Expanded withholding tax: what you owe when you pay a professional
If your business hires a freelancer, consultant, or licensed professional, you may be required to hold back a portion of their fee and send it to the BIR. Here is how expanded withholding tax works.
When paying someone else triggers your own tax obligation
Most people think about taxes only in terms of their own income. But in the Philippines, there is a rule that flips that idea around: when a registered business pays certain service providers, the business itself must hold back a portion of the fee and send it to the BIR.
This rule is called expanded withholding tax, or EWT for short. Think of it as a prepayment system. The BIR collects a slice of the service provider's income at the point of payment, before the money even reaches them. This makes tax collection more reliable and harder to skip, which is exactly why the rule exists.
Who is required to withhold
Not every person who makes a payment has to withhold. The obligation falls on those the official BIR rules call "withholding agents." In practice, this usually means registered businesses (sole proprietors, partnerships, and corporations) and professionals who are themselves BIR-registered.
If you are a registered sole proprietor or business owner and you pay someone for a service, you likely qualify as a withholding agent. Pure employees generally do not have this obligation unless their employer formally designates them as one.
What kinds of payments are covered
Expanded withholding tax applies to a wide range of professional and service fees, including payments to:
- Licensed professionals such as doctors, lawyers, accountants, and engineers
- Consultants and management advisors
- Freelancers providing technical or specialized services
- Talent fees paid to artists, athletes, or performers
- Lessors, when you rent space or equipment from an individual
The withholding rate depends on the type of payment and how the payee is classified. Since rates can vary by service type, always confirm the correct rate through the official BIR rules or by asking AskOnward before you process a payment.
What you must do after withholding
When you hold back EWT from a payment, three things must follow.
Remit the withheld amount to the BIR. This is done through the applicable withholding tax return, filed on a monthly or quarterly schedule depending on your registration type.
Issue BIR Form 2307 to the payee. This certificate is proof that you withheld on their behalf. They will use it to reduce the tax they owe when they file their own income tax return. Without it, they cannot claim the credit.
Keep your records. Hold on to your payment records, the 2307 copies you issued, and your remittance confirmations. These are what the BIR expects to see during an examination.
Common mistakes that get business owners in trouble
Treating withholding as optional. It is not, if you are a withholding agent. The BIR can hold you liable for the full amount you should have withheld, plus penalties, even if the payee already declared and paid tax on the income themselves.
Forgetting to issue Form 2307. Remitting without issuing the certificate leaves your payee unable to claim their tax credit, and it creates a separate compliance issue for you.
Using the wrong rate. Different services carry different withholding rates. Applying the wrong one, even by accident, can still result in a deficiency assessment.
Missing the remittance deadline. The same late-filing rules that apply to your own income tax returns apply here. Delays carry interest and penalties that stack up quickly.
Expanded withholding tax is the kind of obligation that surprises business owners, especially those who recently moved from being an employee to running their own business. Once you know it exists, the steps are manageable: withhold the right amount, remit on time, issue the 2307, and keep clean records.
If you are unsure whether a specific payment is covered, or which rate applies to your situation, bring the question to AskOnward. The answers are grounded in the official BIR rules and explained in plain language you can actually use.
This article is for general information and is not affiliated with the government. For official forms and the latest rules, see the Bureau of Internal Revenue at bir.gov.ph.