Companies are not required to withhold tax if employee income does not exceed the annual limit

The application of Personal Income Tax (IRPF) withholdings on employment income often raises doubts when the employment relationship is brief or the contract is permanent in nature. Recently, the Dirección General de Tributos (DGT) has clarified the scope of the obligation to withhold in cases where the termination of the contract occurs before the end of the calendar year.

What the DGT has ruled

The inquiry analyzes whether a company must apply withholding when a worker with a permanent contract receives income that, whether projected or actually received, does not reach the minimums established by the regulations. The DGT's criteria establish the following:

• In permanent contracts, the minimum rate of 2 percent is not applicable, even if the contract is terminated before completing one year.
• The exclusionary limit for the obligation to withhold provided for in Article 81.1 of the Personal Income Tax Regulations (RIRPF) must be applied.
• If employment income does not exceed the annual amounts set according to the taxpayer's family situation, the company has no obligation to apply withholding.

What it means for you

This criterion has direct consequences for both parties in the employment relationship:

• For the company: There is no legal obligation to apply withholdings if the employee's income remains below the RIRPF thresholds. This avoids the erroneous application of the 2% minimum rate in permanent contracts that end prematurely.
• For the employee: If your total annual income does not exceed the limits established according to your family situation, you will not receive withholdings on your payslip. It is fundamental to consider that this does not exempt you from the obligation to declare earnings in your annual tax return if the declaration thresholds are exceeded.

What should be done

It is necessary to verify the employee's family situation to determine the exact withholding exemption limits. Companies must ensure that the application of withholding rates aligns with the projection of annual income and current RIRPF regulations, avoiding the application of minimum rates when the nature of the contract does not require it. It is recommended to assess each particular case according to the employee's projected income during the tax year.