Module 3

Compensation Income

BACC8
Taxation

to your 3rd module!

This module is a combination of

synchronous & asynchronous learning
and will last for four (4) weeks.

C_Overview_

Atty. Leonicia B.
Garduque
Course Coach

November 15, 2021

Date Initiated
December 11, 2021
Date of Completion

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 COMPENSATION INCOME

A. LEARNING SCHEDULE: For Weeks 13 to 16

o Synchronous Meeting: BSBA-MM III-A- Thurs, 7:00 PM to 8:30 PM through Google Meet
BSBA-MM III-B- Fri, 7:00 PM to 8:30 PM through Google Meet
BSBA-MM III-E- Sat, 2:30 PM to 4:00 PM through Google Meet
BSBA-MM III-F- Sat, 3:30 PM to 7:00 PM through Google Meet
o Asynchronous Schedule : BSBA-MM III-A- Tues, 7:00 PM to 8:30 PM
BSBA-MM III-- Fri, 5:30 PM to 7:00 PM
BSBA-MM III-E- Sat, 1:00 PM to 2:30 PM
BSBA-MM III-F- Sat, 4:00 PM to 5:30 PM
o Offline Learning: Same class schedule based on printed module.

B. OVERVIEW AND COVERAGE

The module covers discussions on employee benefits considered as compensation income,

the types of employees, and exempt and taxable benefits. It also delineates the gap between the
compensation income subject to regular income tax and the fringe benefits subject to fringe benefit
tax.

C. DISCUSSION

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 an officer of a corporation.

Elements of employer and employee relationship:

1. Selection and engagement of employees -There is a screening process for employees to hire.
2. Payment of wages - The employer usually fixes and controls the payment of wages.
3. Power of dismissal - Employer has power to retrench or terminate employees when incurring
heavy losses or other reasonable basis.
4. Power of control - The employer has power to control the employee on the means and methods
by which the work is accomplished.

An arrangement which do not manifest all the elements is not an employer-employee

relationship but an independent contract for the provision of services.

The following are not considered employees:

1. Consultants
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2. Directors without management function
3. Talents and artists on TV shows or radio broadcasts
The income or fees of these individuals are not compensation income but are business or
professional income.

Types of Employees as to Function

1. Managerial employees – Those who are given powers or prerogatives to lay down and execute
managerial policies and/or to hire, transfer, suspend, lay off, recall, discharge, assign or discipline
employees.
2. Supervisory employees - Those who effectively recommend such managerial actions if the
exercise of such authority is not merely routinary or clerical in nature but requires the use of
independent judgment
3. Rank and file employees - Those who hold neither managerial nor supervisory functions.

Types Of Employees as to Taxability

1. Minimum wage earners - 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 progressive income tax.

It must be noted that the “special alien" classification was removed into law by virtue of a
presidential veto to the TRAIN law. The special alien under the old law must be treated as regular
employees.

Minimum Wage Earner

A minimum wage earner refers to a worker in the private sector who is paid the minimum
wage or to an employee in the public sector with compensation income of not more than the statutory
minimum wage (i.e., those with salary grade 1 to 3) in the non-agricultural sector where he or she is
assigned. The statutory minimum wage refers to rate fixed by the Regional Tripartite Wage and
Productivity Board of the Department of Labor and Employment or P5,000/month or P60,000/year,
whichever is higher.

The Tax Model on Compensation Income

Gross compensation income P xxx,xxx

Less: Non-taxable compensation Taxable compensation income xxx,xxx
Taxable compensation income P xxx,xxx
.
Gross compensation income generally includes all remunerations received under an
employer-employee relationship.

Non-Taxable Compensation

A. Mandatory deductions -These includes employees' mandatory contribution to GSIS, SSS,

PhilHealth, HDMF, and union dues

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B. Exempt benefits –

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

Exempt Benefits under the NIRC, as Amended, and Special Laws

1. Remunerations received as incidents of employment

a. Exempt retirement benefits under RA 7641 including exempt retirement gratuities to

government officials and employees
b. Exempt termination benefits
c. Benefits from the United States Veterans Administration
d. Social security, retirement gratuities, pensions, and similar benefits from foreign government
agencies and other institutions, private or public
e. Benefits from SSS, under the SSS Act of 1954, as amended
f. Benefits from GSIS under the GSIS Act of 1937, as amended
g. COVID-19 benefits to health workers under RA 11494 (BAYANIHAN 2)
a. Special Risk Allowance
b. Actual Hazard Duty Pay
c. Compensation paid to private and public health workers who have contracted COVID-19
in the line of duty

2. De minimis benefits
3. 13th month pay and other benefits not exceeding P90,000
4. Certain benefits of minimum wage earners

De minimis benefits

De minimis benefits are facilities or privileges such as entertainment, medical services, or

courtesy discounts on purchases that are of relatively small value and are furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.
De minimis benefits are petty fringe benefits exempt from income tax. As originally conceived, other
petty fringe benefits which fall within the purview of de minimis even if not part of the de minimis list
are normally treated as de minimis and are also exempt from income tax.

However, the BIR and the Department of Finance changed the rule under RR 50-2011, as last
amended by RR 11-2018 wherein the term "de minimis benefits" was restricted to mean only the
following:

1. Monetized unused vacation 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 P250 per month
4. Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per month amounting to not more
than P2,000
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 5. Uniform and clothing allowance not exceeding P6,000 per annum (RR11-2018)
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 the employee under an 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 (i.e., Christmas gift and anniversary gifts)
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.

Note that only CBA benefits and productivity incentives amounting to P10,000 or less is de
minimis. If the amount exceeds P10,000, the entire amount is a taxable "other benefits."

Taxable de minimis benefits

1. Excess de minimis over their regulatory limits

2. Other benefits of relatively small value that are not included in the list of de minimis benefits

Treatment of taxable de minimis benefits

a. For rank and file employees - taxable de minimis is treated as other compensation income
under the category “13th month pay and other benefits"
b. For managerial and supervisory employees -the taxable de minimis is treated as fringe
benefit subject to final fringe benefit tax

DETERMINATION OF EXCESS DE MINIMIS BENEFITS

Illustration 1: De minimis limits

Alexanderia, a private employee who is paid a P600 daily rate, receives the following benefits during
the year 2021:

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days
Medical assistance P 7,000
Rice subsidy (P2,500 per month) P 30,000
Clothing allowance P 9,000
Laundry allowance P 6,000

Required: Determine the taxable amount of de-minimis benefits.

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Solution:
Actual Limit Excess
Monetized unused VL P 5,400 P 6,000 P0
Monetized unused SL 5,400 0 5,400
Medical assistance 7,000 10,000 0
Rice subsidy 30,000 24,000 6,000
Clothing allowance 9,000 6,000 3,000
Laundry allowance 6,000 3,600 2,400
Taxable de minimis as "other benefits" P 16,800

Note: Private Employees

1. The actual value of the monetized unused VL was computed as P600 x 9 while the limit was
P600 x 10.
2. The 10-day rule applies only to vacation leaves. Monetization of sick leaves of private employees
is taxable. (BIR Ruling No. 227-2013, June 20, 2013).
3. The rice subsidy and laundry allowance were likewise annualized by multiplying their monthly
limit by 12. The de minimis benefits within the limits are exempt from income tax.

Illustration 2: Hazelyn, a government rank and file employee, received the following benefits:

Monetized unused vacation leave credits (10 days) P 6,000

Monetized unused sick leave credits (15 days) 9,000
Uniform allowance 5,000
Laundry allowance 4,800

Required: Determine the amount to be included in other benefits.

Solution:
Actual Limit Excess
Monetized unused VL P 6,000 exempt P 0
Monetized unused SL 9,000 exempt 0
Uniform allowance 5,000 6,000 0
Laundry allowance 4,800 3,600 1,200
Taxable de minimis as "other benefits” P 1,200

Note: It is clear under RR5-2011 that the vacation leave and sick leave of government employees
are not subject to the 10-day limit rule.

Illustration 3: Professor Estoque was one of the Hall of Fame awardees of Youbee University. He
was granted P25,000 cash as loyalty award for his 30 years of service. He was also given P10,000
Christmas gift and an additional P10,000 gift during the institution's Founding Day Anniversary.
Besides, he was also given free lunch meals with a total value of P15,000 during the same year,

Required: Compute the total taxable de minimis benefits as other benefits.

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Solution: Actual Limit Excess
Loyalty or service award P 25,000 P 0 P 25,000
Christmas and anniversary gift 20,000 5,000 15,000
Meals 15,000 0 15,000
Total taxable de minimis as other benefits P 55,000

Note:

1. The limit on loyalty or service awards applies only if it is given in kind.

2. Only meals for overtime or graveyard shifts are considered de minimis.
Other meal benefits are no longer considered de minimis.

Note that in all three illustrations, If the employee is a managerial or supervisory employee, the entire
excess de minimis shall be considered as other fringe benefits subject to fringe benefits tax.

Commutation of accumulated leave credits

The terminal leave pay or the commutation of unused leave credits due to involuntary
separation from employment of the employee is now treated as de minimis benefits subject to the 10-
day leave credit limit and is no longer exempt as part of exempt termination benefits.

13th month pay and other benefits shall not be in excess of P90,000.

Benefits Exempt under Treaty or International Agreements

Employee benefits of non-Filipino nationals and/or non-permanent residents of the Philippines

from foreign governments, embassies or diplomatic missions, and international organizations in 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 obligation to withhold tax does not mean income tax
exemption of their Filipino employees. In fact, most of the international agreements to which the
Philippines is a signatory limit exemption only to non-Filipino nationals and/or non-residents of the
Philippines.
Filipino employees of foreign governments, international missions, and organizations are
taxable as a rule except only to employees of the following:
1. United Nations (UN)
2. Specialized Agencies of the United Nations
3. Australian Agency for International Development (AUSAID)
4. Food and Agriculture Organization (FAO)
5. World Health Organization (WHO)
6. United Nations Development Programme (UNDP)
7. International Organization for Migration (IOM)
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 8. International Seabed Authority (ISA)

These organizations have exemption provisions that extend even to their Filipino employees.
Other aid agencies or international organizations may have tax free provisions in their articles of
agreement for Filipiño employees.

Confirmation of Tax Exemptions

The exemption of Filipino employees is not automatic to Filipinos claiming exemptions under
the terms of international agreements or under provisions of special laws granting privileges to
international organizations shall file an application for confirmation of tax exemption with the BIR's
International Tax Affairs Division (ITAD). The confirmation shall serve as proof of exemption. Without
the confirmation certificate, the employee is taxable.

Employees of Philippine embassies or consulate offices

It should be recalled that employees working in Philippine embassies or Philippine consulate

offices are not considered non-resident citizens and are therefore subject to Philippine income tax.

Summary Rules:
Foreign embassy, Philippine Embassy or
Missions, or organization consulate
In the Philippines
- Filipino citizens Taxable N/A
- Aliens Exempt N/A
Abroad
- Filipino citizens Exempt Taxable
- Aliens Exempt Exempt
*Taxpayer must prove if there is an 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 furnished by the employer to the employees to enable them to

appropriately and effectively 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, or entertainment expenses that are subject

to an accounting or liquidation in accordance with specific requirements of substantiation of
expense
2. Allowances which essentially constitute reimbursement to government personnel for expenses
they incurred in the performance of their official duties, such as:

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 a. Representation and Transportation Allowance (RATA) of public officers and employees
under the General Appropriation Act; and
b. Personnel Economic Relief Allowance (PERA) (RR10-2008)

3. Reasonable amounts of reimbursements or advances to employees for travelling and

representation which are pre-computed on a daily basis and which are paid to any employee
while on assignment or duty.
These amounts given to the employee are not income but are expenses of the trade, business
or profession of the employer that are incurred or paid through the employee. These are not employee
benefits since they are mere advances or replenishments of what are supposed to be direct cash
outflows from the employer; hence, these are not considered as compensation income.

Benefits for the Convenience or Advantage of the Employer

Benefits or allowances which are intended for the furtherance of the interest the employer's
business or to ensure its smooth operations are likewise exempt from income tax. This is referred to
as the "convenience of the employer rule".

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 employees are required to be available
always for assignment and consultation (BİR Ruling DA-233-07)
2. Outstation allowance for employees who will be out from office site at least 8 hours to visit lotto
franchise holders for repairs and/or inspection of equipment leased by the employer (BIR Ruling
No. 013-02)
3. Grant of housing privilege to employees working at distant or remote facilities even if the dwelling
is distanced from the facility in compliance to labor safety standards (BIR Ruling No. 055-99)
4. Car incentives to employed on-call medical doctors
5. Scholarship grants to employees under contract to remain in service for a specified period upon
completion of the study
6. Housing privilege of military officials of the AFP located inside or near the military camps

These types of employer spending are regarded as business expenses and are not
considered as employee reward because they are not intended for the free personal consumption or
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 it is 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 types of expense are regarded as "hybrid expenses”
because they are partially 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.

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2. Supplemental compensation - This pertains to other performance-based pays to employee
with or without regard to the payroll period.

An adjunct category to the supplemental compensation, 13th month pay and other benefit
is necessary to contain incentive pays and all other taxable employee benefits not classifiable as
regular or supplemental compensation. 13th month pay and other benefits not exceeding P 90,000 is
an exclusion from gross income. The excess above P90,000 is added to supplemental
compensation..

Illustration: An employee received P400,000 regular compensation, P120,000 supplemental

compensation, and P100,000 13th month pay and other benefits.

The taxable compensation income shall be computed as follows:

Regular compensation P 400,000

Supplemental compensation [P120,000 + (P100,000 - P90,00)] 130,000
Taxable compensation income P 530,000

Regular Compensation Income

The regular compensation includes fixed remunerations due to be received by an employee every
period such as:

1. Basic salary
2. 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 - Allowances which are fixed in amounts and regularly received as part of the
basic monthly, bi-weekly, weekly or daily salaries or wages are part of regular compensation. This
applies even if a portion of the allowances are actually used in the employer's business.

Exception rule on the taxability of allowances:

a. Ordinary and necessary allowances for travelling, representation or entertainment expense of

employees incurred in the pursuit of the employer trade, business or profession.
b. The expense is subject to accounting or liquidation.
c. Any excess advances are returned to the employer.

Hence, variable and liquidated allowances are not subject to tax. However, amounts of allowances
that are retained by the employee for himself shall be considered compensation.

Paid vacation and sick leave allowances - The paid absences of an employee applied against his
vacation or sick leave credits which are normally received as part of the regular salary is part of the
regular compensation.

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 the recipient.

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 2. Commissions to non-employees such as independent sales agents are business income to
the sales agent.
3. Tips and gratuities - Tips and gratuities 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 at the fair value of the
consideration received. If received in shares, the fair value of the shares at the date services were
provided is used.

Illustration 1: The following pertains to an employee in 2021:

Gross salaries P 400,000

Cost-of-living allowance P 36,000
Fixed monthly transportation allowance (P2,000 x 12) 24,000
Deduction for withholding tax on compensation 10,000
Deduction for employee share in SSS, PHIC, and HDMF 32,000

The taxable compensation income shall be computed as follows:

Gross salaries P 400,000

Cost-of-living allowance 36,000
Fixed monthly transportation allowance 24,000
Regular compensation income P 460,000
Less: Non-taxable compensation- mandatory deduction 32.000
Taxable compensation income P 428.000

Illustration 2: An employee who was terminated in 2021 due to business closure of the employer
received the following:

Unpaid 2021 salaries P 200,000

Unpaid 2020 salaries 20,000
Reimbursement for transportation expenses 10,000
Termination pay 100,000

The taxable compensation income shall be computed as follows:

Gross compensation income (P200K + P20K+ P100K) P320,000
Less: Non-taxable compensation
Non-taxable benefits 100,000
Taxable compensation income P 220.000

Note:
1. Reimbursement for transportation expense is not an income to the employee.
2. The termination pay is included in gross compensation income, but is also deducted as non-
taxable compensation because the reason of termination is beyond the employee's control

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Supplementary Compensation
Supplementary or additional compensation includes performance-based remunerations to an
employee in addition to the regular compensation with or without regard to the payroll period.
The following are the additional compensation under current tax rules:

1. Overtime pay
2. Hazard pay
3. Night shift differential pay
4. Holiday pay
5. Commissions
6. Fees, including director's fees (if director is an employee)
7. Emoluments and honoraria
8. Taxable retirement and separation pay
9. Value of living quarters or meals
10. Gains on exercise of stock options
11. Profit sharing and taxable bonuses

Overtime, holiday, hazard, and night differential pay - These constitute additional compensation,
except when derived by a minimum wage earner.

Commissions, emoluments and honoraria - Commissions are incentives intended to stimulate

sales. These may be given as a profit sharing or performance bonus. Emoluments pertain to any pay
in general while honoraria are additional payments for attending to special tasks or assignments.

Living quarters or meals - If an employee receives free living quarters or meals in addition to salary
for services rendered, the value to the employee of such living quarters or meals is included in
compensation income. However, when the same was furnished to an employee for the convenience
of the employer or out of necessity of the employer's business, the value thereof is not compensation
income, but a business expense.

Stock option plans - To motivate employees, employers give stock options to employees allowing
them to earn additional rewards on the appreciation of the stock price of the company. The option will
have value when the value of the stock of the employer exceeds the exercise price fixed at the grant
date.

Types of options:
1. Equity-settled options - entitles employees to purchase shares of stocks of the employer at a
pre-determined exercise price fixed on the grant date
2. Cash-settled options - entitles the employee to receive in cash the excess of the fair value of
stocks over the exercise price without actually delivering stocks
Upon the exercise of the option, the excess of the book value or fair value of the stocks, whichever
is higher, less the exercise price set at grant date is treated as follows:

a. Additional compensation income if the employee is a rank and file

b. Fringe benefits – if the employee is a managerial or a supervisory employee

This rule is applied regardless of the type of the option. (RMC 79-2014)

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Illustration - equity-settled option: Mr. Anthony, a rank and file employee, received a stock option
from his employer, ABC, Inc., entitling him to buy 10,000 of ABC's share at a strike price of P100. In
April 2021, Mr. Anthony exercised the option when an ABC share was selling P150/share. The shares
had a book value of P145/share in the latest published financial statements of ABC, Inc. After two
years, he sold the shares for P180/share.

Fair value of stocks (P150 x 10,000 shares) P 1,500,000

Less: Exercise price of option (P100 x 10,000) 1,000,000
Compensation income (discount) P 500,000

Note:
1. The P150/share fair value is used since it is higher than the P145/share book value.
2. For listed shares, the fair value of the stock is based on the simple average of high and low on the
exercise date. For non-listed shares, the book value per share is simply used in the absence of an
over-the-counter (OTC) market price available.
3. The compensation income shall be reported by Anthony in his 2021 income tax return.
4. If Mr. Anthony is a supervisory or managerial employee, the P500,000 shall not be treated as a
compensation but as a fringe benefit subject to a gross-up fringe benefits tax.

Treatment of the subsequent sale of the shares

If the employer corporation is a:

1. Domestic corporation, and the sale of the stocks is made:

a. Through the Philippine Stock Exchange (PSE), the sale is subject to the stock transaction tax of
60% of 1% of the gross selling price. The tax would be computed as:

Selling price (P180 x 10,000) P 1,800,000

Multiply by: stock transaction tax rate 60% x 1%
Stock transaction tax P 10,800

The tax will be withheld by the broker who affected the sale. The gain from the sale of the stocks
would not be subject to income tax.

b. Directly to buyer, the net gain on the sale is subject to the 15% capital gains tax. The tax shall be
computed as follows:

Selling price (P180 x 10,000) P 1,800,000

Less: Tax basis of shares sold 1,500,000
Capital gains P 300,000
Multiply by: CGT tax rate 15%
Capital gains tax P 45,000

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2. Foreign corporation, the net gain on the sale is a capital gain subject to the rules of regular income
tax. The gain subject to regular tax shall be computed as follows:

Selling price (P180 x 10,000) P 1,800,000

Less: Tax basis of shares sold 1.500.000
Capital gains P300,000
Multiply by: Holding period rate (>1 vear) 50%
Capital gain subject to regular tax P 150,000

Illustration - cash-settled option: Mr. Anthony, a supervisor, received a cash-settled stock option
from his employer ABC, Inc., entitling him to receive the increase in the company's closing share price
on exercise date over the strike price of P100/share covering 10,000 ABC shares. On March 23,
2021, Mr. Anthony exercised the option. ABC shares traded P156/share high, P146/share low and
closed P150/share at the Philippine Stock Exchange. The volume weighted average traded price was
P148/share. ABC shares had a book value of P153/share in the latest published financial statements.

Based on the ABC, Inc.'s option plan, Mr. Anthony shall receive cash instead of stocks amounting to:

Fair value of stocks (P150 x 10,000 shares), P 1,500,000

Less: Exercise price of option (P100 x 10,000) 1,000,000
Cash (Fringe benefit subject to final tax) P 500,000

What if the option is an equity-settled option? If the option would have been an equity-settled
option, Mr. Anthony shall receive the following number of ABC shares pursuant to the terms option
plan:

Fair value of stocks (P150 x 10,000 shares) P 1,500,000

Less: Exercise price of option (P100 x 10,000 1,000,000
Increase in value of stocks covered by the option P 500,000
Divide by: Exercise day closing price 150
Number of shares 3,333.33

Under the regulations, the fair value of listed stocks is the simple average of high and low, computed
as (P156 + P146)/2 = P151/share. Pursuant to RMC 79-2014, the fringe benefits would be valued
based on the P153/share higher book value as follows:

Number of shares 3,333.33

Multiply by: 153.00
Stocks (Fringe benefit subject to final tax) P 510,000

The subsequent sale of the stocks would be subject to the stock transaction tax. There would
be no income tax on the realized gain.

Profit Sharing or Taxable Bonus - Profit sharing is a reward for churning the business to post a
profit. It is a compensation for controlling all the factors that influence profit such as marketing and
sales, productivity, and administrative factors. It is a reward which can be enjoyed by individual
employees such as salesmen, division heads, key officers, or by all employees collectively.
Bonuses are supplemental or 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.
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Productivity incentive bonus - The Productivity Incentive Act of 1990 (RA 6971) encourages private
employers to set-up productivity incentive programs. A productivity incentive is linked to
improvements in productivity usually in terms of cost savings through waste reduction, efficient labor
utilization, or increase in volume of production. Under the NIRC, productivity incentive bonus is
considered as part of "other benefits" under "13th month pay and other benefits". Under the revision
of RA 10653, productivity incentive is now a de minimis benefit.

Productivity incentive distinguished from profit sharing bonus

Productivity incentive is anchored on improvements in the factors of production and is usually

enjoyed collectively by employees due to the inherent difficulty of tracing productivity to individual
performance. It is based upon cost savings; hence, it is payable even if the business poses a loss.
Profit sharing is payable only when the business post a profit.

13th Month Pay And Other Benefits

"13th Month Pay and Other Benefits" includes:

1. 13th month pay

2. Other benefits

a. Christmas bonus of private employees

b. Cash gifts other than Christmas or anniversary gifts of private employees (RR2-98, as
amended by RR5-2011)
c. Additional compensation allowance (ACA) of government personnel (RR8-2000)
d. 14th month pay, 15th month pay, etc.
e. Other 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. (RA 6686 as amended by RA 8441)
b. The 13th month pay of private employees is equivalent to one-month salary. (PD 851)

Christmas Bonus and Christmas Gifts - The Christmas bonus of government employees is their
13th month pay. In private companies, the term "Christmas bonus" may pertain to the 13th month
pay, a separate incentive pay, or to a profit sharing. Christmas bonus of private employees which
is a non-performance-based incentive pay is part of other benefits. Christmas bonus in the
nature of profit sharing should be treated as additional compensation income, not as "other
benefits." The nature of the Christmas bonus of private employees shall determine its tax
classification.

The Christmas gift of government employees is specifically designated as part of "13th month
pay and other benefit" under Sec. 32(B) (7)(e) (i) of the NIRC. RR 5-2011 includes Christmas gift in
the list of de minimis benefits. But since revenue regulations cannot amend the law they implement,
RR 5-2011 should be interpreted to apply only to Christmas gifts of private employees.

15
Hence,

Government Employees Private Employees

Christmas bonus 13th month pay and other 13th month pay and other
benefits benefits
Christmas gift 13th month pay and other De minimis
benefits

Bonus vs. Gift - Bonus is performance-based and is non-discretionary to the employer while a gift is
a gratuity and is discretionary upon the employer.

Other fringe benefits - Other fringe benefits include all other taxable fringe benefits not specifically
included in compensation income as regular, supplementary or 13th month pay, and other benefits
under current tax rules such as:

1. Employee personal expenses shouldered by the employer

2. Taxable de minimis benefits such as:
a. Excess de minimis
b. Benefits not included in the de minimis list

Employee Personal Expenses - Employee personal expenses such as, but not limited to, rental of
residence, grocery, association or club membership dues, travels or vacation expense or tuition fees,
when assumed or paid by the employer, constitute fringe benefits to the employee. This fact holds
true even if the expense is receipted in the name of the employer.

Taxable de minimis benefits - All other benefits of relatively small value which are not included in
the list of de minimis benefits shall not be considered as de minimis but as ordinary fringe benefits.
Corollary to this rule, excess de minimis benefits should be considered as taxable ordinary fringe
benefits.

Tax Treatment of Other Fringe Benefits

a. For rank and file employees - treated as compensation income as part of “other benefits"
under “13th month pay and other benefits"
b. For managerial or supervisory employee treated as fringe benefit subject to 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.”

Illustration 1: The employer pays for the tuition fee of the employee in addition to his regular
compensation.

The tuition fee paid is a fringe benefit which will be treated as follows:
1. As a compensation income as part of “other benefits” under “13th month pay and other
benefits” if the employee is a rank and file employee.
2. As a fringe benefit subject to fringe benefit tax if the employee is a managerial or supervisory
employee.

16
3. As an exempt fringe benefit, regardless of the type of employee, if the same was given by the
employer for his convenience or business necessity such as when the employee is required to
study to acquire expertise for the future use of the employer's business

Illustration 2: An employee receives a monthly rice allowance of P3, 000 a month which is P1,000
in excess of the P2,000 a month de minimis limit for rice allowance.

The P1, 000 monthly excess constitutes a taxable de minimis benefit taxable, compensation
as part of other benefits” for a rank and file employee. It is a fringe benefit subject to final fringe benefit
tax for a managerial or supervisory employee.

Tax Treatment of 13th Month Pay and Other Benefits

RR 2-98 provides that 13th month pay and other benefits are exempt from withholding on
compensation provided they do not exceed P90, 000. It followed 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.

Illustration 1: A government rank and file employee received the following benefits aside from the
basic pay in 2021:

Christmas bonus Cash gift P70,000

Cash gift 5.000
Additional compensation allowance 36,000
Personnel Economic Relief Allowance (P2,000/month) 24,000
Monetized value of vacation leave and sick leave (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

Cash gift 5,000
Additional compensation allowance 36,000
Excess uniform and clothing allowance (P7,000 - P6,000) 1,000
13th month pay and other benefits P 112,000
Less: Exclusion Threshold 90,000
Taxable 13th month pay and other benefits P 22,000

Note on government employees:

1. Personnel Economic Relief Allowance is not subject to income tax and withholding tax
(Under RR8-2000, as affirmed by RR10-2008).
2. The P5,000 Christmas gift of government employees is designated by the NIRC to be par
“13th month pay and other benefits”; hence, it is not a de minimis benefit
3. Under RR5-2011, the monetization of vacation leave and sick leave credits of government
17
 Officials is an exempt de minimis benefit without regard to the number of days,

Illustration 2: A private rank and file employee working in a remote tower station of Snail Internet
Company received the following benefit during 2021:

13th month pay P 72,000

Performance bonus 15,000
Christmas gift 30,000
Danger exposure allowance (hazard pay). 6,000
Housing privilege 38,000
Uniform and clothing allowance 8,000
Laundry allowance 6,000

The housing privilege pertains to the annual value of the employees living quarters furnished
by the employer to employees for staying on-site.

Required: Compute the excess 13th month pay and other benefits.

Solution:

De minimis Limit Other

benefits
Christmas gift P 30,000 P 5,000 P 25,000
Laundry allowance 8,000 6,000 2,400
Excess de minimis benefits (other fringe P 29,400
benefits)
13th month pay 72,000
13th month pay and other benefits P 101,400
Less: Exclusion threshold 90,000
Taxable 13th month pay and other benefits P 11,400

Note Private Employees:

1. Performance bonus is a supplemental or additional compensation.

2. The laundry allowance limit is computed as P300 x 12 = P3,600.
3. Christmas gift is a de minimis benefit for private employees under RR5-2011.
4. The housing privilege is exempt under the convenience of the employer rule.
5. The “13th month pay and other benefits” of rank and file employees includes "other fringe benefits.".

Illustration 3: A managerial employee received the following benefits in 2021:

13th month pay P 95,000

Rental expense on condominium unit 18,000
Salary of personal body guard 12,000
Profit sharing 12,000
Rice allowance 32,400
Clothing allowance 7,000
Night shift differential pay 11,000

18
Required: Determine the taxable “13th month pay and other benefits," additional compensation, and
the fringe benefit subject to fringe benefit tax.

De Limit Other
Minimis Benefits
Rice Allowance P 32,400 P 24,000 P 8,400
Clothing Allowance 7,000 6,000 1,000
Excess De Minimis P 9,400
Other Fringe Benefits
Rent of Residence Paid by Employer 18,000
Salary of Personal Body Guard 12,000
Total Fringe Benefit Subject To Fringe P 39,400
Benefit Tax

Profit Sharing P 12,000

Differential Pay 11,000
Total Supplemental Compensation P 23,000

Total 13th Month Pay And Other Benefits P 95,000

Less: Exclusion Threshold 90,000
Taxable 13th Month Pay And Other P 5,000
Benefits

INTEGRATIVE ILLUSTRATIONS: Compensation Income

Integrative Illustration 1: A government rank and file employee had the following summary of his
compensation and benefits in 2021:

Gross compensation income P 1,044,000

Less: Employee payroll deductions
Employee contribution to GSIS, PHIÇ; HDMF P 80,000
Employee deduction for withholding tax 64,000 144,000
Net regular payroll P 900,000
Representation and Transportation Allowance 8,000
Personnel Economic Relief Allowance 24,000
Christmas bonus 87,000
Uniform allowance 12,000
Christmas gift 5,000
Honoraria 15,000
Total compensation P 1,061.000

The taxable compensation income shall be computed as follows:

De Non- Other Taxable

Minimis Taxable Benefits Benefits
Regular and supplementary
Compensation:
Mandatory Deductions P80,000
Regular Compensation (P1,044,000- P 964,000
P80,000
19
 Supplemental compensation:
Honoraria 15,000
RATA 18,000
PERA 24,000
Total P 0 P 979,000
13th month pay and other benefits:
Christmas bonus P 87,000
Christmas gift 5,000
Excess De minimis:
Uniform allowance P12,000 6,000 6,000
Total P12,000 P 48,000 P 98,000
Exclusion threshold (up to P90,000) 90,000 90,000
Total P138,000 P 8,000
Total non-taxable compensation P218,000
Taxable excess 13th month pay and - 8,000 8,000
other benefits
Taxable compensation income P 987,000

Note:
1. The taxable regular compensation income is computed as (P1,044,000 - P80,000)
2. The excess of the P90, 000 threshold over the actual 13th month pay and other benefits is
Non-deductible to other items of compensation income (RR 3-2015).

Presentation in the Income Tax Return Of The Employee:

Gross compensation income (i.e., P1,061,000 + P144,000) P 1,205,000

Less: Non-taxable compensation income
Mandatory deductions P 80,000
Exempt benefits 138,000 218,000
Taxable compensation income P 987,000

Integrative Illustration 2: A private employee derived the following remunerations and benefits in
2021:

Basic compensation, net of P32,000 SSS, PHÍC, PhilHealth,

HDMF, union dues, and P35,000 withholding tax P 533,000
Overtime pay 21,000
Vacation expenses of the employee paid by employer 24,000
Cost-of-living allowance (COLA) 12,000
Pre-computed daily transportation allowance 16,000
Rice subsidy (12 cavans worth P2,600 each) 31,200
13th month pay 50,000
Monetized unused leave credit (10 VL and 8 SL) 18,000
Uniform allowance 9,000
Total compensation income P 714,200

The non-taxable compensation income and the gross taxable compensation income shall
be computed as follows:

20
For a rank and file employee:

De Non- Other Taxable

minimis Taxable Benefits Benefits
Regular and supplementary
compensation
Mandatory deductions P 32,000
Regular compensation (P600,000 - P32,000) P 568,000
Supplementary compensation
Overtime pay 21,000
COLA 12,000
Daily transportation allowance P 16,000
Total P0 P 601,000
13th month pay and other benefits:
13th month pay P 50,000
Other benefits:
Vacation expense paid by 24,000
employer
Excess de minimis benefits:
Rice subsidy P 31,200 24,000 7,200
Monetized VL 10,000 10,000
Monetized SL 8,000 8,000
Uniform allowance 9,000 6,000 3,000
Total P 58,200 P 56,000 P 92,200 P 601,000
Exclusion threshold 90,000 90,000
Total P 146,000 P 2,200
Total non-taxable P 178,000
compensation
Taxable 13th month pay and other benefits -2,200 2,200
Taxable compensation income P 603,200

Note:

1. The P568,000 basic compensation may also be computed as P533,000 + P35,000 Note the
withholding tax is not an exclusion from gross income.
2. The limit of the monetized unused VL is computed as P18, 000 x10/18 = P10,000
The SL pay is computed as P18,000 x 8/18 = P8,000
3. The vacation expense shouldered by the employer is a fringe benefit part of compensation
income of a rank and file employee under “other benefits”

Presentation in the Income Tax Return of the Employee:

Gross compensation income* P 781,200

Less: Non-taxable compensation income
Mandatory deductions P 32,000
Exempt benefits 146,000 178,000
Taxable compensation income P 603,200

21
Income Tax Due

The income tax due for the employee would be computed as follows:

Tax

Taxable income- P 603,200

Less: Lower limit-of applicable bracket Excess 400,000 P 30,000
Excess P 203,000
Multiply by: incremental tax rate Income tax due 25% 50,800
Income Tax Due P 80,800

Over But Not Over Basic Tax Plus % Of excess over

250,000.00 400,000.00 0 20% 250,000.00

400,000.00 800,000.00 30,000 25% 400,000.00
800,000.00 2,000,000.00 130,000 30% 800,000.00

For a managerial or supervisory employee:

De Non- Other Taxable
Minimis taxable benefits benefits
Regular and supplementary compensation
Mandatory deductions P 32,000
Regular compensation P 568,000
Supplemental compensation
Overtime pay 21,000
COLA 12,000
Daily transportation allowance 16,000 -
Total P 601,000
13th month pay and other benefits
13th month pay P 50,000
Exclusion threshold (up to P90,000) P 50,000 P 50,000
Total P 66,000 P0
Excess 13th month pay & other benefits P0 P0
Taxable compensation income P 601,000

Other fringe benefits

Vacation expense paid by employer P 24,000
Excess de minimis benefits
Rice subsidy P31,200 P24,000 P7,200
Monetized unused VL 10,000 10,000 -
Monetized SL 8,000 0 8,000
Uniform allowances 6,000 6,000
Total P58,200 P106,000 P 18,200
22
Total non-taxable compensation P138,000
Excess de minimis benefits -18,200 P18,200
Total fringe benefits subject to final tax P 42,200

The Gross Compensation Income is Computed As Follows:

Total remunerations and benefits P 781,200

Less: Fringe benefit subject to final tax 42,200
Gross compensation income P 739,000

Presentation in the Income Tax Return of the Employee:

Gross Compensation Income P739,000

Less: Non-Taxable Compensation Income
Mandatory deductions P 32,000
Exempt benefits 106,000 138,000
Taxable compensation income P 601,000

Income Tax Due

The income tax due of the employee would be computed as follows:

Tax
Taxable Income P 601,000
Less: Lower Limit of Applicable Bracket 400,000 P 30,000
Excess P 201,000
Multiply By: Incremental Tax Rate 25% 50,250
Income Tax Due P 80,250

Over Over Not over Basic Plus Of Excess Over

Tax
250,000.00 4000,000.00 0 20% 250,000.00
400,000,00 800,000.00 30,000 25% 400,000.00
800,000.00 2,000,000.00 130,00 30% 800,000.00

The Fringe Benefits Tax on Managerial Or Supervisory Employees

The fringe benefit of managerial or supervisory employees is subject to a grossed- up final

tax at the rate of 35%, computed as follows:

Taxable fringe benefits P 42,200

Divide by: Gross-up rate 65%
Grossed-up monetary value P 64,923
Multiply: Tax Rate 35%
Fringe Benefits Tax P 22,723
...

23
 The fringe benefits tax is a final tax which be paid by the employer to the government. It is
presumed withheld out of the fringe benefits of the managerial or supervisor employee. The
detailed rules on fringe benefit taxation will be discussed in following chapter. It is merely
shown here for you to obtain preliminary understanding.
Taxability of Minimum Wage Earners (MWE) - Minimum wage earners are exempt from income
tax on the following:

1. Basic minimu m wage

2. Other benefits (HHON)
a. Holiday pay
b. Hazard Pay
c. Overtime pay
d. Night Shift Differential Pay
Illustration: Ms. Guevarra, a minimum wage earner employed by CSO Company, derived the
following benefits during the year:

Basic minimum wage P 124,000

13th month pay 11,000
Overtime pay 80,000
Night shift differential pay 30,000
Hazard pay 15,000
Holiday pay 15,000
Total P 275,000
Less: SSS, PhilHealth, HDMF contributions 5,000
Net total P 270,000

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 270.000 275,000
Taxable compensation income P 0

Receipt of other taxable income by MWEs

MWEs are still exempt from income tax on the foregoing exempt benefits even if they are
earning other taxable items of compensation or other income from concurrent employers, trade,
business or practice of a profession. MWEs are' subject to tax only to the extent of income other than
the aforementioned exempt benefits. (RR11-2018) Hence, additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable amount of P90, 000,
taxable allowances and other taxable income given by the same employers to MWEs are subject to
withholding tax. Despite this, it must be noted that MWEs will actually pay income tax only if their total
taxable income -exceeds P250, 000 for the year,

24
Illustration 1: With other taxable compensation income - Mary Dela Fuente, a minimum wage
employee, was able to close a sales deal for her employer during the year. She received the
following compensation during the year:
Basic minimum wage, net of P8,000 mandatory deductions P 160,800
13th month pay 14,000
Holiday pay 4,000
Overtime pay 70,000
Night shift differential pay 5,000
Hazard pay 10,000
Profit sharing bonus 12,000
Commission income 370.000
Total P 655,800

The taxable compensation income should be computed as follows:

Gross compensation income (i.e., P 655,800 + P 8,000) P 663,800
Less: Non-taxable compensation income
Mandatory deductions P 8,000
Exempt benefits 273,800 281,800
Taxable compensation income P 382,000

Exempt benefits consist of the following:

Basic minimum wage P 160,800

13th month pay 14,000
Holiday pay 4,000
Overtime pay 70,000
Night shift differential pay 15,000
Hazard pay 10,000
Total exempt benefits P 273,800

Mary's tax due shall be computed as:

Tax Due

Taxable compensation income P 382,000

Less: Lower limit of the income bracket
where the taxable income qualifies P250,000 P 0
Excess 132,000
Multiply by: 20% 26,400
Total tax due P26,400

25
Illustration 2: With business income: Jun, a minimum wage employee, do part-time business
after work.,He received total minimum wage of P290,000 inclusive of P11,000 13th month pay but
net of P5,000 mandatory deductions. He also received a performance bonus of P20, 000 and
earned P300,000 from his side-line business.
Jun's taxable income shall be computed as follows:

Gross compensation income (i.e., P 290K + P 5K+P20K) P 315,000

Less: Non-taxable compensation income
Mandatory deductions P 5,000
Exempt benefits 290,000 295,000
Taxable compensation income P 20,000
Net income from business 300,000
Taxable income P 320,000

Rules of change in status as a Minimum Wage Earner during a year

1. When an employee becomes a minimum wage earner during the year, he shall be subject
to income tax only on compensation earned before becoming a minimum wage earner.
Illustration 1: Anthony had a basic pay of P400/day when the minimum wage was P382/day. He is
also receiving overtime pay and the year end 13th month pay. On July 1, 2021, the Regional Wages
and Productivity Board increased the minimum wage by P22/day to P404/day: Anthony's employer
increased his salary to the minimum P404/day.
Anthony shall be taxed on his income from January 1 to June 30 because he is not yet a
minimum wage earner. The employer shall regularly deduct the withholding tax on compensation from
his salary but shall stop withholding by June 30. Anthony's compensation starting July 1 including
overtime pay and year-end 13th month pay shall be tax exempt.
If the exact amount of income taxes had been withheld by the employer for the January 1 to
June 30 compensation, Anthony need not file an income tax return. Otherwise, Anthony shall file an
adjustment return reflecting his compensation from January 1 to June 30 and shall pay the tax still
due or claim for refund in case of excess withholding.
This rule may also apply in cases of:
a. Transfer to an employer paying salary at the minimum wage
b. Transfer of employment to a region with higher minimum wage
2. When an employee ceases to be a minimum wage earner during the year due to increase
in salary, only the income for the rest of the year is taxable
Illustration 2: Andrea is a minimum wage earner. She was promoted and was given a salary raise
above the minimum wage starting August 1, 2021.
Andrea shall be exempt from income tax from January 1 to July 31 because she is a minimum
wage earner. Effective August 1, 2021, Andrea shall be subject to tax. The employer shall start
deducting the withholding tax on compensation from Andrea's salaries effective the same date.
If the employer properly withheld the income tax-for the period August 1 to December 31,
Andrea need not file an income tax return. Otherwise, she shall file an adjustment return reflecting
her compensation for the same period and shall pay the tax still due or claim for refund in case of
excess withholding.
This rule applies in cases of:
a. Transfer to an employer paying salary above the minimum wage
26
 b. Transfer of employment to a region with lower statutory minimum wage
3. When an employee ceases to be a minimum wage earner during the year by
disqualification (i.e., earning taxable income) - Note that if the taxable income of the employee
does not exceed P250,000 for the year, there will be no income tax due for the period under the tax
table.
Treatment of Cost-of-living Allowance of MWES - Under RMC 23-2011, COLA which forms part
of the new wage rates prescribed to be the statutory minimum wage should be treated as part of the
minimum wage and 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 citizens or aliens. The
employer is constituted as the withholding agent.
Reproduced herein is the withholding tax table for semi-monthly compensation:
REVISED WITHHOLDING TAX TABLE
DAILY 1 2 3 4 5 6
P 685 and P 685 –P P 1,096- P 2,192 – P P 5,479 – P P 21, 918 and
Compensation Range
below 1,095 P 2,191 5,478 21, 917 above
0.00 P 82.19 P 356.16 P 1,342.47 P 6,602.74
Prescribed
+ 20% over + 25% over P + 30% over P + 32% over P + 35% over P
Withholding Tax 0.00
P685 1,096 2,192 5,479 21,918
WEEKLY 1 2 3 4 5 6
P 4,808 and P 4,808 – P P 7,692 – P P 15,385 – P P 38, 462 – P P 153,846 and
Compensation Range below above
7,691 15,384 38,461 153,845
0.00 P 576.92 P 2,500 P 9,423.08 P 46 346.15
Prescribed 0.00 + 20% over P +25% over P +30% over P +32% over +35% over P
Withholding Tax
4,808 7,692 15,385 38, 462 153,846
SEMI-MONTHLY 1 2 3 4 5 6
P 10, 417 – P
Compensation P 10,417 P16,667 – p P 33,333 – P 383,333 – P P 333,333 and
16,666
Range and below 33,332 P 83,332 333,332 above
0.00 P 1,250 P 5,416.67 P 20,416.67 P100,416.67
Prescribed
0.00 +20% over +25% over P +30% over P +32% over P +35% over P
Withholding Tax
P10,417 16,667 33,333 83,333 333,333
MONTHLY 1 2 3 4 5 6
P 20,833 P 20,833 – P 33,333 – P P 66,667-P P 167,667 – P P 666,667 and
Compensation Range
and below 33,332 66,666 166,666 666,666 above

Procedural computation of the withholding tax on compensation

1. Determine the total monetary and non-monetary compensation of the Employee for the payroll
period monthly, semi-monthly, weekly or daily. Segregate non-taxable benefits, mandatory
contributions and supplemental Compensation.
2. Determine the bracket that applies to the regular compensation of the employee for the
applicable payroll period. Determine the basic tax for the Bracket.
3. Add supplemental compensation to the excess of the regular compensation. Subject the total
to the incremental tax rate for the bracket.
4. Total the basic tax and the incremental basic tax.

27
Illustration 1: Weekly payroll period
Olongapo Company pays Employee Marudo weekly. Marudo has a weekly salary of P10,000,
before P500 mandatory contributions for SSS, PhilHealth, HDMF and Union dues and P1,000 non-
taxable benefits.
Marudo's taxable compensation shall be computed as:
Gross compensation P 10,000
Less: Mandatory contributions P 500
Non- taxable benefits 1,000 1,500
Taxable Income P 8,500

Marudo's P8,500 weekly taxable income qualifies under Column 3 under the weekly payroll
period. ABC Company shall compute the withholding tax on compensation as follows:
Tax
Regular compensation income P 8,500
Less: Base amount at Column No. 3 – weekly 7,692 P 576.92
Excess P 808
Multiply by: Incremental tax rate 25% 202.00
Total withholding tax on compensation P 778.92

The amount of compensation income that will be released to Marudo shall be:
Gross compensation P10,000.00
Less: Mandatory contributions P 500
Non-taxable benefits 1,000 1,500.00
Taxable income P 8,500.00
Less: Withholding tax on compensation 778.92
Net-payroll due to Marudo P 7,721.08

Illustration 2: ABC Company employs Mr. Penoy with a basic monthly salary of P70,000 which is
paid semi-monthly every 15'h,ancl 30th day of the month. For the second half of the month, Penoy
earned total overtime pay of P12,000. Total monthly contributions for SSS, PhilHealth, HDMF and
union dues were P2, 400. Penoy's semi-monthly regular compensation is P33,800, computed as
(P70,000- P2,400)/2. This qualifies under the semi–monthly period.
ABC Company shall compute the withholding tax on compensation as follows:
Tax
Regular compensation income P 33,800
Less: Base amount at Column No. 4 - semi-monthly 33,333 P 5,416.67
Excess P 467
Add: Supplemental compensation 12,000
Total P 12,467
Multiply by: incremental tax rate 30% 3,740.10
Total withholding tax on compensation P 9,156.77

28
The amount of semi-monthly pay that will be released to Penoy shall be:
Regular compensation P 35,000.00
Supplemental compensation 12,000.00
Total compensation P 47,000.00
Less: Mandatory deduction P 1,200.00
Non-taxable benefits 0.00 1,200.00
Taxable income P 45,800.00
Less: Withholding tax on compensation 9,156.77
Net payroll due to Penoy P 36,643.23
The procedures discussed herein are also applicable for daily or monthly payroll but of course
using their respective withholding tax table.
Year-end Tax Adjustment
It must be noted that the total amount withheld on every payroll date may not annual tax due.
Due to this, the income of the employee needs to be reckoned at the end of the Year and adjustment
is made as necessary. Any under-withholding shall be deducted on the final payroll of the employee.
An over withholding shall be refunded to the employee.
Benefits not Subject to Withholding Tax on Compensation Under RR 2-98, as amended:

1. Remunerations received-as incidents of employment

2. Remunerations paid for agricultural labor and paid entirely in products of the farm where the
labor is performed
3. Remuneration for domestic service
Note that the minimum wage for domestic workers or "Kasambahay" prescribed under Sec. 24,
Art. IV of RA 10361 or the Domestic Workers Act or Batas Kasambahay of 2013 ranges from
P1,500 to P2,500 and a month - too low compared to the tax exempt minimum wage for
commercial, industrial, or agricultural workers.
4. Remuneration for casual labor not in the course of an employer's trade or business - treated as
other income
5. Compensation for services by a citizen or resident of the Philippines for a foreign government or
an international organization
Under AMC 31-2013, this is not compensation income subject to withholding, but it is still taxable
compensation income; hence, it must be reported by the employee.
6. Damages paid by the employer to employees
7. Proceeds of life insurance
8. Amounts received by an insured employee as a return of premium
9. Compensation for injuries or sickness
10. Income exempt under treaty
11. 13th month pay and other benefits not exceeding a total of P90,000
12. GSIS, SSS, PhilHealth, and other contributions
13. Compensation income including overtime pay, holiday pay, night shift differential pay, and
hazard pay of Minimum Wage Earners
14. Compensation income of employees in the public sector if the same does not exceed those of
minimum wage earners in the nonagricultural sector
These listed benefits are not considered compensation income; hence, they are exempt from the
withholding tax on compensation

29
Deadline of Filing and Remittance of the Withholding Tax on Compensation
Employers shall file the BIR Form 1601-C (Monthly Remittance Return of Income Taxes
Withheld on Compensation) on or before the 10th day of the following month the withholding was
made except for taxes withheld for December which shall be filed/paid on or before January 15 of the
succeeding year.
Employers are also required to file BIR Form 1604-CF (Annual Information Return of Income
Taxes Withheld on Compensation and Final Withholding Taxes) on or before January 31 of the
following calendar year in which the compensation income payments and passive income payments
were made.
Employers shall furnish each employee-taxpayer a copy of BIR Form 2316 (Certificate of
Compensation Payment or Income Tax Withheld) on or before January 31 of the succeeding year.
Treatment of the Withholding Tax on Compensation
If the employee has other items of income that are subject to regular income tax such as
income from business or profession, income from other employment or casual income, he must file a
consolidated income tax return to include such items of income for the entire taxable year. The
withholding tax on compensation is credited against the total tax due in the consolidated income tax
return.
Substituted filing of tax return
Under the substituted filing system, the employer files the income tax return of the employee.
If the amount of tax is correctly withheld by the employer, the -employee no longer needs to file an
annual income tax return.

- END OF DISCUSSION -

D. STUDENT ACTIVITY –

1. Reviewer Notes. Write your REVIEWER NOTES based on

the discussions above.

2. For Finals Recitation 1 – Go to Lawphil, Chan Robles

or Supreme Court of the Philippines website. Do a
research on fringe benefit or de minimis benefits. Choose
one (1) case which was promulgated for the period January 2010 to present, and write a case
digest. Follow the format provided – FACTS, ISSUE, HELD. Must be in Word format, short
bond paper, font Arial, size 12, spacing 1.5, 1-inch margin each side. Submit in the Google
Classroom. Deadline: November 27, 2021, Sat, 11:00 PM. Also, forward a copy of your case
digests to the Class President for consolidation for email to me.

2. For Finals Project – Go to Lawphil, Chan Robles or Supreme Court of the Philippines website.
Do a research on cases related to compensation income or taxability of compensation income.
Choose two (2) cases which were promulgated for the period January 2010 to present, and write
case digests. Follow the format provided – FACTS, ISSUE, HELD. Must be in Word format, short
bond paper, font Arial, size 12, spacing 1.5, 1-inch margin each side. Submit in the Google
Classroom. Deadline: December 4, 2021, Sat, 11:00 PM. Also, forward a copy of your case digests
to the Class President for consolidation for email to me.

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