MM Vibal

Compensation Income

1. What are the types of employees as to function? Distinguish

1. Managerial employees- those who are given powers or prerogatives to lay down and
exercise managerial policies and/or to hire transfer, suspend, layoff, recall,
discharge, assign or discipline employees.
2. SupervisorySupervisory employees – those who effectively recommend such
managerial actions.
3. Rank and File employee – those who hold neither managerial or supervisory
functions.

2. What are the types of employees as to taxability Distinguish

1. Minimum wage earners- an employee who is a recipient of minimum wage and is
exempt from income taxation.
2. Special employees – special aliens subject to the 15% final income tax on
compensation income.
3. Regular employees – an employee subject to the regular progressive income tax

3. What are the classifications of compensation income? Discuss each

1. Regular compensation – the fixed remunerations received by the employee every
payroll period.
2. Supplemental compensation – other performance-based pays to employees with or
without regard to the payroll period.
3. 13th month pay and other benefits – a residual category which generally includes
incentive pays and all other taxable employee benefits.

4. Enumerate the general classes of non-taxable benefits.

1. Benefits excluded and/or exempted under the NIRC and special laws.
2. BenefitsBenefits exempt under treaty or international agreements.
3. BenefitsBenefits necessary to the trade, business or conduct of profession of the
employer.
4. Benefits for the convenience or advantage of the employer.

5. Enumerate the list of de minimis and their respective thresholds.

De minimis and their respective thresholds are:
1. Monetized unused vacation and sick leave credits of private employees - not
exceeding 10 days during the year.
2. Monetized unused vacation and sick leave credits paid to government officials and
employees.
3. Medical cash allowance to dependents of employees – not exceeding P1,500 per
employee per semester, or P375 per month
4. Rice subsidy – P2,000 or 1 sack of 50kg price per month amounting to not more than
P2,000.
5. Uniform and clothing allowance – not exceeding P6,000 per annum (RR8-2012)
 6. 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 per annum.
7. Laundry Allowance – not exceeding P300 per month.
8. Employee achievement award, e.g. for length of service or safety achievement,
which must be in the form of tangible property other than cash or gift certificates
with an annual monetary value not exceeding P10,000 received by employee under
a established written plan which does not discriminate in favor of highly paid
employees.
9. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum.
10. Daily meal allowance for overtime work and night or graveyard shift not exceeding
25% of the basic minimum wage on a per region basis. (i.e.. Overtime meal)
11. 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 P10,000 per employee per taxable year.

6. Distinguish regular compensation from supplemental compensation.

Enumerate the benefits considered as supplemental compensation.
The regular compensation includes fixed remunerations due to be received by an employee
every period, such as:
1. Basic salary
Fixed allowances, such as cost of living allowance, fixed housing allowance, representation,
transportation and other allowances paid to an employee every payroll period.
Fixed allowances which are fixed in amounts and regularly received as part of the basic
monthly salaries or wages are part of regular compensation.
Exception rule on the taxability of allowances:
1. If it is an ordinary and necessary travelling, representation or entertainment expense of
employee in the pursuit of his trade, business or profession.
The expense is subject to accounting or liquidation.
Any excess advances are returned to the employer.

Supplementary Compensation
Overtime pay
Hazard pay
Night shift differential pay
Holiday pay
Commissions
Fees, including directors fees (if director is an employee)
Emoluments and honoraria
Taxable retirement and separation pay
Value of living quarters or meals
Gains on exercise of stock options
Profit sharing and taxable bonuses

7. Enumerate the components of 13th month pay and other benefits and the corresponding
tax treatment.
 1. 13th Month pay
2. Other benefits
a. Christmas bonus of private employees
Cash gifts, other than Christmas or anniversary gifts, of private employees
b. Additional Compensation Allowance (ACA) of government personnel
c. 14th month, 15th month, etc.
d. OtherOther fringe benefits of rank and file employees

13th Month pay

a. The 13th month pay of government employees consists of a Christmas
bonus equivalent to one month salary plus a P5,000 cash gift.
b. The 13th month pay of private employees is equivalent to one month
salary.

8. Discuss the difference in tax treatment of the "other fringe benefits" of

rank and file employees and managerial or supervisory employees.

For rank and file employees, they are treated as compensation income as part of”other
benefits” under “13th month pay and other benefits”. While for managerial or supervisory
employee, they are treated as fringe benefit subject to fringe benefit tax.
It must be emphasized that the “other benefits” of managerial or supervisory employee is
excluded in their “13th month pay and other benefits.
RR2-98 provides that 13th month pay and other benefits are exempt from withholding on
compensation provided they do not exceed P90,000. It follows, therefore, that the excess
above P90,000 is subject to the withholding tax on compensation.

Hence, the excess of “13th month pay and other benefits” over P90,000 should be treated as
compensation income subject to regularincome tax.