“Annualize” simply means “to calculate or adjust to reflect a rate based on a full year.” Let’s talk about three kinds of annualization: the annual review; annualized income; and annualized withholding tax.
Most companies conduct annual reviews that determine the level of salary increase their employees will receive the next year. This percentage is determined by the amount of income earned by the company, minus the expenses. If the company brought in substantial sums of money, then they can convert a part of their profits into increases for their employees. This is a very good practice, considering that employees will get annual salary adjustments, which in turn will help motivate them to perform well during the year so that they will get good reviews.
Annualized income is “an estimate of the amount of money that an individual, business or asset will earn over the course of a year.” This projected income is used to create budgets and income tax payments, as well as to plot a business’ expenditure. This is computed by “[multiplying] the earned income figure by the number of months in a year, [divided] by the number of months of income data available.” So, if a company earned US$12,000 in January, US$10,000 in both February and March, and then US$12,000 again in April, the company earned US$44,000 in the span of four months. As such, US$44,000×12 (number of months) ÷ 4, equals an annualized income of US$132,000.
Annualized Withholding Tax
Now, almost all employees look forward to their tax returns every December. At the end of each year, employees either get a tax refund (if the total taxes deducted from them exceeded the amount of tax that they should’ve paid) or they will be paying additional taxes (if their deductions were lesser than the amount of tax they owed). In cases where the HR department was accurate in computing the appropriate taxes, then they will neither receive a refund nor will they be made to pay additional taxes.
Meanwhile, employers prepare their annual tax payments by segregating their employees into three categories: those who were with the company for the entire year; those who had a previous employer within the same year; and those who were terminated or who resigned. They will compute the corresponding withholding tax for each individual and submit the proper amount to the BIR.
As always, if you are unsure of any aspects of annualization, just asked one of our certified payroll geniuses at email@example.com.