 Compensation Income

Income arising out of an employer-employee relationship. It encompasses all

remuneration for services performed by an employee for his employer
whether paid in cash or in kind. Remuneration for services constitutes
compensation income even if the relationship of employer and employee does
not exist any longer at the time when payment is made between the person in
whose employ the services had been performed and the individual who
performed them.

Fringe Benefits:
Taxable FB received by:
Rank and Fil : subject to basic tax
Supervisory or Managerial : subject to FBT (a final tax)
Tax Exempt FB:
If the grant is required by the NATURE of, or necessary to the
trade, business or profession of the employer.

If the grant for the convenience of the employer

De minimis
Subject to tax in excess of P 90,000.00 threshold.

Other Benefits include:

Christmas bonus
Productivity incentive bonus
Loyalty awards
Gifts in cash or in kind and other benefits of similar nature
actually received by officials and employees o both government and private
offices.

FURTHER, RR 3-2015emhasized that this exclusions from gross

income is not applicable to:
Self-employed individuals and
Income generated from business

Fixed or Variable Allowances:

In general these are subject to income tax and withholding tax on
compensation income. Examples: travel, representation, communication, lving
away allowances.

Pre-computed business allowances:

Reasonable amounts of reimbursement/advances from travelling
and entertainment expenses which are pre-computed on a daily basis and are
 paid to an employee while he is on an assignment or duty need not be subject to
the requirement of substantiation and to withholding. (example per diem).

Business related allowances subject to liquidation

Any amount paid specifically, either as advances or
reimbursements for travelling, representation and other bona fide ordinary and
necessary expenses incurred or reasonably expected to be incurred by the
employee in the performance of his duties are not compensation subject to
withholding if the following conditions are satisfied:
It is ordinary and necessary travelling and representation or
entertainment expenses paid or incurred by the employee in the pursuit or the
trade, business or profession and
The employee is required to account/liquidate for the foregoing
expenses in accordance with specific requirements with the substantiation for
each category of expenses pursuant to Sec. 34 of the tax code.

Representation and transportation allowances (RATA)

RATA granted to certain officials and employees of the government
are considered reimbursements for the expenses incurred in the performance
one’s duties rather than as additional compensation. However, the excess of
RATA, if not returned to the employer, constitutes taxable compensation income
of the employee.
RATA, or Representation Allowance and Transportation allowance,
is granted to select government officials, as identified in the General Provisions of the
Annual Government Appropriations Act (GAA), to cover related expenses incidental to
and in connection with the actual performance of their respective functions.

RATA has two kinds — commutable and reimbursable.

What is Commutable RATA?

As derived from Section 317, Article 8, Chapter 5, Volume 1

of the Government Accounting and Auditing Manual, RATA is
commutable if the grant thereof is specifically authorized by law and
if funds for its payment are provided for in the Agency budget. The
GAA serves as the law authorizing the payment of commutable
RATA. Payment of the said allowances presupposes actual
rendition of services in line with official duties.

When is RATA reimbursable?

When the RATA of certain government official has not been

provided for in the Agency budget, unlike commutable RATA,
 although the incurrence of the same is allowed under existing rules
and regulations, the said RATA is said to be on reimbursable basis.

As derived from Section 286, Article 1, Chapter 5, Volume 1

of the Government Accounting and Auditing Manual, reimbursable
RATA should be duly supported by receipts or by a certification to
the effect that the expenses had been incurred in accordance with
the purpose for which the allowance is granted.

Stipends of Resident Physicians

The stipends received by resident physicians during their intensive
training in the residency program of a hospital and individuals engaged in the
practice of profession or calling like doctors of medicine are subject to CWT
imposed under the Tax code, as amended.

Cost of Living Allowance (COLA)

COLA of minimum wage earners is exempt from income tax. The
COLA forms part of the new wage rates or statutory minimum wage. Hence, it is
covered by the income tax exemption of MWEs’ under RA 9504, as implemented
by RR No. 10-08 which covers the statutory minimum wage (inclusive of COLA
under NCR Wage Order # NCR-16), including holiday pay, overtime pay, night
shift differential pay and hazard pay.

Premiums of Life Insurance

Premiums of life insurance covering the life of an employee paid by
the employer is taxable income to the employee, where the insured employee,
directly or indirectly is the beneficiary under the policy.