What is Withholding Tax and How Does It Work?

What is Withholding Tax

Withholding tax is another tax that legal entities must understand, as it is an important part of accounting. As mentioned earlier, withholding tax requires the payer, if registered as a legal entity, to withhold tax before making payments to both individuals and other legal entities. The withheld amount must then be submitted to the Revenue Department between the 7th and 15th of each month.

However, if the total amount for goods or services does not exceed 1,000 baht per payment, the payer is not required to withhold tax. But if payments are made continuously, even if each payment is less than 1,000 baht, the payer must still withhold tax. For example, if phone service fees are paid monthly, and each payment is less than 1,000 baht, but the total accumulates to more than 1,000 baht, tax must still be withheld.

The recipient of the payment must have withholding tax deducted according to the prescribed tax rate for each type of transaction. The more withholding tax that is deducted, the better it is for the recipient. When filing taxes at the end of the year, if the income does not meet the threshold for tax payment, the recipient can apply for a refund. Alternatively, if taxes are owed after filing, the amount to be paid will be reduced because part of the tax has already been withheld. This helps ease the burden of tax payment for the income earner.

As for the payer, they must withhold tax immediately before making any payment to the recipient. If the tax is not withheld or if the information submitted to the Revenue Department is incorrect, it will be considered a violation of the law, and the payer will face penalties and interest charges if the tax withheld is insufficient.

How to Withhold Tax: The payer must withhold tax at the specified rates for each type, which include the following:

1. Wages and salaries: If the net income of an employee for the entire year does not exceed 150,000 baht, they will be exempt from withholding tax or taxed at the lowest rate of 0%.
2. Payment for work or services: For example, a sales agent receiving a commission will use the same calculation method as wages and salaries, with the lowest withholding tax rate of 0%.
3. Professional services: The hiring company must withhold 3% tax for these services, and this group includes only 6 specific professions as follows:

3.1) Medical professions such as doctors, pharmacists, and dentists.

3.2) Fine arts.

3.3) Architects.

3.4) Engineers.

3.5) Accountants.

3.6) Lawyers.

4. Payment for contracts or services: Withholding tax of 3% must be applied, such as for hiring product manufacturing, business card printing, product reviews, and graphic design services, as well as for internet and phone services. (This is different from work or service contracts, as the contractor must use their own equipment to complete the tasks assigned.)
5. Property rental: If the person holds the keys to the property, it is considered a rental payment, and the renting company must withhold 5% tax.
6. Advertising costs: If a company hires an advertising agency to promote its brand, the withholding tax is 2%.
7. Transport costs: For companies registered as legal entities that provide transportation services, they must also register as transport service providers, and withholding tax of 1% must be applied.

In the case where the business is the payer, after withholding tax, before making payment to the recipient, the payer must issue a withholding tax certificate (Form 50 T.W.I.) to the recipient. The certificate must be completed correctly, with all the required details as specified by law, otherwise, it cannot be used for tax purposes.

How to Prepare a Withholding Tax Certificate

The party responsible for issuing the withholding tax certificate must prepare it according to the criteria set by law as follows:

1. The name, address, tax identification number/national identification number of both the party responsible for withholding the tax and the recipient of the withheld tax must be stated.

2. The certificate must include the number and volume number. However, if issued by computer, the volume number does not need to be specified.

3. The withholding tax certificate must contain the following information in each copy as prescribed by the Director-General of the Revenue Department:

– Copy 1 must include the statement "For the recipient of the withholding tax, to be attached with the tax return".

– Copy 2 is for the recipient to keep as evidence.

4. Sequence number on forms Phor Ngor Dor. 1 Kor, Phor Ngor Dor. 1 Kor Special, Phor Ngor Dor. 2 Kor, Phor Ngor Dor. 3 Kor:

– In the case of submitting an income return for annual income tax that needs to be filed, such as payment of salary, Phor Ngor Dor. 1 Kor must be submitted by February of the following year.

– For Phor Ngor Dor. 2, Phor Ngor Dor. 3, Phor Ngor Dor. 53, withholding tax return must be submitted monthly.

5. The "Type of assessable income" section in the withholding tax certificate must specify the type of income. This can be written or printed, but the important thing is that the information must be clear and easy to understand.