able to deduct business expenses if you are
engaged in a "trade or business," which means that
you are conducting business activities for livelihood or
profit. The IRS defines a trade or business as one in
which both a profit motive and economic activity are
present.
All of your taxable income will be calculated according
to the tax year. All income received or accrued during
a single year is recorded on that year's tax return, along
with expenses paid or accrued. Once the tax year ends,
any tax-saving strategies must have already been
applied.
You'll also need to report your accounting method to
the IRS. The two basic methods most applicable to
small business owners are "cash" and "accrual." Under
some circumstances, you might be able to use a hybrid
that combines components of both. In addition,
certain kinds of businesses may be allowed to use
special accounting methods.
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GROSS RECEIPT TAX
A gross receipts tax or gross excise tax is a tax on the
total gross revenues of a company, regardless of their
source. A gross receipts tax is similar to a sales tax, but
it is levied on the seller of goods or service consumers.
This is compared to other taxes listed as separate line
items on billings, are not directly included in the listed
price of the item, and are not a factor in markup or
profit on company sales. A gross receipts tax has a
pyramid effect that increases the actual taxable
percentage as it passes through the product or service
life-cycle.
To calculate the sales tax that is included in a
company's receipts, divide the total amount received
(for the items that are subject to sales tax) by "1 + the
sales tax rate". In other words, if the sales tax rate is
6%, divide the sales taxable receipts by 1.06.
How do I calculate the amount of sales tax that is
included in total receipts?
Sales Tax Calculation
To calculate the sales tax that is
included in a company's receipts, divide the total
amount received (for the items that are subject to sales
tax) by "1 + the sales tax rate". In other words, if the
sales tax rate is 6%, divide the sales taxable receipts by
1.06. If the sales tax rate is 7.25%, divide the sales
taxable receipts by 1.0725.
Example of the Sales Tax Calculation
As an example, assume that all of the items in a
vending machine are subject to a sales tax of 7%. In the
most recent month the vending machine receipts were
$481.50. Hence, $481.50 includes the amounts
received for the sales of products and the sales tax on
these products. The use of algebra allows us to
calculate how much of the $481.50 is the true sales
amount and how much is the sales tax on those
products:
Let S = the true sales of products (excluding the sales
tax), and let 0.07S = the sales tax on the true sales.
Since the true sales + the sales tax = $481.50, we can
state this as S + 0.07S = 1.07S = $481.50. We solve for
S by dividing $481.50 by 1.07. The result is that the true
product sales amounted to $450. The 7% of sales tax
on the true sales is $31.50 ($450 X 0.07). Now let's
make sure this adds up: $450 of sales of product +
$31.50 of sales tax = $481.50, which was the total
amount of the vending machine receipts.
Additional Example of the Sales Tax Calculation
Now let's assume that total amount of a company's
receipts including a 7% sales tax is $32,100. The true
sales will be S, and the sales tax will be 0.07S.
Therefore, S + 0.07S = 1.07S = $32,100. The true sales,
S, will be $30,000 ($32,100 divided by 1.07). The sales
tax on the true sales will be 0.07 X $30,000 = $2,100.
Our proof is $30,000 of sales + $2,100 of sales tax =
$32,100. In general journal form the accounting entry
to record this information is: debit Cash $32,100; credit
Sales $30,000; credit Sales Tax Payable $2,100.
COVERAGE TAXABLE TAX
BASE RATE
Domestic Gross 3%
Carriers and receipts
keepers of
garages
International Gross 3%
air/shipping receipts on
pcarriers doing transport of
business in the cargo from
Philippines the
Philippines
to a foreign
country
In the Philippines, taxpayers are classified as either
corporate or individuals. If you are registered as an
individual taxpayer, you are either employed (or a
compensation income earner, which includes
minimum wage earners) or self-employed. As self-
employed, you can register as a single proprietor or
entrepreneur (other than marginal income earners or
those earning less than Php 100,000 annual gross
revenues), or as professionals.
Professionals, classified as self-employed, refer to an
individual or a group, practicing his/her or their
profession or calling, with or without license under a
regulatory board or body. These exclude those who are
earning purely from compensation income (purely
employees).
Professionals with license under a regulatory board
include doctors, lawyers, certified public accountants,
architects, engineers, and the like. Although
freelancers may not have professional licenses under a
regulatory body, as in the case of bloggers, web
developers, graphic designers, writers and other
people who provide specialized services, they are also
considered professionals.
Know your taxes and BIR compliance
Upon registration with the Bureau of Internal Revenue
(BIR), you will receive a Certificate of Registration (BIR
Form 2303) with the taxes you are required to file and
pay. It is important to take note of the BIR forms you
need to use for every tax type and the corresponding
deadlines to avoid penalties:
The Income Tax Return (BIR Form 1701) is due within
60 days after the end of each quarter while annual
return is due every April 15.
A taxpayer engaged in business or in the practice of
profession may choose optional standard deduction
(OSD) or itemized deduction in determining his/her
allowable deduction.
In OSD, an individual taxpayer shall only be allowed a
maximum of 40 percent of gross sales or gross receipts
as deduction. But anyone who opts to avail of this
deduction need not submit financial statements.
Thus, if you don’t have significant expenses to claim or
sufficient evidence to support your itemized
deductions, you may avail of OSD. Unlike itemized
deductions, it does not require official receipts or
invoices to support the standard deduction.
Generally, itemized deductions allowed are the
ordinary and necessary expenses paid or incurred
during the taxable year in carrying on, or which are
attributable to the development, management,
operation and conduct of the trade, business or
exercise of profession, including a reasonable
allowance for salaries, travel, rental and entertainment
expense.
It should also be noted that these deductions should
be supported by sufficient evidence such as official
receipts (OR), cash/sales invoice, payroll, vouchers,
bank statements and/or debit/credit memo.
In addition, an individual taxpayer is entitled to deduct
the basic personal exemption (Php 50,000) and
additional exemption (Php 25,000 per qualified
dependent) with maximum of four dependents.
Gross Receipt
Less: Allowable deductions*
Personal Exemptions
Additional Exemptions (Php 25,000.00 x 4
children)
TAXABLE INCOME
TAX DUE (based on tax table in BIR Form 1701)
Less: Creditable Withholding Tax (Php 300,000.00 x
15%)
Income Tax Payable
Php 1,000,000.00
(600,000.00)
(50,000.00)
(100,000.00)
Php 250,000.00
Php 50,000.00
( 45,000.00)
Php 5,000.00
A taxpayer engaged in business or in the practice of
profession shall choose either optional or itemized
deduction. Assuming all allowable deductions are
purchases subject to VAT, it should be noted that the
amount claimed as itemized deductions should be
exclusive of VAT.
Value Added Tax is due monthly on or before the 20th
of day of the succeeding month and quarterly on or
before the 25th day following the close of each
taxable quarter. Or, the monthly percentage tax which
should be paid not later than the 20th day following
the end of each month.
All professional services are subject to VAT and
consequently, required to register as VAT-taxpayers.
Except those whose gross receipts for the preceding
year (or expected gross receipts for the current year,
for new taxpayers) do not exceed the threshold
amount of Php1,919,500.00. In this case, he/she is
liable to pay only 3 percent of the percentage tax,
provided that he/she has not yet registered as VAT-
taxpayer.
VAT Payable Computation:
Total Output Tax or Total Sales X 12%
Php xx
Total Input Tax or Total Purchases X 12% xx
VAT Payable Php xx
Example:
Output Tax:
Total Sales * Php 1,000,000.00
VAT rate 12%
120,000.00
Input Tax:
Total Purchases* Php 600,000.00
VAT
rate 12% ( 72,000
.00)
VAT PAYABLE
48,000.00
*Note that the total amount reflected on the official
receipt or invoice is VAT inclusive. To get the total sales
of Php 1,000,000.00 (VAT exclusive), total sales
inclusive of VAT (Php 1,120,000.00) should be divided
by 112%.
Withholding Tax (Expanded/Compensation/Final) is
due on or before the 10th day of the month following
the month the withholding was made.
If you are paying for rental, professional services, and
other income payment subject to Expanded/Creditable
Withholding taxes, you are required to deduct and
withhold taxes on those income payments and remit
the same to the bureau.
Bookkeeping and invoicing requirements
Professionals like self-employed individuals are
required to maintain books of accounts using any
acceptable method of accounting (accrual or cash
basis) in a consistent manner. The same shall be
preserved within the prescriptive period (three years
from the close of taxable year) for post-audit
examination.
Also, the following should be considered upon
invoicing:
ADVERTISEMENT - CONTINUE READING BELOW
1. Receipts or sales invoices shall be
serially numbered;
2. Among other things, the name,
business style, the TIN and business
address of the Professional shall be
shown;
3. Receipts or invoices shall be issued by
the professional for every payment
received;
4. The original of each receipt or invoice
shall be issued to the client at the time
the transaction is effected and the
duplicate shall be preserved in the
Php place of business for a period of three
(3) years from the close of the taxable
year.
Php

CORPORATE FRANCHISE TAX
- A franchise tax is a government levy (tax) charged
by some US states to certain business
organizations such as corporations and
partnerships with a nexus in the state. A franchise
tax is not based on income. Rather, the typical
franchise tax calculation is based on the net worth
of or capital held by the entity.
What is corporate franchise?
Many chain restaurants, hotels and retail stores are
owned as franchises, meaning the parent company
provides permission for the local owner to use the
parent company's name and products. A franchise can
be owned as a corporation, sole proprietorship,
limited liability company or other business structure.
DEFINITION of Franchise Tax
Franchise tax is a tax levied at the state level against
businesses and partnerships chartered within that
state. In some states, companies with operations in
that state may also be liable for the tax even if they are
chartered in another state. This is a privilege tax that
gives the business the right to be chartered and/or to
operate within that state.
Note that a franchise tax is not a tax on franchises.
BREAKING DOWN Franchise Tax
A franchise tax is a state tax levied on certain
businesses for the right to exist as a legal entity and to
do business within a particular jurisdiction. As of 2017,
states that incorporate a franchise tax are Alabama,
Arkansas, Delaware, Georgia, Illinois, Louisiana,
Mississippi, Missouri, New York, North Carolina,
Oklahoma, Pennsylvania, Tennessee, Texas, and West
Virginia.
Calculating the Franchise Tax
The amount of franchise tax in any given state can
differ greatly depending on the tax rules within each
state. Some states will calculate the amount of
franchise tax owed based on assets or net worth of the
business, while other states look at the value of capital
stock of the company. Still other states might charge a
flat fee to all businesses operating in its jurisdiction or
calculate the tax rate on the company’s gross receipts
or paid-in capital. For example, in the state of
California, the amount of franchise tax a firm is subject
to is either the California net income times the
appropriate tax rate or an $800 minimum franchise
tax, whichever is greater. The state of Texas calculates
its franchise tax based on a company’s margin which is
computed in one of four ways: total revenue multiplied
by 70%; total revenue minus cost of goods sold (COGS);
total revenue minus compensation paid to all
personnel, or; total revenue minus $1 million.
Franchise Tax vs. Income Tax
Franchise taxes are not based on a corporation’s profit,
therefore, whether a business entity makes a profit or
not in any given year, it must pay the franchise tax. This
is how the franchise tax differs from the state
corporate income tax which is imposed on businesses
that make profit. The income tax is also applied to all
corporations that derive income from sources within
the state, even though they do not do business in it.
“Doing business” may be defined differently by some
states as several factors are considered in establishing
nexus, including whether the company sells in the
state, has employees in the state, or has an actual
physical presence in the state.
Businesses Exempt from Franchise Tax
A company that does business in multiple states may
have to pay franchise taxes in all the states it is formally
registered in. Sole proprietorships are not usually
subject to franchise taxes and other forms of state
business income tax, in part because these businesses
are not formally registered with the state in which they
do business. The following entities are not subject to
franchise tax:
sole proprietorships (except for single member LLCs)
general partnerships when direct ownership is
composed entirely of natural persons (except for
limited liability partnerships)
entities exempt under Tax Code Chapter 171,
Subchapter B
certain unincorporated passive entities
certain grantor trusts, estates of natural persons and
escrows
real estate mortgage investment conduits and certain
qualified real estate investment trusts
a non-profit self-insurance trust created under
Insurance Code Chapter 2212
a trust qualified under Internal Revenue Code Section
401(a)
a trust exempt under Internal Revenue Code Section
501(c)(9)
unincorporated political committees
Corporate Franchise Tax: Everything You Need to Know
A corporate franchise tax is a tax imposed by a state on
corporations, LLCs, and partnerships for doing business
or incorporating their business in that state.10 min
read
A corporate franchise tax is a tax imposed by a state on
corporations, LLCs, and partnerships. This tax is
assessed to these companies for the privilege of either
doing business in the state or incorporating their
business in that state. Like income taxes, typically
franchise taxes are assessed annually. When a business
fails to pay a franchise tax, this may result in the
business being disqualified from doing business in a
particular state.
Corporate Franchise vs Income Tax
There are two different types of taxes that can be
assessed on businesses: corporate income taxes and
franchise taxes. The difference is found in looking at
what exactly is being taxed. Income taxes apply to
profit. Franchise taxes do not apply to profit. Another
difference between income tax and franchise tax is the
entity that does the taxing.
Companies pay income taxes on the business's profit,
or the company's net income. Companies that don't
make a profit do not have corporate income tax
liability. As a general rule, only corporations are
required to pay corporate income taxes. Sole
proprietorships, limited liability companies, and
partnerships do not pay income taxes. Instead, the
profits from those types of companies are passed on to
the owners. The owners then pay income taxes. Small
business corporations that operate as S corporations
also don't pay federal income taxes. However, S
corporations may be responsible to pay state taxes.
Corporate franchise taxes, on the other hand, are
essentially fees that companies must pay for the
privilege of doing business in a particular city or state.
Franchise taxes are not based on profit. Even
companies that make very little money, break even, or
lose money may be required to pay franchise taxes.
Franchise taxes come in many forms:
A simple flat fee.
A fee that varies based on the net worth of the
company.
A fee based on the company's gross receipts, or the
amount of business that a company performs in the
jurisdiction.
There are different types of companies that are subject
to franchise taxes in different states. However, it is
common for franchise taxes to be assessed not just to
corporations but to other companies as well.
Geography
In addition to federal corporate income tax, some
states assess a corporate income tax. Some cities also
assess corporate income taxes. Frequently, states
assess a corporate income tax using a single rate for all
corporations, regardless of the size of their income.
Other states have a series of different tax brackets.
Only about half the states impose a franchise tax. The
federal government does not impose a franchise tax
and has no equivalent to the franchise tax. The way to
determine whether a business is subject to the state
corporate income tax or the state franchise tax
depends on whether a business has a nexus in the
state.
As an example, Louisiana requires all corporations,
along with entities that are considered corporations
for federal income tax purposes, to file a state
corporate income tax return if they receive income
from Louisiana sources. This applies even if they do not
make a profit. If they have an exemption from the IRS,
they can submit it to the state taxation department to
receive an exemption from state income tax as well.
Corporations in Louisiana pay tax according to a table,
depending on the size of their net income. This
graduated taxation amount ranges from four percent
on the first $25,000 of their net income to eight
percent on all income earned over $200,000.
The state of Louisiana's due dates for taxes are
representative of most other states that impose
corporate income taxes. If the corporation's tax year
begins on January 1, it must submit its return along
with payment by the 15th day of the fifth month, which
is May 15.
Louisiana, along with many other states, requires
corporations to pay estimated income taxes at
intervals throughout the year if they expect their
income tax to be $1,000 or more for the tax year.
Installments are due quarterly on the 15th of the
month. Estimated tax may be recalculated if needed,
and the new estimated tax payments may increase or
decrease. The difference will then be divided between
each remaining installment. Overpayments can either
be credited or refunded.
Nexus
As a general rule, businesses pay corporate franchise
tax if they have a nexus in the state seeking to assess
the corporate franchise tax. When a business doesn't
have a company that does business in a given state,
there is no nexus to that state, and there's no liability
and no tax consequences.
Federal law requires a physical presence within a state,
either a business address or business location within
the state, for corporate tax. However, for franchise tax
purposes, a physical presence is not required.
Generally, the rule is that if you are required to collect
sales tax based on sales to customers in a particular
state, there is probably sufficient nexus in that state to
be required to pay franchise tax. States, however, have
different rules. Frequently, companies with a presence
in many different states hire professionals to assist
them in sorting out tax nexus issues.
Why Franchise Taxes May Not Be Good for Businesses
Franchise taxes are frequently referred to as "privilege
taxes." This means that they are the taxes imposed on
entities for "the privilege" of being able to do a
business, provide a service, or sell products within a
state. There are some states, such as Louisiana, that
impose both income taxes and franchise taxes on
companies doing business in the state. This results in
the tax rate for the state being higher, and it can also
result in driving businesses out of the state.
Other states are choosing to eliminate franchise taxes.
States like West Virginia have found that eliminating
the franchise tax encourages business growth.
What States Have Franchise Taxes?
Currently, there are 14 states that have franchise
taxes, including the following:
Alabama
Arkansas
Delaware
Georgia
Illinois
Louisiana
Missouri
New York
North Carolina
Oklahoma
Pennsylvania
Tennessee
Texas
How Do States Determine Franchise Taxes?
Each individual state has its own individual criteria for
determining the type of entities that are required to
pay franchise tax and how they are going to tax such
entities.
States base franchise taxes on different criteria, which
can include the following:
Income, in which case the franchise tax acts
functionally the same as an income tax
The number of shares of stock, the value of capital
stock, or the par value of stock
As an example, Louisiana requires corporations to pay
a franchise tax if the following are true:
The corporation is taxed as a corporation for the
purpose of federal income tax.
The corporation is formed in Louisiana and follows
Louisiana business laws.
The corporation is currently doing business in
Louisiana, or is qualified to do so.
The corporation is continuing its charter with the state,
allowing it to continue doing business.
The corporation owns capital, property, or a physical
plant within Louisiana, either directly or indirectly,
through some type of business organization.
You will need to consult the specific laws for your state,
but Louisiana assesses corporation franchise tax with a
graduated flat rate. It charges $1.50 for each $1,000 of
the company's capital within Louisiana up to $300,000,
and $3 for each $1,000 over $300,000. It charges a
minimum franchise tax of $110.

Louisiana's franchise tax returns are due by the 15th
day of the fifth month following the first day of a
corporation's tax year. When a corporation files its first
return, it is due by the 15th day of the third month
following the date the corporation is officially formed.
How Taxes Apply to C Corporations
Corporations (and some partnerships) taxed under
subchapter C of the internal Revenue Code, commonly
referred to as “C corps,” are subject to the corporate
franchise tax.
In regards to income taxes, C corps work differently
than S corps. C corps pay tax as individual income tax
for the profits distributed by the corporation as
dividends. They also pay tax as a corporate entity for
profits that are earned.
Entities Exempt From the Corporate Franchise Tax
There are a number of entities that are exempt from
corporate franchise tax. These include so-called “pass-
through entities.” Pass-through entities include most
partnerships, limited liability corporations, and S corps.
These types of businesses pay taxes through the
individuals' tax returns, rather than on the business
entity's income. These entities are subject to minimum
fees, as discussed further below.
Insurance companies are also exempt from corporate
franchise taxes. Instead, insurers pay something
referred to as a “premium tax.”
Credit unions are also not taxed under corporate
franchise taxes. Federal law protects federally
chartered credit unions from this type of taxation.
State laws also extend an exemption to state-
chartered credit unions, exempting them from
corporate franchise taxes.
Similarly, charitable organizations and other business
entities that are exempt from federal income taxes are
not subject to federal corporate franchise taxes.
Tax Base as Profits
A company's tax base is considered taxable income.
Put another way, the profits of C corporations, which
are taxable income, make up their tax base. State law
defines the tax base by specifying what counts as
taxable income using the definition provided for
federal corporate income tax.
By way of example, consider federal depreciation
rules. Generally, federal depreciation rules are
followed in states such as Minnesota, with the
exception that bonus depreciation and expensing are
subject to special rules in the state of Minnesota.
Minnesota deviates from the federal rules in a few
other ways. For example, it taxes some income the
federal law considers exempt from taxes. This includes
state bond interest and local bond interest. It also does
not allow for percentage depletion in its tax structure.
Minnesota applies a flat tax rate of 9.8 percent to
Minnesota-based taxable income.
Income Apportionment
In states like Minnesota, income is apportioned based
on the percentage of sales a business makes to
Minnesota buyers. Many corporations, particularly in
the internet age, make numerous sales across state
lines. Under the United States Constitution, states are
only allowed to tax for the income of a business that is
"fairly apportioned" to the activity the business
performed within that state.
All states use a formula apportionment considering the
in-state percentage of one or more factors. Minnesota,
for example, takes a multistate corporations' income
and considers the proportion of sales made to buyers
within the state of Minnesota. When there is a unitary
business that operates through several corporations,
such as a parent-subsidiary combination, all the
income for the business is combined. This method is
referred to as the combined reporting method.
Various Tax Credits Apply
Corporate franchise taxes can be reduced by tax
credits. There are several different tax credits that are
available to businesses. In Minnesota, tax credits are
available for the following types of things:
Research and development
Jobs credit under the JOBZ program
Historic structure rehabilitation credit
Taxes paid to different states
Revenues Go to the General Fund
Revenues gained from corporate franchise tax
collections go to the general fund. For example, the
Minnesota Management and Budget office estimated
that in February 2015, corporate franchise tax
collections totaled approximately $1.32 billion for
fiscal year 2015. The Minnesota Management and
Budget office also estimated that 2016's corporate
franchise tax collection would amount to
approximately $1.3 billion.
Revenues for Franchise Taxes Are Volatile
With corporate franchise tax collection, these tax
revenues are the most volatile. When the economy
goes into a recession, corporate profits drop, and
franchise tax revenues also drop.
For example, in 2007, which was considered an
expansion year, revenues were 1.17 billion in the state
of Minnesota. By 2010, during the recession, revenues
had dropped to 663 million in the state of Minnesota.
This is a reduction of 43 percent in just three years. Five
years later, in 2012, revenues had recovered to 1.04
billion. This led to an increase in corporate franchise
tax for the state of Minnesota of 57 percent. Such
volatility makes it difficult for states to rely on
corporate franchise tax as a steady source of revenue.
A Minimum Tax Applies in Franchise Tax Law
An alternative minimum tax, also referred to as an
AMT, applies under the franchise tax codes in some
states. This state AMT closely follows a similarly
situated federal AMT.
It works like this: corporations compute the taxes
owed under the alternative minimum tax using a broad
tax base — in other words, less generous depreciation
rules — and compare this rate against a similar
calculation under a lower tax rate. If the alternative
minimum tax, or AMT, results in a higher amount of tax
to be paid, the corporation is obligated to pay the
higher amount to the state as their share due.
A Minimum Fee Applies to Most Entities
All corporations, including S corporations and C
corporations as well as partnerships and LLCs, must
pay, in some states, a minimum fee in addition to the
minimum tax. This minimum fee is based on their
property owned within the state, their sales, and their
payroll. This fee is considered an add-on fee. In other
words, it is “added on” to the taxes due and owing.
This fee is paid in addition to the tax the corporation
has computed under either their regular income tax or
alternate minimum tax. In Minnesota, in 2013, the
Minnesota Legislature increased these fee amounts.
Additionally, the Minnesota Legislature provided for a
rule that allows the state to adjust for inflation each
year going into the future.
Getting Set Up to Pay Franchise Tax
Since sole proprietorships do not need to register with
the state where they form and do business, they do not
need to pay franchise tax or set up an account to do so.
However, other business entities — including
corporations, partnerships, and LLCs — need to file an
application specific to that type of business structure.
After your business is registered with the state, the
state will contact you with further information.
Can You Get an Extension for Paying Franchise Tax?
All states that require businesses to pay franchise tax
have different rules. However, most are similar to
Louisiana's rules, which allow extensions up to seven
months from the return's due date. If your business
needs to request an extension, it must be submitted
before the return's original due date. If it is submitted
after that date, it will not be approved.
The Louisiana Department of Revenue allows
businesses to request an extension electronically
through the portal on its website. Requests can also be
filed electronically through an automated telephone
system; taxpayers need to have their account numbers
when they call. A third way to request an extension is
by using tax preparation software that offers that
capability. In that case, you can usually make a
payment through the tax preparation software as well.
Louisiana, as well as many other states, offers methods
for making franchise tax payments online. Businesses
that plan to mail in checks or money orders can print
out an extension payment voucher, which may be
found on the state's website. Be sure to check your
own state's Department of Revenue or equivalent
agency for detailed instructions on requesting
extensions and making payments.
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EMPLOYENT WITHHOLDING TAX
What is withholding tax in the Philippines?
Corporations and individuals engaged in business are
required to withhold the appropriate tax on income
payments to non-residents, generally at the rate of
30% in the case of payments to non-resident foreign
corporations or 25% for non-resident aliens not
engaged in trade or business.
IMPORTANCE OF WITHHOLDING TAX SYSTEM
It is considered as an effective tool in the collection of
taxes for the following reasons:
It encourages voluntary compliance;
It reduces cost of collection effort;
It prevents delinquencies and revenue loss; and
It prevents dry spell in the fiscal conditions of the
government by providing revenues throughout the
taxable year.
PERSONS REQUIRED TO WITHHOLD WITHHOLDING
TAXES
Individuals engaged in business or practiced of
profession
Non-individuals (corporations, associations,
partnertship, cooperatives) whether engaged in
business or not
Government agencies and its instrumentalities
(National Government Agentcies (NGAs), Government-
owned or Controlled Corporations (GOCCs), Local
Government Units including Baranggays (LGUs
A WITHHOLDING AGENT - is any person or entity who
is in control of the payment subject to withholding tax
and therefore is required to deduct and remit taxes
withheld to the government.
CLASSIFICATION OF WITHHOLDING TAXES
Creditable withholding tax
Compensation - is the tax withheld from income
payments to individuals arising from an employer-
employee relationship.
Expanded - is a kind of withholding tax which is
prescribed on certain income payments and is
creditable against the income tax due of the payee for
the taxable quarter/year in which the particular
income was earned.
Withholding Tax on GMP - Value Added Taxes (GVAT) -
is the tax withheld by National Government Agencies
(NGAs) and instrumentalities, including government-
owned and controlled corporations (GOCCs) and local
government units (LGUs), before making any payments
to VAT registered taxpayers/suppliers/payees on
account of their purchases of goods and services.
Withholding Tax on Government Money Payments
(GMP) - Percentage Taxes - is the tax withheld by
National Government Agencies (NGAs) and
instrumentalities, including government-owned and
controlled corporations (GOCCs) and local government
units (LGUs), before making any payments to non-VAT
registered taxpayers/suppliers/payees
Final Withholding Tax is a kind of withholding tax which
is prescribed on certain income payments and is not
creditable against the income tax due of the payee on
other income subject to regular rates of tax for the
taxable year. Income Tax withheld constitutes the full
and final payment of the Income Tax due from the
payee on the particular income subjected to final
withholding tax.
[return to index]
WITHHOLDING TAX ON COMPENSATION
Compensation or Wages - refers to all remuneration
for services performed by an employee for his
employer under an employee-employer relationships
unless exempted by the NIRC and pertinent laws.
KINDS OF COMPENSATION
Regular
Basic Salary
Fixed allowances
Supplmentary
Commission
Overtime pay
Fees, including directors fees
Profit sharing
Monetized vacation leave in excess of ten (10) days
Sick leave
Fringe benefits received by rank and file employees
Hazard pay
Taxable 13th month pay and other benefits
Other remuneration received from an employee-
employer relationships
[return to index]
RESPONSIBILITIES OF THE EMPLOYER
Submit the duly accomplished BIR Form Nos. 1902
and/or 1905 to the RDO within thirty (30) days from
receipt;
Withhold the tax due from the employees following
the prescribed manner;
Remit the amount of tax withheld from the employee
within the prescribed due dates;
Do the year-end adjustment;
Submit Annual Information return (BIR Form 1604-C,
1604-F and 1604-E), including the required
alphabetical list of employees/payees on or before
January 31 following the close of the calendar year;
Issue the Certificate of Compensation Payment/Tax
Withheld (BIR Form No. 2316) to the employees; and
Refund excess tax withheld.
EXEMPTIONS AND EXCLUSIONS FROM GROSS INCOME
Remuneration received as an incident of employment
(RA 7641; those with approved reasonable private
retirement plan; Social Security Act of 1954, as
amended; GSIS Act of 1937, as amended; and etc.
Remuneration paid for agricultural labor;
Remuneration for domestic services;
Remuneration for casual labor not in the course of an
employer's trade or business;
Compensation for services by a citizen or a resident of
the Philippines for a foreign government or
international organization;
Damages (Actual, moral, exemplary and nominal);
Life insurance;
Amounts received by the insured as a return of
premium;
Compensation for injuries or sickness;
Income exempt under treaty
13th Month pay and other benefits
GSIS, SSS, Medicare and other contributions
(employee's share only)
Compensation income of minimum wage earners
(MWEs) who work in the private sector and being paid
the Statutory Minimum Wage (SMW), as fixed by the
Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages Productivity Commission
(NWPC), applicable to the place where he/she is
assigned;
Compensation income of employees in the public
sector with compensation income of not more the the
SMW in the non-agricultural sector as fixed by the
RTWPB?NWPC applicable to the place where he/she is
assigned.
De Minimis benefits
Fringe benefits given to employees other than rank and
file and subjected to Fringe Benefit Tax (FBT);
Personnel Economic Relief Allowance (PERA) given to
government employees; and Representation and
transportation allowance (RATA granted to public
officers and employees under the General
Appropriations Act.
[return to index]
MINIMUM WAGE EARNERS
No withholding tax shall be required on the Statutory
Minimum Wage (SMW) of the Minimum Wage earner
in the private/public sectors as defined in RR 2-98, as
amended by RR 11-2018, including:
Holiday pay
Overtime pay
Night shift differential
Hazard pay
of Minimum Wage earners in the private/public
sectors as defined by these Regulations.
DE MINIMIS BENEFITS NOT SUBJECT TO WITHHOLDING
TAX
Monetized unused vacation leave credits to employees
not exceeding ten (10) days during the year;
Monetized value of vacation and sick leave credits paid
to government officials and employees;
Medical cash allowance to dependents of employees,
not exceeding P1,500 per employee per semester of
P250 per month;
Rice subsidy of P2,000 or one sack of 50kg rice per
month amounting to not more than P2,000;
Uniform and clothing allowance not exceeding P6,000
per annum;
Actual medical assistance, e.g. medical allowance to
cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and
routine consultations, not exceeding P10,000.00 per
annum;
Laundry allowance not exceeding P300 per month;
Employees achievement awards, e.g. for length of
service or safety achievement, which in the form of a
tangible personal property other than cash or gift
certificate, with an annual monetary value not
exceeding P10,000 received by the employee under an
established written plan which does not discriminate
in favor of highly paid employees;
Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum;
Daily meal allowance for overtime work not exceeding
twenty five percent (25%) of the basic minimum wage;
Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total
annual monetary value received from both CBA and
productivity incentive schemes combined do not
exceed ten thousand pesos (Php 10,000.00)per
employee per taxable year;
YEAR-END-ADJUSTMENT period
Px x x x
On or before the calendar year and prior to the
payment of the compensation for last payroll Collectible : Tax Due> tax
period, the employer shall determine the sum withheld - collect before payment of
of the taxable regular and supplementary last salary
compensation paid to each employee for the
whole year and must ensure that the tax due is Refund: Tax Due< tax withheld
equal to tax withheld. - refund on or before January 25th
of the year/ last payment of salary

Break even: Tax due = tax

ANNUALIZED WITHHOLDING withheld - no more withholding for
TAX FORMULA December salary

Gross Compensation Income EXPANDED WITHHOLDING TAX

(present + previous
employer) The Withholding of Creditable Tax at Source or simply
Px x x x called Expanded Withholding Tax is a tax imposed and
prescribed on the items of income payable to natural
Less: Non-Taxable/Exempt or juridical persons, residing in the Philippines, by a
Compensation Income payor-corporation/person which shall be credited
against the income tax liability of the taxpayer for the
1. 13th month pay and other taxable year.
benefits
P90,000.00 When you have employees, you need to stay on top of
2. SSS, GSIS, PHIC, HDMF changing employment tax rates. Rates impact the
and union dues (employee amount of money you withhold from employee wages.
share) xxxxxx To reflect recent legislation, there are new 2018
3. Other Non-Taxable salaries income tax withholding tables you need to know
(P250,000) about.
xxxxx
x xxxx Below, you will first find information about how
withholding tables work. Then, you can learn about the
Taxable Compensation new 2018 tables, when you must implement them by,
Income and more.
Px x
What are income tax withholding tables?
xx
You will use an employee’s Form W-4 and the income
tax withholding tables to determine how much federal
Tax
income tax to withhold from employee wages.
Due
New hires are required to fill out Form W-4,
Pxxxx Employee’s Withholding Allowance Certificate, when
they start working at your business. On this form, the
Less: Tax Withheld (January to employee can claim withholding allowances. The more
November/termination allowances an employee claims, the less you withhold
date) for federal income tax. Employees can claim
Pxxxx allowances for many reasons, including if they have
dependents.
Tax to be withheld for December/last
payroll Once you have an employee’s withholding allowance
information on Form W-4, you must use the income tax
withholding tables found in IRS Publication 15. These The 2018 income tax withholding tables aren’t the only
tables provide ranges based on pay frequency, filing things that got updated. Supplemental wages and
status, and withholding allowances. backup withholding rates changed, too.

There are two methods you can choose from to Withholding on supplemental wages fell from 25% to
determine an employee’s federal income tax the new 22%. The backup withholding rate fell from
withholding: 28% to the updated 24%. You will withhold less in taxes
on supplemental wages and backup withholding.
Wage bracket method
Percentage method
https://www.patriotsoftware.com/payroll/training/bl
og/2018-income-tax-withholding-tables/
Wage bracket method
If you use the wage bracket method, you must find the
range the employee’s wages fall under. Then, using
their claimed allowances, find the amount to withhold.

Percentage method
The percentage method is a little different. You must
multiply the amount of one withholding allowance
(explained below) by the number of allowances the
employee claims and subtract that from the
employee’s wages. Then, you must find the range for
that number and calculate the tax amount.

2018 income tax withholding tables

Now, to the news. The IRS released new income tax
withholding tables for 2018. According to the IRS,
these new tables should result in increased paychecks
for many employees.

The new tables have changes in tax rates and brackets,

an increase in the standard deduction, and the
elimination of personal exemptions. And, these
changes work towards preventing over- and under-
withholding of taxes.

As an employer, you need to use these new income tax

withholding tables to run payroll as soon as possible,
but absolutely no later than February 15, 2018. If you
use online payroll software, information will
automatically update.

The new 2018 income tax withholding tables work with

the existing Forms W-4. However, the IRS is also
working on revising Form W-4 for future use.

The IRS also released their federal tax calculator for

withholding. Individuals can use this calculator to
determine their tax liabilities.

Supplemental and backup withholding tax changes