There are many components to pay that Employers should be aware of when they set out to hire employees in the Philippines.  

Salary packages typically begin with the end in mind: How much will the employee get in the end?  Only later do employers deal with the nitty gritty details. 

This article provides a brief overview of the primary issues that you should consider to understand how to properly manage payroll in the Philippines!

 

MINIMUM WAGE

Minimum Wage is set forth by Regional Wage Orders that prescribe the daily minimum wage rates per industry per locality within the region and in some instances depending on the number of workers and the capitalization of enterprises.

There are 16 Regions in the Philippines that each issue their own rules and rates for minimum wage.  Please refer to the DOLE Handbook for the latest minimum wages.

 

MONTHLY AND DAILY WAGES

Employees may be paid based on a Monthly or Daily wage rate depending on their employment agreements.  

Computation of Estimated Equivalent Monthly Rate (EEMR) is necessary for the purposes of determining contributions to several required government benefit plans, as outlined below.  

It is typical practice to convert Daily Wages called the Applicable Daily Rate (ADR) to EEMR depending on what days the employee is required to work and is paid for each week.  For instance if the employee does not work and is not paid for Sundays

EEMR = (365 day per year - 52 rest days) * ADR / 12 months

However, depending on if the employee is required to work on holidays, rest days or special days, the calculation can be much more complicated.  Please refer to the DOLE Handbook for examples of suggestion calculations for various other situations.  

Similarly, if the employee is paid a Monthly wage, conversion to a Daily wage may be necessary to ensure compliance with Minimum Wage requirements.  Following the example above.

ADR = Monthly Wage * 12 months / (365 day per year - 52 rest days)

 

HOLIDAY PAY

Holiday pay refers to the payment of the regular daily wage for any unworked regular holiday.

This benefit applies to all employees except

• Government employees
• Those in retail and service with less than 10 workers
• Kasambahay and persons in personal service of another
• Managerial employees
• Officers or member of a managerial staff
• Field personnel and other employee whose time and performance in unsupervised

Every applicable employee is entitled to Holiday Pay ONLY IF he/she was present or is on leave with pay on the work day immediately preceding the holiday.

If work is performed on the holiday, twice (200%) the daily wage of the employee must be paid.  And if the holiday falls on the scheduled rest day of the employee, an additional 30% (or 260%) must be paid.

There are currently 12 regular holidays in the Philippines, namely:

1. New Year's Day (Jan 1)
2. Araw ng Kagitingan (April 9)
3. Maundy Thursday (Movable Date - April 9)
4. Good Friday (Movable Date - April 10)
5. Labor Day (May 1)
6. Independence Day (June 12)
7. National Heroes Day (Last Monday of Aug - Aug 31)
8. Eidul Fitr (Movable Date)
9. Eidul Adha (Movable Date)
10. Bonifacio Day (Nov 30)
11. Christmas Day (Dec 25)
12. Rizal Day (Dec 30)

 

PREMIUM PAY

Premium pay is the additional compensation for work performed within eight (8) hours on non-work days, such as Rest Days and Special Days.

This benefit applies to all employees except

• Government employees
• Managerial employees
• Officers or member of a managerial staff
• Kasambahay and persons in the personal service of another
• Workers who are paid by results
• Field personnel and other employee whose time and performance in unsupervised

 

Special Days

The “no work, no pay” principle applies during special days and on such other special days as may be proclaimed by the President or by Congress.

Workers who are not required or permitted to work on special days are not entitled to any compensation. However, this is without prejudice to any voluntary practice or provision in the Collective Bargaining Agreement (CBA).

 

Special Work Days

For work performed on a declared Special Work Day, an employee is entitled only to his/her daily wage. No premium pay is required since work performed on said day is considered work on an ordinary workday. 

 

OVERTIME PAY

Overtime pay refers to the additional compensation for work performed beyond eight (8) hours a day. 

Employees entitled to this pay are the same with Premium Pay. The minimum overtime pay rates vary according to the day the overtime work is performed.

For work in excess of eight (8) hours performed on ordinary working days, employees must be paid an additional 25% of the hourly rate.

Overtime Pay = P537 / 8 x 125% = P67.125 x 125% x number of OT hours worked

The premium pay for work performed on rest days, special days, or regular holidays is included as part of the regular rate of the employee in the computation of overtime pay for overtime work rendered on said days, especially if the employer pays only the minimum overtime rates prescribed by law.

 

NIGHT SHIFT DIFFERENTIAL

Night Shift Differential (NSD) refers to the additional compensation of ten percent (10%) of an employee’s regular wage for each hour of work performed between 10 p.m. and 6 a.m.

This benefit applies to all employees except

• Government employees
• Those of retail and service establishments
• Kasambahay and persons in the personal service
• Managerial employees
• Officers or members of a managerial staff
• Field personnel and other employee whose time and performance in unsupervised

The minimum night shift pay rates vary according to the day the night shift work is performed.

Night Shift Differential = P537 / 8 x 110% = P67.125 x 110% x number of NSD hours worked

 

PATERNITY LEAVE

According to Republic Act No. 8187, this grants seven (7) days with full pay to all married male employees in the private and public sectors for the first four (4) deliveries of the legitimate spouse with whom he is cohabiting and for other purposes.

This gives him opportunity to help and lend a hand or support to his wife while she is in her period of recovery and/or to nurse his newly born child.

 

MATERNITY LEAVE

According to Section 3 of Republic Act No. 11210, Maternity leave can be grant to all covered female workers in government and the private sector, including those in the informal economy, regardless of civil status or the legitimacy of her child, shall be granted:

• One hundred five (105) days - regardless of the mode of delivery (Cesarean/Normal Delivery)
• One twenty (120) days for Solo Parent

 

OTHER LEAVES AND BENEFITS MANDATED BY LAW

Service Incentive Leave

Every employee who has rendered at least one (1) year of service is entitled to Service Incentive Leave (SIL) of five (5) days with pay. 

This benefit applies to all employees except

• Government employees
• Persons in the personal service of another
• Managerial employees
• Officers or members of a managerial staff
• Field personnel and other employee whose time and performance in unsupervised
• Those already enjoying this benefit
• Those enjoying vacation leave with pay of at least five (5) days
• Those employed in establishments regularly employing less than ten (10) employees

The service incentive leave may be used for sick and vacation leave purposes.  The unused service incentive leave is commutable to its money equivalent at the end of the year.

Parental Leave

“Parental leave” shall mean leave benefits granted to a solo parent to enable him/her to perform parental duties and responsibilities where physical presence is required. 

The parental leave, in addition to leave privileges under existing laws, shall be for seven (7) work days every year, with full pay, consisting of basic salary and mandatory allowances fixed by the Regional Wage Board, if any, provided that his/her pay shall not be less than the mandated
minimum wage.

Leave for Victims of Violence against Women and their Children

Private sector women employees who are victims as defined in RA 9262 shall be entitled to the paid leave benefit under such terms and conditions provided herein. The leave benefit shall cover the days that the woman employee has to attend to medical and legal concerns.

In addition to other paid leaves under existing labor laws, company policies, and/or collective bargaining agreements, the qualified victim - employee shall be entitled to a leave of up to ten (10) days with full pay, consisting of basic salary and mandatory allowances fixed by the Regional
Wage Board, if any.

Special Leave for Women

Any female employee regardless of age and civil status shall be entitled to a special leave benefit under such terms and conditions provided herein. -It shall be used after a surgery due to gynecological disorders for a maximum of 2 months. Gross monthly compensation refers to the monthly basic pay plus
mandatory allowances fixed by the regional wage boards.

 

13TH MONTH PAY

Thirteenth month pay is a form of compensation that is paid in addition to an employee's annual (12-month) salary. Often this equates to one month's salary.

All employers are required to pay their rank and file employees thirteenth-month pay, regardless of the nature of their employment and irrespective of the methods by which their wages are paid, provided they worked for at least one (1) month during a calendar year. The thirteenth-month pay should be given to the employees not later than December 24 of every year. 

13th month pay and other benefits, such as productivity incentives, and Christmas bonus, not exceeding Ninety Thousand Pesos (₱90,000.00) are exempt from taxation.

The following employers are not covered by PD 851

• Government and any of its political subdivisions
• Employers who are already paying their employees thirteenth- month pay
• Persons in the personal service of another
• Employers of those who are paid on purely commission, boundary or task basis, and those who are paid a fixed amount for performing specific work

 

Formula and Computation of 13th Month Pay

Total basic salary earned during the year / 12 months = proportionate 13th month pay

 

An employee who has resigned or whose services are terminated at any time before the time of payment of the thirteenth-month pay is entitled to this monetary benefit in proportion to the length of time he or she has worked during the year.

The thirteenth-month pay is not part of the regular wage of employees for purposes of determining overtime and premium payments, fringe benefits, and contributions.

 

SEPARATION PAY

Separation pay is given to employees in instances covered by Articles 298 and 299 (formerly Articles 283 and 284) of the Labor Code of the Philippines.

 

Authorized Causes

An employee is entitled to receive a separation pay equivalent to one-half (1/2) month pay for every year of service, a fraction of at least six (6) months being considered as one (1) whole year, if his/her separation from the service is due to any of the following authorized causes:

• Retrenchment
• Closure or cessation of operation
• When the employee is suffering from a disease not curable
• Lack of service assignment of security guard

An employee is entitled to separation pay equivalent to his/her one-month pay for every year of service, a fraction of at least six (6) months being considered as one whole year, if his/her separation from service is due to any of the following authorized causes: 

• Installation by employer of labor-saving devices
• Redundancy
• Impossible reinstatement of the employee
• Lack of service assignment of security guard by reason of age

The computation of separation pay of an employee shall be based on his/her latest salary rate.

Exempted  from  taxation  is  employee  as  a  result  of his/her he  separation  pay  received  by an separation  from  the  service  of  the  employer due  to  death,  sickness beyond  the  control  of or  other  physical  disability said or for other  cause employee  such  as  retrenchment,  redundancy  or cessation  of  business  operations.

 

Just Cause

Employees who are terminated from their employment due to just causes are not entitled to separation pay as these employees are at fault. Employees who resigned are not entitled to separation pay as they themselves decided to leave their employment. The following are further examples of just causes:

• Neglection of duties
• Willful disobedience
• Serious misconduct
• If the employee has committed fraud or a willful breach of the trust given to him or her by a duly authorized representative
• Commission of crime against the employer
• Commission of crime against any duly authorized personnel

 

RETIREMENT PAY

Retirement pay is given to employees who retired upon reaching the age of sixty (60) years or more but not beyond sixty-five (65) and have served the establishment for at least five (5) years.

This benefit applies to all employees except

• Government employees
• Employees of retail, service and agricultural establishments/ operations regularly employ not more than ten (10) employees.

The minimum retirement pay shall be equivalent to one-half (1/2)   month salary for every year of service, a fraction of at least six (6) months being considered as one (1) whole year. 

Minimum Retirement Pay = Daily Rate x 22.5 days x number of years in service

 

MANDATORY CONTRIBUTIONS

Employers and employees are required to contribute to three regulated pension funds. The employer is obligated to withhold the contribution of employees and make its own contribution.  Remittance is the obligation of the employer.  

 

The pension funds contributed to are:

Social Security Services (SSS)

The Social Security Program provides a package of benefits in the event of death, disability, sickness, maternity, old age, and unemployment. Basically, the Social Security System (SSS) provides for a replacement of income lost on account of the aforementioned contingencies.

Covered for this program are private employees, whether permanent, temporary or provisional. 

Contributions to SSS depend on the employee’s salary. The contribution rate currently is at 8.5% for Employer Share and 4.5% for Employee Share. There is a minimum ceiling of MSC which is 3,000 and maximum of 25,000. 

 

Pag-IBIG or Home Development Mutual Fund (HDMF)  

The Home Development Mutual Fund, otherwise known as Pag-IBIG (Pagtutulungan sa kinabukasan: Ikaw, Bangko, Industriya at Gobyerno) Fund is a mutual provident savings system for private and government employees and other earning groups, supported by matching mandatory contributions of their respective employers with housing as the primary investment.

Coverage of this program are

• Mandatory Membership 
• Voluntary Membership 

The monthly contributions for the members are below indicated:

Monthly Compensation	Employee Share	Percentage of Monthly Compensation Employer Share
P1,500 and below	1%	2%
Over P1,500	2%	2%

 

The maximum monthly compensation used in computing the employee contributions is currently set at ₱5,000. This means that the maximum member contribution and employer counterpart per month are both currently ₱100.

 

PhilHealth Insurance Corporation (PHIC)

The National Health Insurance Program (NHIP), formerly known as Medicare, is a health insurance program for SSS members and their dependents whereby the healthy subsidize the sick who may find themselves in need of financial assistance when they get hospitalized. 

The program covers the following

• Members in the Formal Economy 
• Sponsored Members
• Members in the Informal Economy
• Lifetime Members
• Indigent Members
• Senior Citizens

Contribution rate for employed members is 3% which is computed as follows.

Employee or employer share = (Monthly Basic Salary x 0.03) / 2

 

TAXES

If companies can’t get away from tax, neither can employees!  The Bureau of Internal Revenue requires income tax to be withheld by the employer from the employee.  This tax is called Withholding Tax. 

Withholding Taxes is a corporate tax obligation paid by taxpayers engaged in trade or business activities in the Philippines. Employers withhold from the salary of their employees every month and each amount withheld serves as an advanced payment for the employer’s Income Taxes during the business year.

There are a few classifications of Withholding Taxes

• Compensation - the tax withheld from income payments to individuals arising from an employer-employee relationship.
• Expanded - a kind of withholding tax which is prescribed on certain income payments and is creditable against the income tax due of the payee for the taxable quarter/year in which the particular income was earned.
• Final Withholding Tax - a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the particular income subjected to final withholding tax.

In computing withholding tax, be guided by the different computations.

 

Withholding Tax On Compensation

Computation covers the following

• Compensation or Wages - all remuneration for services performed by an employee for his employer under an employee-employer relationships unless exempted by the NIRC and pertinent laws.
  • Basic Salary
  • Fixed allowances
  • Commission
  • Overtime pay
  • Fees, including directors fees
  • Profit sharing
  • Monetized vacation leave in excess of ten (10) days
  • Sick leave
  • Fringe benefits received by rank and file employees
  • Hazard pay
  • Taxable 13th month pay and other benefits
  • Other remuneration received from an employee-employer relationships
• Regular Compensation
• Supplementary

 

Minimum Wage Earners

No withholding tax shall be required on the Statutory Minimum Wage (SMW) of the Minimum Wage earner in the private/public sectors as defined in RR 2-98, as amended by RR 11-2018, including:

• Holiday pay
• Overtime pay
• Night shift differential
• Hazard pay

 

De Minimis Benefits NOT Subject to Withholding Tax

• Monetized unused vacation leave credits to employees not exceeding ten (10) days during the year
• Monetized value of vacation and sick leave credits paid to government officials and employees
• Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester of P250 per month
• Rice subsidy of P2,000 or one sack of 50kg rice per month amounting to not more than P2,000
• Uniform and clothing allowance not exceeding P6,000 per annum
• Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum
• Laundry allowance not exceeding P300 per month
• Employees achievement awards, e.g. for length of service or safety achievement, which in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees
• Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum
• Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage
• Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (Php 10,000.00)per employee per taxable year

 

Annual Tax Table

EFFECTIVE DATE JANUARY 1, 2018 to DECEMBER 31, 2022
Not over P250,000	0%
Over P250,000 but not over P400,000	20% of the excess over P250,000
Over P400,000 but not over P800,000	P30,000 + 25% of the excess over P400,000
Over P800,000 but not over P2,000,000	P130,000 + 30% of the excess over P800,000
Over P2,000,000 but not over P8,000,000	P490,000 + 32% of the excess over P2,000,000
Over P8,000,000	P2,410,000 + 35% of the excess over P8,000,000

 

Year-End Adjustment

On or before the calendar year and prior to the payment of the compensation for the last payroll period, the employer shall determine the sum of the taxable regular and supplementary compensation paid to each employee for the whole year and must ensure that the tax due is equal to tax withheld.

Refer to this BIR Withholding Tax site for Annualized WTAX formula.

 

Withholding Tax Forms

As an employer, be ready to prepare the following forms for your submission on behalf of individuals arising from employer-employee relationships!

• BIR FORM NO. 1601-C - Monthly Remittance Return of Income Taxes Withheld on Compensation
• BIR FORM NO. 1604-C - Annual Information Return of Income Taxes Withheld on Compensation 
• BIR FORM NO. 2316 - Certificate of Compensation Payment/Tax Withheld

 

Substituted Filing

An individual taxpayer will no longer have to personally file his own Income Tax Return (BIR Form 1700) but instead the employer's Annual Information Return on Income Taxes Withheld (BIR Form No. 1604-C) filed will be considered as the "substitute" ITR of the employee.

Requisites For Individuals Qualified For Substituted Filing of BIR Form No. 1700.

• Receives purely compensation income regardless of amount;
• Compensation from only one employer in the Philippines for the calendar year;
• Income tax has been withheld correctly by the employer (tax due equals tax withheld);
• the employee's spouse also complies with all the three conditions stated above;
• Employer files the BIR Form No. 1604-C; and
• The employer issues each employee BIR Form No. 2316 (latest version)

All the above requisites must be present. The annual Information Return of Income Taxes Withheld on Compensation (BIR Form No. 1604-C) filed by their respective employers is duly submitted to the eSubmission facility of the BIR.

Requisites For Individuals NOT Qualified For Substituted Filing of BIR Form No. 1700.

• Individuals with two or more employers concurrently and/or successively at any time during the taxable year.
• Employees whose income tax have not been withheld correctly resulting in collectible or refundable return.
• Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to final tax.
• Individuals receiving purely compensation income from a single employer whose income tax has been correctly withheld but whose spouse does not qualify for substituted filing.
• Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or compensation income and other non-related business, non-profession-related income.

 

Final Withholding Tax

The amount of income tax withheld by the withholding agent is constituted as a full and final payment of income tax due from the payee of the said income.

The liability for payment of tax rests primarily on the payor as a withholding agent. Failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from payor/withholding agent.

 

BENEFITS

Companies give other benefits to employees in cash and not cash terms.  It is important to know how they are treated from a reporting standpoint. 

 

De Minimis

These are any benefits given to the employees by the employee, which are mandated by law. In the computation of taxable income for the employee, any excess beyond the allowable amount of 90,000 tax exemption Philippines will be part of the taxable income.

See this list of De Minimis from BIR.

 

Commissions

A sum of money paid to an employee upon completion of a task, usually selling a certain amount of goods or services. Employers sometimes use sales commissions as incentives to increase worker productivity.

 

 

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