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    Chapter 10 PDF

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    Fely Maata

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    chapter 10 - Compensation income CHAPTER 10 COMPENSATION INCOME LL Chapter Overview and Objectives ‘This chapter discusses the employee benefits considered as compensation income. It discusses the types of employees, and exempt and taxable benefits. It also delineates the gap between the compensation income subject to regular income taxand the fringe benefits subject to fringe benefit tax. After this chapter, readers are expected to demonstrate: 1. Understanding of the concept of an employer-employee relationship 2, Knowledge of the classifications of employees and the tax treatment of their compensation income and fringe benefits 3. Mastery of the list of employee benefits exempted under the NIRC and special laws and the de minimis list 4. Knowledge of the condition for exemption of employee benefits under treaty or international agreements 5. Understanding of the concept of "employer convenience” rule and the “necessity of the employer” rule 6. Understanding of the conditions of exemption of a minimum wage earner 7, Knowledge of the classification rules for items of gross taxable compensation income 8, Mastery of the composition of "13° month pay and other benefits” for rank and file employees and managerial or supervisory employees 9. Comprehension of the fringe benefits subject to regular tax and fringe benefits subject to fringe benefits tax EMPLOYER-EMPLOYEE RELATIONSHIP Employer ~ refers to any person for whom an individual performs any service of whatever nature as employee of such person. ‘An employer is the person who has control over the payment of the employee remuneration. However, if such person is a non-resident not engaged in trade or business in the Philippines, the employer is deemed the person paying remuneration in their behalf. Employee - refers to any individual who is a recipient of wages and includes officer, employee or elected official of the Government of the Philippines or any Political subdivisions, agency or instrumentality thereof. The term also includes 4n officer of a corporation. 317 oer: 0 omer and employee bsp under ca tr selection and engagement of employees ~ There If 2 sc ‘employees to hire 2. Payment of wages ~The employer usually fixes and wages. 3. Power of dismis when incurring. - Employer has power to retrench or terminate wy losses or other reasonable basis. ela 4. Power of con - The employer has power to contol the emp aye gg means and methods by which the work is accomplished. ‘an arrangement which do not manifest all the elements is not an e “employee relationship but an independent contract for the provision of seen 1. Consultants 2. Directors without management function 3. Talents and artists on TV shows or radio broadcasts (Sonza ys AB Broadcasting Corporation, GR. No. 138051) SCH ‘he income or fees of these individuals are not compensation income but sy business or professional income, ‘TVPES OF EMPLOYEES AS TO FUNCTION 1. Managerial employees - Those who are given powers or prerogatives toy down and execute managerial policies and/or to hire, transfer, suspend iy. (ff, recall, discharge, assign or discipline employees 2. Supervisory employees ~ Those who effectively recommend such managen actions ifthe exercise of such authority is not merely routinary or clenealt nature but requires the use of independent judgment 3. Rank and file employees - Those who hold neither managerial nor supervsoy functions ‘TYPES OF EMPLOYEES AS TO TAXABILITY 1. Minimum wage eorners - Employees who are recipients of minimum wage They are exempt from income tax on their compensation, 2. Regular employees - Employees who are subject to the regular progress income tax Itamust be noted thatthe “special allen” classification was removed into law by vite of presidental vet tothe TRAIN low. The special lender te old law oat ‘treated as regular employees. 318 chapter 10 - Compensation Income Minimum Wage Earner im wage earner refers to a Private sector who is paid the ‘with compensation income ose with salary grade 1 to 3) igned. ‘The statutory minimum wage refers to rate fixed by the Regional Tri nd Productivity ard of the. Departmen of Labor and Emyment ar 5,000/month of P60,000/year, whichever s higher. om ‘THE TAX MODEL ON COMPENSATION INCOME Gross compensation income Less: Non-taxable compensation ‘Taxable compensation income (GROSS COMPENSATION INCOM! {Gross compensation income gen ‘an employer-employee relatio NON-TAXABLE COMPENSATION ‘A. Mandatory deductions ‘These includes employees’ mandatory contribution to GSIS, SSS, PhilHealth, HOME, and union dues includes all remunerations received under Exempt benefits 1. Benefits excluded and/or exempted under the NIRC and special laws 2. Benefits exempt under treaty or 3. Benefits necessary to the trade, busi employer 4, Benefits for the convenience or advantage ofthe employer EXEMPT BENEFITS UNDER THE NIRC, AS AMENDED, AND SPECIAL LAWS eceived as incidents of employ 2. De minimis benefits 3. 13 month pay and other benefits not exceeding P90,000 319 chapter 10 - Compensation Income vage earners ‘4. Certain beneftsofainimum WaBe © De minimis benefits ies or privileges such a5 entertainment, mp De minimis beefs are (ache Tages that are of relatively small yye ‘services, ot courtesy discount rely as a means of Promoting the pest! me 2 hea ae furshed by the en cy of is employees. DE tims benef ft wil, contentment, OF sete ng bene exert rom income cuherpety fringe benefits which fall Within the puny eee x part of te de minimis lst aCe normally treated ay ri are also exempt from income 3% nt of Finance changed the rule unde However the BIR and te Department of Finance change ne under ig. tower sem the term “de minimis benefs” was restricted tO mean ony jy following: 1. Monetized unused yacation leave credits of private employees nq exceeding 10 days during the year 2. Monetized unused vacation and sick leave credits paid to governmen, officials and employees 3, Medical eash allowance to dependents of employees not exceeding Pa. per employee per semester, or P375 per month Rice subsidy not exceeding B2,000 or 1 sack of S0-kg rice per month amounting to not more than P2,000 Uniform and clothing allowance not exceeding P6,000 per annum (Res. 2012) ‘Actual Medical Assistance, eg. medical allowance to cover medical and healthcare needs, annual medicai/executive check-up, maternity assistance, and routine consultations not exceeding P10,000 per annum ‘Laundry allowance not exceeding P300 per month Employee achievement award, eg 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 P1000 the employee under an established written plan which does nt favor of highly paid employees. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum (ie, Christmas git and anniversary gifts) Dally meal allowance for overtime work and night or graveyard shift nit exceeding 25% of the basic minimum Se regen ass (2 overtime meal wage on a per region basis (te As originally conceived, ex 11. Benefits received by an employee by vi ree by virtue of a collective bargalning ‘agreement (CBA) and productivity incentive schemes provided that the 320 chapter 10 - Compensation Income total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000 per employee per taxable year: benefits and productivity incentives amounting to P10,000 or less 1¢ amount exceeds P10.000, the entire ameunt is a taxable “other iue that are not included in the list of de ‘Treatment of taxable de minimis benefits a For rank and file employees ~ taxable de minimis is treated as other compensation income under the category “134 month pay and other benefits” ». For managerial and supervisory employees - taxable de minimis is treated as fringe benefit subject to final fringe benefit tax (RRS-2011 and RMC20-2011) ‘Alexander, private employee who is paid 2 P600 daly rate, receives the following. benefits during the year 2019: Monetized unused vacation leave credits Monetized unused sick leave credits Says days Medical assistance P 7,000 Rice subsidy (P2,500 per month) 30,000 Clothing allowance 9,000 Laundry allowance 6.000 Required: Determine the taxable amount of de-minimis benefits. Solution: Monetized unused VL ’ —Actwal_ __Limit_ _Excess_ 5400 F 6000 PO Monetized unused SL 5400 S400 7900 10,000 ° 30000 24000 6,000 000 “6,000 3.000 Laundry allowance 6000 3600 _2.400 Taxable de minimis as “other benefits” Esso Note: Private employees 1. The actual value ofthe monetized unused V was computed as P600 x9 while the limit was 600° 10. 321 Chapter 10 - Compensation Income 2. The 10-day rule applies ony to vacation eaves. Monetization of sick fay Employees taxable. (IR Ruling No. 227-2013. june 20,2013). ny allowance were hikewise anoualzed by multiplyin OF iy 3, Thence siya be aoe se temmroentswithn elise emp rom get stration2 Mastration2 ent cankand fle employee, received the following bene ‘Monetized unused vacation leave credits (10 days) P 6,000 Moneteed unused sick leave reds (15 2375) 3100 000 Uniform allowance Laundry allowance 4800 Required: Determine the amount to be included in other benefits. Solution: Actual Limit _Excess_ Monetized unused VL F 6000 exempt PO Monetized unused St. 9,000 exempt 0 Uniform allowance 5900 6,000 0 Laundry allowance 4900 3.600 __1.z00 ‘Taxable de minimis as “other benefits” E1200 Note: ts clear under RRS: © vacotion leave and sick leave of government employe, are not subject othe 10-day lim Mlustration 3 Professor Radvic was one of the Hall of Fame awardees of Youbee University. He ws ranted P25,000 cash as loyalty award for his 30 years of service. He was also gen $10,000 Christmas gut no an additional P20,000 gift during the institutions Founding Day Anniversars tesides, he was also given free lunch meals with a toad value of P15,000 during the same year. Required: Compute tne total taxable de-minimis benefits as other benefits. Solution: Actual _Limit_ _Excess_ Loyalty orserviceaward F-25000 P= P2500, Christmas and anniversary git 20,000 $,000— 5,000 Meals "5,000 0 _ i500 Total taxable de minimis 2s “other benefits” Ese.000 loyalty or service awards applies only overtime or graveyard shifts are co are po longer consisered ue minimis, 322 gnapter 10 - Compensation Income Note that in all three illustrations, ifthe employee is a managerial or supervis Naployee, the entre excess de minimis shal be coniiced as caer Wao, Senefits subject to fringe benefits tax oN Commutation of accumulated leave credits ‘The terminal leave pay or the commutation of unused leave unused leave eredits due cay separation fcom employment of the enploye & ws teed ode ‘and is no longer exempt ds part of exempt termination benefits, 1301 month pay and other benefits notin excess of? 90,000 The composition of the “13th month pay and other ber i under taxable benefits nefits” will be discussed later BENEFITS EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS fee benefits of non: ippines from foreign g international organi ino nationals and or non-permanent residents of the "mnments, embassies or diplomatic missions, and Sin the Philippines are exempt from income tax. ‘Exemption from withholding tax does not mean income tax exemption Foreign government embassies, diplomatic missions and international organizations are immune from income tax including the obligation to withhold income tax by virtue of international comity as embodied in several international agreements to which the Philippines is a signatory. However, this exemption from the income tax exemption of their international agreements to which the Pt only to non, ligation to withhold tax does not mean Fipino employees of foreign governments, international missions and organizations are taxable as a rule except only to employees of the following organizations: 1. United Nations (UN) 2 1ed Agencies of the United Nations 3, Australian Agency for International Development (AUSAID) 4. Food and Agriculture Organization (FAC, 5. World Health Organization (W! 6. United Nations Development 7. International Organization fo 8 International Seabed Authority (ISA) ‘These organrzations have exeraption provisions that extend even to thei Filipina employees. Other aid agencies or international organizations may have tax free provisions in their articles of agreement for Filipino empioyees. 323 Chapter 10 - Compensation Income ce tion of Tax Exemptions eee of ployees is not automatic. Filipinos ja, ‘exemptions under nder pro Special laws granting pplication for confirmation of tax exemption sanigion (ITAD). The confirmation shall Serve 3s proof of exe Without the confirmation certificate, the employee s taxable, an al Tay 'MPtion i r offices Employees of Philippine embassies or consulate Treen be cecaled that employees working in Philippine embassies Philippine consulate offices are not considered non-resident citzens ang 4 therefore subject to Philippane income tax. ‘Summary of rules | Foreign embassy | Philippine embasey | | missions, or organization |_or consulate office ilippines NA N/A Taxable E *Taspoyer must prove there isan exemption grant under contract or special law. BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO, THE TRADE, ‘BUSINESS OR CONDUCT OF PROFESSION OF THE EMPLOYER ” Benefits or allowances furmsued by the employer to the employees to enable them to appropnately and effectiely execute their duties as required by their employment are exempt from income tax. This is referred to as “necessity of the ‘employer rule.” Examples 1. Necessary traveling, transportation, representation, of entertainment expenses that are to an accounting or liquidation in accordance with specific requirements of substantiation of expense. ‘Allowances which essentaly co ibursement to gover fe reimbursement srnment personnel i__ Rresbese they caren pers mancr afte ates so {presentation and Transportation Allowance (RATA) of public officers and employeesunderthe General Appropriation Ace nn PUM 'b. Personne! Economic Relief Allowance (PERA} (RR10.2008) Reasonable amoun's of relnburstment or advances to employees for eaveling and representation which are pre-computed on a daily basis 1nd which are paid 19 ‘any employee while on assignment or duty. 324 chapter 10 - Compensation Income ‘These amounts given to the employee are not income but are expenses of the trade, business oF profession of the employer that are incurred or paid through the Employee. These are not employee benefits since they are mere advances OF feplenishments of What are supposed to be direct cash outflows from the Employer; hence, they are not considered as compensation income. eens bums nner meth ries we we et examples: 1, Work-related mobile phone allowance and transportation allowance particularly to employees of call centers which are operated on a 24-hour basis where ance for empses who wil eos rom fe sie o ranchse holders for repairs ander nspection of equipment Ruling No 01 ™ one fe t0 employees working at 10 employed on-call medical doctors ants to employees under contract to remain in service for a : 5, Scholarship specified period upon completion Housing privilege of military officials camps ity he AFP located inside or near the military ‘These types of employer spending are regarded as business expenses and are not considered as employee reward because they are not intended tor the free personal consumption oF disposal of the employees but as implements of the Employer's business to ensure the employer's convenience. However, if the expense is unreasonably excessive making it depart from the nature of a reasonable business expense such as when itis deliberately granted to include a benefit for the employee, the portion of the expense representing. provision or privilege to the employee is considered a taxable fringe benefit. These pes of expense are regarded as “hybrid expenses” because they are parnally business expense and partially employee benefits. COMPOSITION OF TAXABLE COMPENSATION INCOME 1. Regular compensation - This pertains to the fixed remunerations received by the employee every payroll period. 325 = Compensation Income oe eval compensation ~ Tis pertains 10 oIher Berfo 2 SupPermnloyct with or wihout egArdto HePaYro) rman ety employee benefits not 1 en onl Soe ein a Manager received 40,000 regular compensation, P120,000 suppig eee ee radi gotcha Parone ga (10008 900) ‘Taxable compensation income REGULAR COMPENSATION INCOME The rela compensation clades fixed remunerations du tobe received y employee every period such as: ” 1 Basksalary 2. Fixed allowances such as cost-of-living allowance, fixed housing allow, every payroll penod Fed allowances ‘Allowances whch ae fxed in amounts and regularly received as part ofthe mont beer wee or ay sles oF wages ae part of wk 5 even fa portion ofthe allowances are actually sed the employer s busine xcepuon rule on the taxabilty of allowances: @ Ordinary and necessary entertainment expense of e lowances for travelling, representation « loyees incurred in the pursuit of the employ counting o S advancee are returned t dated allowances are no subject to tax. Howewee Fe retained by the employee for himself shal ord vacation ana sick leave allowances ‘The paid absences of Be pelt seen ormally nucveeaPpied agnst his vacation or sick leat creis wh ar ne wed aS part of the regular salary 15 part of BE 326 captor 10 Compensation Income Non-compensation Items 1 Fees Retainer fees of consultants, talents, and directors who have no management function in the business are professional income, not compensation income of, the recipient ‘Commissions to non-employees such as independent sales agents are business income to the sales agent 2 2s s paid directly to an employee by customers of the employer which are not accounted for by the employee to the employer are not Considered as compensation income, but are to be reported as “other income” in the income tax return of the employee, valuation of compensation paid in kind ‘Compensation in kind is taxable atthe fir value ofthe consideration received. If served in shares, the fait value ofthe shares at the date services were provided isused Mustration 1 ‘The following pertains to an employee in 2019: ‘The taxable compensation income shall be computed as follows: > 100,000 3600 41000 P 60.000 Mandatory weduction 2.000 le compensation income F2g000 dustration 2 mplayee who was terminated in 2019 due 200,000 ‘Unpaid 2018 salaries 20,000 Xeimnursement for transportation expenses 10,000 ‘ermination pay 100,000 327 cng 1 -Cageston ee rasa cme compute atolls ‘00K + P20K + PLOOK) P 320,000 fon Gross compensation ince Less. Non-taxable com Non-taxable benefits ‘Taxable compensation income 100.000 2.220.000 oration empense isnot an income tothe employee ead n gross compensation icome, DUES also dedu ie eason of termation is beyond the employee's a scone SUPPLEMENTARY COMPENSATION ation includes per Supplementary ar addtional compensation includes performance. eayetons to an employee in addition to the regular compensation wy regard tothe payroll period ‘The following ae the additional compensatson under current tax rules: 1. Overume pay 2. Mazard pay 3. Nightshift differential pay 4. Hobday pay 5. Commissions 6 7 8 seg th Fees, including director's fees (if director is an employee) irement and separation pay 9. Value of ving quarters or meals 10. Gains on exercise of stock opuons (BIR Ruling 119-2012) 11. Profit sharing and taxable bonuses Overtime, holiday, hazard, and night differential pay “These constitute additional compensation, except when derived by a minimum wage nts and honoraria ves intended to stimulate sales. These may be given as a profe sharing ot pei ce bonus. Emoluments pertain to any pay in general while ‘ronorana are additional payments for attending to special tasks or assignments. Living quarters or meals an employee receives free living quarters or meal in addition to salary for serves rendered, the value (o the employee of such living quarters or meat ded in ‘compensation income. However, when the same was lurnished to an emplo} 328 chapter 10 - Compensation Income. ont an ‘Under various stock option plans, employees are given the privilege to buy shares a re eee ate ney enh pee bay sare a pave value when the st \e employer increases in value above th bien es in value above the exercise price agrexercise date. Th 1€ Option isthe discount at exercise date. hot taxed at exercise date under the view that the discount becomes realized only when the stocks are disposed. Under current tax mies ue de ie. market price -exerase price) at exerese date is viewed as Tompensation in ki tn the past, stock options w ‘The gains from the income, unless they q\ Of stock options constitute a taxable compensation as fringe benefits subject to fina tax. (RMC8B-2012) ustration Mr Anthony met the vesting conéition of his employer's stock option plan where he is tniitled to Buy 10,000 of his employer's share ata strike price of PLOO. In 2018, Mr. fanthony exercised the option when the share of his employer was selling P150/share ‘ater two years, he sold the shares for PL80/share. Fair value of stocks (P150 x 10,000 shares) 1,500,000 Tess Exercise price of option (P100x 10.000) _Lagv099 Compensation income (discount) Espana “The compensation income shall be reported by Anthony in his 2018 come tax return. ‘Treatment of the subsequent sale of the shares + corporation isa corporation, and the sale ofthe stocks is made: igh the PSE, the sale is subject to the stock transaction tax of 60% of 196 of the gross selling price. The tax would be computed as Selling price (P1.80 x 10,000) P 1,800,000 Multiply by: stock transaction taxrate 60%. 19% ‘Stock transaction tax E1809 ‘The tax will be withheld by the broker who effected the sale. The gain from the sale ofthe stocks weuld not be subject to income tax 1b directly to buyer. the net gain on the sale is subject to the 15% capital gains ax shall be computed as follows. P 1,800,000 1500.00 “300.000 lst BL s5.000 Capital gains tax 329 (Chapter 10 « Compansaton Income im SUbIeC* to the, net gain on the sale (828 2. Foreign corporation the net pal compen ray Feguler income tax. The gain subject fo regular (ax! lowe P 1,800,000 ‘Selling price (P100 x 10.000) ol Ssoouue tes ax basis of shares sold ia pital gains 4 year 0% Starapy by: Holding period rate (98 607) Capital gain subject to regular tax EAidowe ‘The rules on dealings of ater capital assets will be discussed tm deta yy. following chapter. Profit sharing or taxable bonus Profi shoring 1 2 reward for churning the business to post a prof, Compensation for conteollingall he factors that infiuence Profit such as markegne nd sales, productivity, and administrative factors. It is a reward which can ge {Enjoyed by indivadual employees such as salesmen, division heads, key offices oy by all employees collecuvely. is a Bonuses are supplemental ar additional compensation. However, if they are linked solely to productivity under the productivity incentive plan of the employer pursuant to RA 6971, they should be considered as de minimis benefits, Productivity incentive bonus ‘The Productivity Incentive Act of 1990 (RA 6971) encourages private employers to set-up productivity incentive programs. [A productivity incentive 1s Inked to improvements in productivity usualy in terms of cost savings througn waste reduction, efficient labor utiliza increase m volume of production. Under the NIRC, productivity incentive bonus considered as part of “other benefits" under "13% month pay and other benef. Under the revision of RA 10653, productivity incentive Is now a de minimis benef. Productivity Incentive distinguished from profit sharing bonus Producuvity incentwe 1s anchored on improvements inthe factors of production and is usualy enjoyed collectively by employees due to the inherent difficulty of tracing productty to individual performance. It 1s based upon cost savings hence, its payable even the business poses a loss. Profit sharing is payable tly ‘when the business posta profit 13TH MONTH PAY AND OTHER BENEFITS "13th Month Pay and Other Benefts” includes: 1. 13th month pay 330 chapter 10 - Compensation income 2. Other benefits ‘a. Christmas bonus of privat b. Cash gifts other than Chris -mployees Or anversary gts of pvate employees ial compensation allowance (ACA) of government personnel Hone (ACA) of government personnel a 14 month pay, 15% month pay, ete. fe Other fringe benefts of rank and jie employees 43th month pay 2. The 12th month pay of government employees consists ofa Christmas bonus equivalent to one-month salary plus a 5,000 cash pik (RAGOBE os amended by RA 8441) ‘The 1th month pay of private employees is equivalent to one-month salary. (P0851) ‘christmas bonus and Christmas gift tumas bonus of government employees is their 13th month pay. In private the term "Christmas bonus” may pertam to the 13th month pay, a 13th month pay and other be 2011 includes Christmas gift in regulations cannot amend the law they imy interpreted to apply only to Christmas gifts of private employees. Hence, ‘of the NIRC. RRS- But since revenue ] Government Ghrisimas bonus Chrismas runes oi | andosher ents Bonus ve Git te nonediscretionary tothe employer while 2 gfe 2 gratuity ployer 331 ‘Chapter 10 - Compensation Income oe ager nue al ther wae tinge benefits not spe, aerate compensation Income a8 eBUat upPeMeBAY OF 13th many WY ndother benefits under current tax rules such a8 : 1 Employee personal expenses shouldered by the employer 2 Taxable de minimis benefits such 25: a. Excess de mini +. Benefits notinluded inthe de min ist Employee personal expenses grocery, asoaation or club membership dues, Favel oF vacation expense ¢ ion fees, when assumed or paid by the employer, c Inge benefits, the employee, Ths fact holds true even if the expense is rece1pted in the name the employer Taxable de minimis benefits ‘All other benefits of relatvely small value which are not included in the listo dg fs benefits shall not be considered as de minimis but as ordinary ting benefits Corollary to this rule, excess de minimis benefits should be considered’ taxable ordinary fringe benefits. ‘Tax Treatment of Other Fringe Benefits 2. For rank and file employees - treated as compensation income as part o “other benefits" under 134 month pay and other benefits” b. For managerial or supervisory employee - treated as fringe benefit subject fringe benefit tax It must be emphasized that the “other fringe benefits” of managerial or supervisory ‘employees are excluded from their “13th month pay and other benefits." Mlustration 1 ‘The employer pays for the tuition fee of the employee In addition to his regular compensation ‘The tuition fee paid isa fringe benefit which 1, Asa compensation income as part of be treated as follows: =r benefits" under 13 month pay ond ‘other benefits" ifthe employee isa rank and fie employee 2 Asa fringe benefit subject to fringe benefit tax i the employee is 2 managerial er supervisory employee 3. Asan exempt fringe piven by the erpioy employee is req employer's busin regardless of the type of employee, if the same was 3s convenvence or business necessity such as when the study to acquire expertise for the future use of the 332 chapter 10 - Compensation income usage cece 4 mony ie al ‘employee receives 2 monthly rice allowance of mon! : ‘the P1,000 monthly excess constitutes a taxable de minimis beneft taxable 28 ompensation as part of “other benefits for a rank and fle employee tis a fringe fenetit subject to final fringe benefit tax fora managerial or supervisory employee, TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS ‘AR2-98 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. RR3-98, the revenue regulation implementing the fringe benefit tax, also provides that it does not cover benefits forming part of compensation income 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 regular income tax. ihustration 1 ‘A-government rank and file employee received the following benefits aside from the basic pay in 2019 P 70,000 5.000 36,000 26000 ized value of vacation leave and sick eave (18 days) 9.000 Uniform and clothing allowance 7,000 Required: Determine the taxable “13th month pay and other benefits” Solution: Christmas bonus (13th month pay of gov't employees) P 70.000 pay and other benefits Less: Exclusion Threshold Taxable 13th month pay and other benefits Note on government employees: 1 Personne! Economie Relief Allowance is oot subyect to income tax and withbolding tax (Under RRB-2000, as affirmed by RR 2. The P5.000 Christmas gift of gover ioyees is designated by the NIRC tobe part of “1h month pay and other benefs; hence, itisnota de minimis benef 333 ‘Compensaton Income Chapter 10- x vacation leave and ick Ive credits of er BRS-2011 the monebuaon ee 3. Under BRS eiewitout regard tothe Dumber of dayy Py cna is an exempt de mii Be ation 2 Museen nents wagner OWE SN fn Aprva Tervedtheflowngbene8 Suing 2019: 13th month pay 72.000 Performance Bonus 00 hrimas gift 30,000 Danger exposure allowance (hazard Pay) 6000 How ace 28000 for and clothing allowan , . 6.000 Laundry allowance ‘The housing privilege pertains t0 il Frralshed by the employer to employees fr staying onsite Required: Compute the excess 13th month payand other benefits, Solution: De Other minimis _Limit_ Benefits. CChastnas gift P 30,000 P 5,000 P 25,000 ‘Uniform and clothing allowance 8000 6000 2,000 Laundry allowance 6000 3600 __2400 Excess de minimis benefits (other fringe benefits) P 29,400 13th month pay 72.000 ‘Total 13th month pay and other benefits P 101,400 Less’ Exclusion threshold 30.009 Tavable 13th month pay and other benefits Bo1s90 Note Private employees for prvate employees under RRS-2011. feconvenience of the employer rule Mustration 3 ‘Amanageral employee recewved the following benefits in 2019. con P 95,000 ‘ase on condominium unlt 18,000 ronal body guard 12,000 mR 12,000 ce 32,400 allowance z 7,000 differentia pay 11,000 334 the annust value of the employees living quate, apter 10 “Compensation Income eau! compensa solutions tion, and the Fringe benefit subject to fringe benef tax De Other minimis _Limit_ fienefits, pice allowance P 32,400 P 24,000 P8400 Clothing allowance L000 __6000 __1.000 acess de micimis aA benefits: Tesdence raid by employer 18000 f personal body gua 2000 ‘otal finge benefit subject to fringe benefit tax Eoaeago P 12,000 1.000 Bozao09 ‘gotal 13% month pay and other benefits P 95,000 Less: Exclusion threshold “99000 ‘Taxable 13th month pay and other benefits Eso00 INTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME ‘Integrative Mlustration 1 IR government rank and file employee had the following summary of his compensation and benefits in 2019: Gross compensation income P 1,084,000 Less: Employee payroll deductions Employee conti (oGSIS, PHIC; HDMF P 90,000 Employee deduction for withholding tax 4000 _144.000 Honoraria 15000 Total compensation Pioei009 ‘The taxable compensation income shall be computed as follows: 335, Determine the taxable “13th month pay and other benefits” additional oe . mulnimis Taxable Benefits Benefits Reoular ond supalementany compensating 000 pla compensio 1,044,000 - P80.000) P 964,000 ‘Supplemental compensation 15,000 Hee 18,000 moe POP 975000 ‘Christmas gift S000) Excess De minimis: ‘informallowance &12000 26.000 6.000 Total paseriny x osision threshold (opto P3000) —_90.000-¢-- 90,000 Total Pisgo00 P 8.000 Tora nontaxablecompensation — E.2LR00 Teele excess 13th month pay and other benefits __- 8.000" 8.099 “Tarabe compensation come 2387009 in the Income Tax Return of the employee: jon income ie, P1,061,000+P144000) —P. 1,205,000 pensation income uetions P 80.000 138000 ___218.000 ‘Taxable compensation income B987,000 Integrative llustration 2 [A private employee derived the following remunerations and benefits in 2019: Basic compensation, net of P32,000 SSS, PHIC, PhilHealth, on dues, and P35,000 withholding tax P $33,000 23,000 24,000 12,000 16,000 31200 mth pay 50,000 zed unused leave credit (10 VL and 8 SL) 18,000 ‘Total compensation income 2 Fia200 336 Tae neta allows fora rankand file employee: De Non: Other Taxable Mandatory deductions. Regular compensation (P600,000 - ae P 568,000 Supplementary compensation ‘Overtime pay 21,000 COLA 12,000 Daily transportation allowance —-P-_16,000 POP 601000 P 50000 24,000 249007200 Monetized VL 10.000 Monetized SL 8.000 - 8000 Uniform allowance —_9.000 __6.990 __3.000 oral ‘ELsH200 P 56.000 P 92,200 P 601,000 Exclusion threshold 20.000 +-90.000 P 146.000 __iza.ono ‘Taxable compensation income 17714200 nat py + (2000+ #35000 pyr dations 337 chapter 10 - Compensation Income tacome Tax Due vapute slows soca eax de ofthe employee would Be tad alow amt nc otappcablebracket 400.000 F 30.000 ore: Check the complete Individual Income Tax Taber Chapter vor managerial or supervisory employes: De Non Other ‘Taxable Minimis Towable. Benefits. Benefits. Mandatory deductions b32000 Regular compensation Supplemental compensation Overtime pay coua Dally transportapon allowance 16,000 Total P 601,000 ‘Lithmanth pay and other b nefits: 13th month pay P 50,000 Exclusion threshold (up 0 P90,C00) __S0.000 - 50.000 ‘Total fringe benefits subject to final tax ba2209 338 ‘TAXABILITY OF MINIMUM WAGE EARNERS (MWE) sre exempt from income tax on the following: 339 fe aieentil pay exempted benefits, they should be presen erm amount of txable compenaton 32% Since the foregoing are legally Set a rae munimum wage earner empioyed By CSO Company, derived the fp, ‘benefits during the year: OW, = se Ses Shamtpe mee Te ee P 275,000 ‘Less: $55, Phillealth, HDMF contributions 5.000 b_270.900 Net otal “The taxable compensation income should be computed as follows: Gross compensation income P 275,000 Less Non-taxable compensation income Mandatory deductions. = P= 5,000 Exempt benefits ‘Taxable compensation income inimum wage and HHON are exempt benefit, they must be removed ‘amount of taxable compensation income. The would be no tax duein seme Court in Soriano et al. vs. Secretary of Finance ari al Revenue, G.R No. 184450 dated 24 January 2017. exempt from income tax rom he ‘hey receive other taxable compensation, However her taxable income exceeds the P250,000 fore may be subjected to year. 340, cnapeer 10 - Compensation Income tion 1: With other taxable compensation come rast inimum wage employee, was able to close sales dea for her employer pasieminimam wage, net of 000 mandatory deductions > 160200 se month py 14000 Hotday pay 4000 70000 ial pay 15.000 sat 10.000 Prottsharng bonus bee Commision Income ry Total Eos -The taxable compensation income should be computed as follows: Gross compensation e.P655800+ P8000) P_—663,000 {ise Non-taxable compensation income Mandatory ded > 2000 Exemptbenetts P ytam __ 2o.a00 ‘Taxable compensation income cae Mary's tax due shall be computed as: —TaxDue_ P 302,000 Lest Lowe im wherethe taxableineomequalfies 28009 0 excess 7 132,000, Multy by: 30m 26.400 Total we due Eek Iustration 2: With business income rage employee, do part-time business after work. He received total ‘of PLL,000 13% month pay but net of P5000 ved a performance bonus of F20,000 and earned 16. P290K + PSK+P20K) «315,000 8 income P 5,000 —2e0000 295.000 P2000 ——s00.000 ‘Taxable income LOL nore ‘Minimum Wage Earner during a your aminimum wage carne” dig the yen, iy on compensation earned before tea sha me ‘Chapter 10 - Compensation Rules of change in stabs a5 2 mes 1. When an emplayee beco! be subject to income tax on ‘munimuum wage earner. Musee a base pay af P400/day when the minimum waRe was F382 ay ‘ {has reeiing overtime pay ad the yearend 15/8 mon ay. On july 1. git the Regional Wages and Productivity Boat ibaa minimum Wage by P22/day to P404/day. Anthonys employer 11 ary ¢0 the minim recy os nebo caie fom Au tb on et ea Sine we yaa paige 3) Compenearonstorting fly 1 wcluding overtime pay and yearend 13th monty ‘shall be tax exempt whet b 1e exact amount of income taxes had been withheld by the employer for 1 atone toy ned mo fle a ne x et psn en fg Mcgee Foe tage sl eo a or inde eet ny 1 fume 30 becouse ny ‘Ths rule may also apply n cases of: ‘a. Transfer to an employer paying salary at the minimum wage b. Transfer ofemployment toa region with higher minimum wage 2. When an employee ceases to be a minimum wage earner during the year dye tomecrease in salary, only the income for the rest of the year is taxable Austration 2 [Andrea ts a minimum wage eamer. She was promoted and was given a salay raise above the minimum wage starting August 1, 2019. Andrea shall be exempt from income tox from January 1 to July 31 because sheise arner. Effective August 1, 2019, Andrea shall be subject to tax Te rt deducting the withholding tax on compensation from Andra, the same date If the employer properly withheld the income tax for the period Aug December 31, Andrea need not fle an income tax return. Otherwuse, she sh ‘adjustment return reflecang her compensation for the same period and shall pay be ‘due or claim or refund in case of excess withholding Transfer to an employer paying salary above the minimum wage . Transfer of employment toa region with lower statutory minimum wage 342 copter 10 - Compensation Income 4. When an employee ceases to be a minimum wage earner during the year by disqualification ((e.. earning taxable income) taxable income of the employee does not exceed P250,000 for the ote that ear there wal be no income tax due for the period under the tax table Under RMO23-201 iving Allowance of MWEs LA which forms part of the new wage rates prescribed to be the statutory minimum wage should be treated as part of the mmamurn wage ped shall not be treated as a separate or other benefit. ‘THE WITHHOLDING TAX ON COMPENSATION ‘The withholding tax on compensation is a method of collecting the income tax at source upon receipt of the income, It applies to all employed individuals whether ‘uizens or aliens. The employer is consttuted as the withholding agent. Reproduced herein is the withholding tax table for semi-monthly compensation: a _+__} Veaas | Picauar P| Pua ana | "yee |” etce” |’ Shoe Fiomn | reoanse | rion Coomoneet | Sapkecer® | 3K one? geen Leese sonar ‘Chapter 10 - Compensation Income Procedural computation ofthe withholding fax on compensation compat monetary and non-monetary, COMPEnsation for the payroll period: monthly. ble benefits, mandatory Cr Segregate non-taxat that apphes to the regular compensation period. Determine the basi ta gy OY of the regular compen Pensa 2, Determi ‘employee for the applicable payrel bracket. 43, Add supplemental compensation to the € Subject the total tothe incremental tax rate 44, Total the basic tax and the incremental tein AV POPMET apse ty sron 1: Me a Pe ety. Zn has weir of £96 Compr Em 8 Peal HONE a Unda 1,000 nen-taxable benefits. ‘andro's taxable compensation shall be computed 2: Gross compensation P 10,000 Less: Mandatory contributions. «== P= S00 Non-taxable benefits ——1000 ___L500 Paso ‘Taxable income andro’ P8500 weekly taxable Income qualifies under Column 3 under the west ‘pavzall pexiad) ABC Company shall compute the withholding tax on compensation follows: Ta Regular compensation income P gs00 ‘Less: Base amount at Column No.3 - weekly ——2092 P 57692 Exc > 808 Multiply by: Incremental taxrate 259% 20200 Total withholding tax on compensation 27a ‘The amountof compensation income that wil be released to 2andro shall be Grose compensation ene oe Non-tarable benefits ——1000 _1soo00 #50000 27892 ezzo8 Net payroll due to Zandro 344 caster 10 - Compensation Income strat employs Mr Penoy wth 2 basi yy employs Mr. Penoy with a basic monthly salary of P70,000 wh) ry 150 and 30° day ofthe month. For the second hi y th, HDMF and union dues were P4,100, ;-monthly regular compensation is P35,000 (ie. P70,000/2).This qualifies under the withholding fx — Regular compensa 7 Pasion Reigase amount at Column No, 4~semi-monthly oan PF satée7 we P1667 Jad. Supplemental compensation Taal P 13,667 Muleiply by: Incremental tax rate {otal withholding tax on compensation se ‘The amount of compensation income that will be released to Penoy shall be: -ompensation P 35,000.00 Supplemental compensation 2.000.00 ‘Total compensation 47,000.00 less: Mandatory compensation P= 0,00 Nontaxable benefits 40000 __4.10000 ‘Taxable income 42,900.00 2516.77 23.383.23 ‘The procedures discussed herein are also applicable for daily or monthly payroll penods but of course using their respective withholding tax table a Tax Adjustment ‘be noted that the total amount withheld on every payroll date may not exactly match the annual tax due. Due to this me of the employee needs to be reckoned 0 adi fe as necessary. ANY ‘employee. An over- BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION UNDER RR2-96, AS AMENDED: ‘employment 1: and paid entir-ly in products of the ‘chapter 10 - Compensation Inoome ation for domestic services . 3. Remuneration

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