Panama Payroll Income Tax 2026: Brackets and Withholding Calculation

The Impuesto Sobre la Renta (ISR) — Panama's personal income tax — on salaries is withheld monthly by the employer and reported annually in the employee's sworn declaration. Unlike many countries in the region, Panama has a simple progressive system with an exemption threshold that protects lower-income earners. This article explains the brackets, the step-by-step calculation, and the allowable deductions, with examples.

Important: ISR brackets, rates, and deductions may be updated by tax reform. Always verify with the DGI or your accountant before processing actual withholdings.

The Panamanian system on one page

Panama taxes personal income with two progressive tiers on annual taxable income:

• Up to the exemption threshold: 0% (no ISR is paid).
• Middle tier: rate of 15% on the amount exceeding the exemption threshold up to a certain level.
• Upper tier: rate of 25% on the amount exceeding the middle tier.

For 2026, the typical active brackets are:

These values are for reference — verify the updated brackets with the DGI before applying them.

Calculating annual ISR

ISR is calculated first on an annual basis and then distributed into monthly withholdings. The formula:

Annual ISR = (Taxable income − exemption threshold) × marginal rate

Under the progressive system, the calculation is done tier by tier:

Example 1: salary in the middle tier

Carlos earns B/.2,000 per month (base salary). His approximate annual income:

• Salary × 12 months + 13th month ≈ 2,000 × 12 + 2,000 = B/.26,000
• Taxable income (after CSS deductions): approximately B/.23,400 (after deducting 9.75% CSS).

Annual ISR calculation: - Tier 1 (0 – 11,000): 0% - Tier 2: (23,400 − 11,000) × 15% = 12,400 × 15% = B/.1,860

Carlos's annual ISR: B/.1,860.

Monthly withholding: 1,860 ÷ 12 = B/.155.00 withheld each month.

Example 2: high salary in the upper tier

Lucia earns B/.6,000 per month + an annual bonus of B/.10,000. Estimated annual income:

• 6,000 × 12 + 10,000 + 6,000 (13th month) = B/.88,000
• Taxable income: ~ B/.79,420 (after CSS).

Annual ISR calculation: - Tier 1 (0 – 11,000): 0% - Tier 2 (11,000 – 50,000): 39,000 × 15% = B/.5,850 - Tier 3 (50,000 – 79,420): 29,420 × 25% = B/.7,355 - Total annual ISR: B/.13,205

Estimated monthly withholding: 13,205 ÷ 12 ≈ B/.1,100/month.

The annual bonus generates an additional adjustment that is withheld in the month it is paid.

Allowable deductions

To arrive at taxable income, the following deductions from gross income are permitted:

Automatic deductions

• Employee CSS contribution (9.75% of salary, see our CSS guide).
• Other mandatory withholdings that reduce taxable income under current law.

Personal deductions (declared annually)

The employee may request personal deductions from the employer by providing documentation. The most common:

• Dependent spouse: fixed annual deduction if the spouse has no income.
• Dependent children: annual deduction per minor or student child.
• Donations to DGI-authorized organizations.
• Mortgage interest on a primary residence (with an annual cap).
• Medical expenses for the employee and dependents (with an annual cap).
• Children's educational expenses (with a cap).
• Contributions to private pension plans.

These deductions are applied in the annual sworn declaration (individual tax return) — the employee may receive a refund if the amount withheld during the year exceeded the final tax liability.

How monthly withholding is applied

The employer calculates the monthly withholding using the projected annual method:

1. Estimate the employee's annual income: monthly salary × 12 + 13th month (1 additional month) + expected bonuses.
2. Subtract declared deductions: CSS, personal deductions if any.
3. Calculate annual ISR using the current brackets.
4. Divide by 12 to obtain the base monthly withholding.

Adjustments during the year:

• If the employee receives a bonus or extraordinary commission, the projected ISR is recalculated and the withholding is adjusted in the following month.
• If the employee declares new deductions (marriage, child, mortgage), the calculation is updated from the following month.

Example: treatment of the 13th month bonus

To avoid sharp spikes, the ISR on the 13th month bonus is calculated using the "annual salary + 13th month" method:

• Estimate the annual ISR including the 13th month in the base.
• Compare with the ISR without the 13th month.
• The difference is what is withheld from the 13th month in the month it is paid.

This prevents an employee from facing an excessive withholding in the month the 13th month is paid (which would happen if the regular monthly table were applied without adjustment).

Annual sworn declaration

Although the employer withholds monthly, the employee must file their annual sworn declaration within the DGI's deadlines (typically by March 15 of the year following the fiscal period).

In the declaration:

• The actual annual income is reported.
• Documented personal deductions are applied.
• The definitive annual ISR is calculated.
• The result is compared with what was withheld by the employer (sum of monthly withholdings).

Possible outcomes:

• If withheld = final ISR → no adjustment.
• If withheld > final ISR → the DGI refunds the excess (credit balance).
• If withheld < final ISR → the employee pays the difference.

The annual income and withholdings certificate that the employer delivers to the employee each year (typically in February) is the key document for the annual sworn declaration.

Salaries exempt from ISR

Some salaries or payment types are completely exempt from ISR:

• Salaries below the annual exemption threshold.
• Severance payments up to a certain amount.
• Disability, old-age, or death pensions granted by the CSS.
• Maternity and disability subsidies paid by the CSS.
• Certain specific labor benefits as defined by tax law.

Common mistakes with payroll ISR

1. Not deducting CSS before calculating ISR: the ISR base is salary minus CSS, not gross salary.
2. Applying the marginal rate to all income: the system is progressive; each tier has its own rate — you do not apply 15% or 25% to the entire income.
3. Forgetting the 13th month adjustment: paying the 13th month using the standard monthly table generates excessive withholding.
4. Not considering declared deductions: the employee has the right to apply personal deductions if they declare them with documentation.
5. Not issuing the annual income certificate: the employer must provide this certificate so the employee can file their annual sworn declaration.

How cifraHQ automates payroll ISR

cifraHQ automatically calculates the projected monthly withholding based on estimated annual income, adjusts the calculation when bonuses, extraordinary commissions, or the 13th month bonus are paid, integrates personal deductions declared by each employee, generates the annual income and withholdings certificate in the DGI format, and produces ISR withholding reports to be filed monthly.

Want to see how cifraHQ processes payroll with CSS, Income Tax (ISR), and other Panamanian withholdings? Request a demo or explore our Panama payroll guide.

Official resources

• Dirección General de Ingresos (DGI) — brackets, deductions, forms
• Caja de Seguro Social — employee CSS base
• 13th Month Bonus Panama — special ISR treatment

This article is informational and does not constitute tax advice. Brackets and deductions may be updated; verify with the DGI or your accountant before processing actual withholdings.