CHAPTER 10 » 4 I •

COMPENSATION INCOME

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Chapter Overview and Objectives

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This chapter discusses the employee benefits considered as compensation income

It discusses the types of employees, and exempt and taxable benefits. It als%

delineates the gap between the compensation income subject to regular income

tax and the fringe benefits subject to fringe benefit tax. au

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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

. s l a w s 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

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· · : - "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

• • ' ¢ i

Income

• 8. Mastery of the composition o f " 1 3 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 en g a g ed in trade or

b usin e ss in the P h il ippines , the employer is d ee m e d he

t person paying

r e mune r ation in the i r beha lf.

Employee - refers to an y indi vi du al who is a re cipi e nt of wag es an d includes

officer, e mployee or elected official of the G ove rnm en t of the P hi li pp i ne s or any

political s ubdivisions, agency or instrumentality thereof. The term al so includes

an officer of a c o rp oration.
 Elements of employer and employee relationship under case law: I

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. I

3. Power of dismissal - Employer has power to retrench or terminate employees '

: when incurring heavy losses or other reasonable basis. I

4. Power of control - The employer has power to control the employee on the I

means and methods by which the work is accomplished. I

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

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employee relationship but an independent contract for the provision of services.

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The following are not considered employees: I

1. Consultants I

2. Directors without management function

3 Talents and artists on TV shows or radio broadcasts (Sonza vs. ABS-CBN

Broadcasting Corporation, G.R. No. 138051)

The income or fees of these individuals are not compensation income but are

business or professional income.

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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. I

2. Supervisory employees - Those who effectively recommend such managerial

actions if the exercise of such authority is not merely routinary or clerical in

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nature but requires the use of independent judgment. I

3. Rank and file employees - Those who hold neither managerial nor supervisory
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functions.
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TYPES OF EMPLOYEES AS TO TAXABILITY I

1. Minimum wage earners - Employees who are recipients of minimum wage.

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They are exempt from income tax on their compensation.

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2. Regular employees - Employees who are subject to the regular progressive

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income tax.
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lt must be noted that the "special alien" classification was removed into law by virtue I

of a presidential veto to the TRAIN law. The special alien under the old law must be I

treated as regular employees. I

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Minimum Wage Barner. · , . , .. • ,. ,,., · · ' ' I

A minimum wage earner refers to a worker in the private sector who is paid ta [
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. l

THE TAX MODEL ON COMPENSATION INCOME

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1 z · '
Gross compensation income P xxx,XXx I

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Less: Non-taxable compensation XXX.28XX%¥

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Taxable compensation Income R 2Xx.8RX

GROSS COMPENSATION INCOME

Gross compensation income generally includes all remunerations received under

an employer-employee relationship.

,, NON-TAXABLE COMPENSATION ' t i t

A. Mandatory deductions
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These Includes employees' mandatory contribution to GSlS, SSS, PhilHealth,

HDMF, and union dues

I « f re

· • 0B. Exempt benefits

vi t 1. Benefits excluded and/or exempted under the NIRC and special laws

2. Benefits exempt under treaty or international agreements

isgr3. Benefits necessary to the trade, business, or conduct of profession of the

uiu, . , 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

te.w o b . Exempt termination benefits o

c. Benefits from the United States Veterans Administration

• sd. 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

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f. 1 Benefits from GSIS under the GSIS Act of 1937, as amended

g. C O V I D - 1 9 b e n e fi ts to health workers under RA 11494 (BAYANIHAN 2)

a. Special Risk Allowance

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 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. 13 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 I
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 I
of de minimis even if not part of the de m i n i m i s list are normally treated as de

minimis and are aJso exempt from income tax.

However, the BIR and the Department of Finance changed the rule under RRS- I
2011, as last amended by RR 1 1 - 2 0 1 8 wherein the term "de minimis benefits" was

restricted to mean only the following:

1. Monetized unused yacation leave credits of private employees not

exceeding 10 days during the year

2. Monetized unused yacation and sick leave credits paid to government

officials and employees

3. Medical cash allowance to dependents of employees not exceeding P1,50O

per employee per semester, or P 2 5 0 per month

4. Rice subsidy not exceeding P2000 or 1 sack of 50-kg rice per month

amounting to not more than P2,000

5. Uniform and clothing allowance not exceeding P6,000 per annum (RR11­

2018)

6. Actual Medical Assistance, e.g., m e d i ca l allowance to cover medical and

healthcare needs, annual medical/executive check-up, maternity assistance,

and routine consultations not exceeding P 1 0 , 0 0 0 per a n n u m

7. Laundry allowance n o t 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 m o n e ta ry va l u e not exceeding P10,000

received by the employee under an e s ta b l i s h e d written plan which does not

• discriminate in favor of highly p a i d employees.

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 9. Gifts given during Christmas and major anniversary celebrations not

exceeding P5,000 per employee per annum (i.e., Christmas gift and
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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

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total annual monetaty value· received' from both CBA and productivity

incentive schemes combined do not exceed P 1 0 , 0 0 0 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

r • benefits." · ·
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' Taxable de minimis benefits

· {

1. Excess de minimis over their regulatory limits

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

·; minimis benefits

• Treatment of taxable de minimis benefits s

a. For rank and file employees - taxable de minimis is treated as other

·ws compensation income under the category "13 month pay and other benefits"

b. For managerial and supervisory employees -the taxable de minimis is

t treated as fringe benefit subject to final fringe benefit tax

DETERMINATION OF EXCESS DE MINIMIS BENEFITS

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Illustration 1: De minimis limits

Alexanderia, a private employee who is paid a P600 daily rate, receives the following

benefits during the year 2 0 2 1 :

Monetized unused vacation leave credits 9days

Monetized unused sick leave credits 9 days

Medical assistance • P 7,000

Rice subsidy ( P 2 , 5 0 0 per month) 30,000

Clothing allowance 9,000
• Laundry allowance 6, 0 0 0

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

 Solution: · 1
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Actual Limit Excess

Monetized unused VL, P 5,400 p p
6,000 0
Monetized unused SL 5,400 0 5,400

Medical assistance 7,000 10,000 0

Rice subsidy 30,000 24,000 6,000

C l o th i ng allowance 9,000 6,000 3,000

Laundry allowance 6,000 3,600 2,400

Taxable de m i n i m i s as "other benefits" P 16.800

Note: Private employees t

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 a n n u a l i z e d by multiplying their

monthly li m i t by 1 2 . The de m i n i m i s benefits within the l i m i ts are exempt from income tax.

Illustration 2

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

Monetized unused vacation leave credits ( 1 0 days) P 6,000

Monetized unused sick leave credits (15 days) 9,000

Uniform allowance 5,000

Laundry allowance 4,800

Required: Determine the a m o u n t to be i n c l u d e d in other benefits.

Solution:

Actual Li m i t 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 m i n i mis as "other benefits" P 1200

Note: It Is clear under R R 5 - 2 0 1 1 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 You bee 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 Pl0,000 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 d e - m i n i m i s benefits as other benefits.

Solution:

Actual Limit E x ces s .

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 ls given In kind.

2. Only meals for overtime or graveyard shifts are considered de m i n i m i s . Other meal benefits

are no longer considered de minimis.

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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 .

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Note to readers:

Many follow the practice of treating excess de-minimis benefits as part of 13

month pay and other benefits regardless of whether the employee is a managerial,

supervisory or rank and file. This treatment is based on the erroneous use of the

phrase "income tax as well as withholding tax on compensation income" in section 2

of R R S - 2 0 1 1. This inadvertence was subsequently clarified and corrected by then

Commissioner Henares as "fringe benefits tax" under RMC20-2011. It must be

clarified therefore that the excess de-minimis benefits of managerial or

supervisory employees is subject to final fringe benefits tax and is not part of 13

month pay and other benefits.

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 not in excess of P 90,000

The composition of the "13th month pay and other benefits" will be discussed later

under taxable benefits.

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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, an

international organizations in the Philippines are exempt from income tax.
 Exemption from withholding tax does not mean income tax exemption I

Foreign government embassies, diplomatic missions and international I

organizations are immune from income tax including the obligation to withhold I

income tax by virtue of international comity as embodied in several international

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agreements to which the Philippines is a signatory. ,

However, this exemption from the obligation to withhold tax does not mean
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income tax exemption of their Filipino employees. In fact, most of the
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international agreements to which the Philippines is a signatory limit exemption

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only to non-Filipino nationals and/or non-residents of the Philippines.

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Filipino employees of foreign governments, international missions, and I

organizations are taxable as a rule except only to employees of the following

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organizations:
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1. United Nations (UN) 8

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2. Specialized Agencies of the United Nations I

3, Australian Agency for International Development (AUSAID) I

· 4. Food and Agriculture Organization (FAO) I

5 World Health Organization (WHO)

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6. United Nations Development Programme (UNDP)

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7. International Organization for Migration (IOM)

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8. International Seabed Authority (ISA)

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

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Confirmation of Tax Exemptions

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The exemption of Filipino employees is not automatic. Filipinos claiming

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exemptions under the terms of international agreements or under provisions of

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special laws granting privileges to international organizations shall file an I

application for confirmation of tax exemption with the BIR's International Tax I

Affairs Division (ITAD). The confirmation shall serve as proof of exemption. I

Without the confirmation certificate, the employee is taxable.

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Employees of Philippine embassies or consulate offices I

It should be recalled that employees working in Philippine embassies or

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

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$ 4¢ ] . + l . .

Summary of rules

Foreign embassy, Philippine embassy

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missions, or organization or consulate office

In the Philippines

- Filipino citizens Taxable +

N/A
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- Aliens I Exempt N/A

Abroad . .

. Taxable
Filipino citizens - .
Exempt
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- Aliens Exempt Exempt

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i there is an exemption grant under contract or special law.

Taxpayer must prove f
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BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO, THE TRADE,

BUSINESS OR CONDUCT OF PROFESSION OF THE EMPLOYER

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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:

a. Representation and Transportation Allowance (RATA) of public officers and

employees under the General Appropriation-Act

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. ' t '

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 of

the employer's business or to ensure its smooth operations are likewise exem'

from income tax. This is referred to as the "convenience of the employer rule.

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 Examples: . . v . ' . . ',, .
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

(BIR Ruling D4-233-07)

2. Outstation allowance for employees whowill be out from office site at least 8

hours to visit lotto franchise holders for repairs and/or inspection of equipment

a ' l e a s e d by the employer (BIR Ruling No. 013-02) '

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3. Grant of housing privilege to employees working at distant or remote facilities

, e v e n if the dwelling is distanced from the facility in compliance to labor safety

5 . . . . s ta n d a r d s (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

u. camps t s

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

fl) 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

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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 represen ti n g

provision or privilege to the employee is considered a tax able fringe bene fit. These

types of expense are regarded as "hybrid expenses" because they are partially

bu siness expense and partially employee benefi ts .

COMPOSITION OF TAXABLE COMPENSATION INCOME

1 Regular compensation - This pertains to the fixed remunerations received

r' l by the employee every payroll p e r i o d .

2. Supplemental compensation - This pertains to other performance-based

• pays l
to emp oyees w ith or wi thout regard to the payroll period .
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An ad junct category to the supplemental com p ensation , 13th month pay and

other benefit, is n ecessary to contain incentive pays and all other taxable

employee benefits not classifiable as regular or supplemental compensation. 13th

m onth pay and other b e n e fits .not exceeding P9 0 , 0 0 0 is an exclusion from gross

income. The excess above P90,000 is added to supplemental compensation.

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Illustration

An employee received P400,000 regular com p e ns a ti on , P120,000 s upp l eme ntal

compensation, and P100,000 1 3 th month pay and other benefits.

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The taxable compensation Income shall be computed as follows: I

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p 400,000
Regular compensation
Supplemental compensation [P120,000 + (P100,000 - P90,00)]
130,000

Taxable compensation Income P 530.000

t ,
4 $ t

REGULAR COMPENSATION INCOME , . 2.

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.

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b. The expense is subject to, accounting or liquidation. , , ,, ,

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c. Any excess advances are returned to the employer.

Hence, variable and liquidated allowances are ndt subject to tax. However,

amounts of allowances that are retained by the employee for himself shall be

considered compensation. l

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.
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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.

2. Commissions to non-employees such as independent sales agents are business

income to the sales agent

 3, Tips and gratuities . l

·" ' T i p s and gratuities paid d i r e ctl y 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"

tw. i n 't h e income tax return of the employee.

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e , e l • I i l i f t ,

Valuation of compensation paid in kind

Compensation in ki n d is taxable at the fa i r value of the con sideration received. If

received in shares, the fair value of the shares at the date services were provided

is u sed.
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Illustration 1 '»
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The following pertains to an employee in 2 0 2 1 :

1
tt

Gross salaries p 400,000

I , • I ' %

Cost-of-living allowance 36,000

-4

Fixed monthly transportation allowance (P2Kx 12) 24,000

r I
+

Deduction for withholding tax on compensation 10,000

Deduction for employee share in SSS, PHIC, and H D M F 32,000

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The taxable compensation income shall be computed as follows: I i

Gross salaries · P 400,000 «4 f

4.

, Cost-of-living allowance 36,000

Fixed monthly transportation allowance 24,000

p 460,000
Regular compensation income
i + i LfR )

Less: Non-taxable compensation ' '

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•. Mandatory deduction 32,000

• Taxable compensation income P 428,000

t i
t 0
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Ill u s tr 2a ti o n !

An employee who was terminated in 2 0 2 1 due to business closure of the employer

received the following: t

7 + + l

P 200,000 + J i
+ Unpaid 2 0 2 1 salaries
t ,
20,000 '
Unpaid 2 0 2 0 salaries
10,000 I I

Reimbursement for transportation expenses

100,000
Termination pay \ + $€

The taxable compensation income shall be computed as follows:

t + s '
Gross compensation income (P200K + P20K + P 1 0 0 K) P 320,000

Less: Non-taxable compensation

100,000
Non-taxable benefits
P 220,000 f +

Taxable compensation income

Not.t· ·' . . ,,
·· · ·- rtatic expense is not an income to the employee.
1
· Reimbursement for transpo1 ton
 m-««a«.»s o«as·re::a::i;:z;:.:a:t.:::,5::zz:z;z;
taxable compensation because the reason of ter in a t io n .- Fol

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 ..

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8. Taxable retirement and separation pay

9. Value of living quarters or meals

10. Gains on exercise of stock o pti on s

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 inte nd ed to stimula t e sales. These may be given as a profit

sharing or performance bo n u s . Emoluments perta in 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 Jivi n g quarters or meals I n a dd i ti o n to salary for services

rendered, the value to the employee of such living quarters or meals is in cluded in

compensation income. However, when the same was fur nis h e d to an employee for the

convenience of the employe r or out of n ecess i ty of the employer's bus in ess, the value

thereof is not compe n sa ti o n in come, but a bus in ess expense.

Stock option plans

To motivate employees, employers give stock options to employees allowing them to

earn additional rewards on the app r e ci a ti o n 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.

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Types of options ;

1. Equity-settled options - entitles employees to purchase shares of stocks of th"

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 fa i r value of the stocks,

whichever is higher, less the exercise price set at grant date ls treated as follows:

a. Additional compensation income - If the employee is a rank and file

b. Fringe benefits - If the employee ls a managerial or a supervisory employee

This rule is applied regardless of the type of the o p ti o n . (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 h i m to buy 1 0 , 0 0 0 of ABC's share at a strike price of P 1 0 0 . In April

2021, Mr. Anthony exercised the option when ABC shares 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 ( P 1 5 0 x 10,000 shares) P 1,500,000 I

Less: Exercise price of option ( P 1 0 0 x 10,000) 1.000,000 I

• Compensation income (discount) P 500,000

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t Note; •
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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 I

on the exercise date. For non-listed shares, the book value per share is simply used in the
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absence of an over-the-counter (OTC) market price available.

3, The compensation income shall be reported by Anthony in his 2 0 2 1 income tax return.
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4. If Mr. Anthony Is a supervisory or managerial employee, the P500,000 shall not be treated as
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a compensation but as a fringe benefit subject to a gross-up fringe benefits tax.

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Treatment of the subsequent sale of the shares ,

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If the employer corporation is a:

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

a, through the PSE, the sale is subject to the stock transaction tax of 60% of 1 %
I

vi of the gross selling price. The tax would be computed as:

I

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

I

Multiply by: stock transaction tax rate 6 0 %. x 1 %

Stock transaction tax P 10,800 I

The tax will be withheld by the broker who effected the sale. The gain from I

the sale of the stocks would not be subject to income tax.

I

b. directly to buyer, the net gain on the sale is subject to the 1 5 % capital gains I

i s · tax. The tax shall be computed as follows:

I

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

I

Less: Tax basis of shares sold 1,500,000

P 300,000
I

Capital gains
 . .
Capital gains p · 300,000
, ,
Multiply by: CGT tax rate '
' .
15%

Capital gains tax P 45,000

4 +

I I

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.
t + • t

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

J I' > ! t l r
Less: Tax basis of shares sold 1,500,000 4

Capital gains 300,000

l rail,
Multiply by: Holding period rate (>1 year) · ·%
50%

Capital gain subject to regular tax

4 ts
f

°
P 150,000
I •
,,
' t ,

+ t f f

The rules on deal ings in other capital assets will be d i s c u s s e d in Chapter 1 2 .

f' #

Illustration - cash-settled option

Mr . Anthony, a supe rvi sor , received a cash - se ttl ed stock option from his employer,

ABC, Inc., entitling him to receive the increase in the company's closing share price on

exe rcise date over the strike pr ice of P100 / sh ar e covering 10 , 000 ABC shares. On

March 23, 2021, Mr. Anthony exercised the option . AB C s h a re s traded P156/share

high, P146/share low and closed P150/share at the Philippine Stock Exchange. The

volume weighted average traded price was P 148 / sha r e . ABC shares had a book value

of P153/share in the latest published financial statements. ,

] +

Based on th e ABC, Inc.'s option plan, Mr. Anthony shall receive cash instead of stocks

amounting to: 1

I », )
I
•

Fair v alue of stocks ( P 150 x 10,000 shares) p 1,5 00 , 0 00

! '
+l d
Less: Exercise price of o p tion ( P 100 x 10,000) 1,000,000

Cash (Fringe benefit subject to final tax) P 5 00,0 0 0

'
« I

What if the option is an equity-settled option?

If the o pti on would have been an equity - settled o pti on, Mr. Anthony shall receive the

following number of AB C shares pursuant to the terms op ti on plan:

e

Fair value of stocks ( P 1 5 0 x 1 0 , 0 0 0 shares) p 1,500,000

¥

Less: Exer ci se p rice of o pti on ( P 1 0 0 x 10 , 000) 1 , 0 0 0, 0 0 0

Increase in value of stocks covered by the op ti on p 500,000

Divide by: Exercise day closing p rice 1 150 t

Number of shares 3,333.33

Under the regulations, the fair v alue of listed stocks is the simple average of high and

low, computed as (P156 + P146)/2 = P151/share. Pursuant to RM 79-2014, the

fringe benefits would be valued based on the P153/share higher book value a°

follows:
 t.
4 5

' "

Number of shares
3,333.33
Multiply by:
153
Stocks (Fringe benefit subject to final tax) p 510,000
t . l
. , .
.
.
.

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.

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 "13 month pay and other benefits".

Under the revision of RA 10653, productivity incentive is now a de minimis

• • I

benefit

Productivity incentive distinguished from profit sharing bonus

Productivity incentive is anchored on improvements in the factors of p rodu cti on

and is usually enjoyed collectively by employees due to the i nherent di ffi cu lty of

tracing productivity to ind i vidual p erfor m ance . It is b a se d upon cost savings;

hence, it is payable even if the b usiness poses a loss. Pro fi t 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. C h ristm a s bonus of private employees

b. Cash gifts other than Christmas or anniversary gifts of private em p loyee s

(RR2-98, as amended by RR5-2011)

 • • :I

Ch
apter 10 - Compensation Income + . ' [

c Additional compensation allowance (ACA) of government personne

(RR8-2000) , l

d. 14 month pay, 15 month pay, etc. . ' t

e. Other fringe benefits of rank and file employees l

+ ' , i

1 3 thmonth pay : · ' @ w v · ° · " , . ,

a. The 13th month pay of government employees consists of a Christmas bonus

equivalent to one-month salary plus a P5,000 cash gift. (RA6686 as amended

I

by RA 8441) a n s + ·' ' •

% . #1au month pay of private employees is equivalent to one-month salary

j

(Pt
D851) . i. . i s . % s a » , r ! •

Christmas bonus and Christmas gift - ' . t i ·

The Christmas bonus of government employees is their 13th month pay. In private

companies, the term "Christmas bonus" may pertain to the 1 3 th 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 a "other

benefits." The nature of the Christmas bonus of private employees shall determine

its tax classification. e 7 ' '

The Christmas gift of government employees is specifically designated as part of

"13th month pay and other benefit" under Sec. 32(B)(7)(e)() of the NIRC. RR5­

2011 includes Christmas gift in the list of de minimis benefits. But since revenue

regulations cannot amend the law they implement, RR 5 - 2 0 1 1 should be

interpreted to apply only to Christmas gifts of private employees.

Hence,
4 . ' +ss i 1! > « $ q
I i

• Government Private

employees employees

Christmas bonus 13th month pay 1 3 th month pay

and other benefits and other benefits

Christmas gift 1 3 th month pay De minimis

and other 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 pa

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 d

b. Benefits not included in the de minimis list

f
(
r

Employee personal expenses

Employee personal expenses such as, but not limited to. rental of residence,
j

grocery, association or club membership dues, travel 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 minim is benefits 1

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 "13 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. ! J
. ,

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 "13 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 i ,

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

.'. . 3l i, uired to study to acquire expertise for the future use of the
e m pl o y e e 1s req

employer's business ' .

Illustration2 ± . .
· . onthly rice allowance of P 3 , 0 0 0 a month which is P1,000 in
An e m plIo y e e receives a m ,, , ill
I % th de minimis limit for rice al lo w a n c e .
excess of the P2,000 a mon
 The P1,000 monthly excess constitutes a taxable de minimis benefit taxable as

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

RR2-98 provides that 13th month pay and other benefits are exempt from

withholding on compensation provided they do not exceed P90,000. It follows

therefore, that the excess above P90,000 is subject to the withholding tax on

compensation. j

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.

tj

Illustration 1 j

A government rank and file employee received the following benefits aside from the �

basic pay in 2 o 2 1. [

Christmas bonus P 70,000 1'

Cash gift 5,000

Additional compensation allowance 36,000

1
Personnel Economic Relief Allowance (P2,000/month) 24,000 1·

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

Total 13th month pay and other benefits P 112,000

Less: Exclusion Threshold · 9 0, 0 0 0

Taxable 1 3 th month pay and other benefits P 22.000

1

Note on government employees:

, ; 1. Personnel Economic Relief Allowance is not subject to income tax and withholding tax

(Under RR8-2000, as affirmed by RRl0-2008).

2. The PS,000 Christmas gift of government employees is designated by the NIRC to be part of

" 1 3 th month pay and other b e n e fi ts " ; hence, it is not a de minimis b e n e fi t.

3. Under RR 5 - 2 0 1 1 , the m o n e ti za ti o n of vacation leave and sick leave credits of governmen'

offic ials 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 2 0 2 1 :

I

13th month pay P 72,000

Performance bonus t + » , I er 15,000
I

Christmas gift 1
30,000
l
Danger exposure allowance (hazard pay) 6,000

Housing privilege 38,000

I

Uniform and clothing allowance 8,000 J

Laundry allowance 6,000 I

The housing privilege pertains to the annual value of the employees' living quarters I

furnished by the employer to employees for staying on-site.

I

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

Solution:
f f < e
d
De Other
I

minimis Limit Benefits

Christmas gift P 30,000 P 5,000 P 25,000 I

Uniform and clothing allowance 8,000 6,000 2,000

2,400
I

Laundry a lowance '

6,000 3,600

Excess de m i n i m i s benefits (other fringe benefits) P 29,400

•
1 ll
13th month pay • • 72,000

Total 1 3 th month pay and other benefits P 101 ,400

Less: Exclusion threshold 9 0 ,0 0 0 "

Taxable 1 3 th month pay and other benefits P 1 1 ,400

N o t e : Private employees I

1. Performance bonus is a supplemental or additional compensation. J

2. The laundry allowance limit is computed as P 3 0 0 x 1 2 = P3,600.

3. Christmas gift is a de m i n i m i s benefit for private employees under RRS-2011. I

4. The housing privilege is exempt under the convenience of the employer rule.

5. The "1 3 th month pay and other benefits" of rank and file employees includes "other fringe I

benefits." [

Illustration3
A managerial employee received the following benefits in 2 0 2 1 :

13th month pay P 95,000 l

Rental expense on c o n d o m i n i u m u n i t 1 8, 0 0 0

Salary of personal body guard 12,000

Profit sharing 12,000 ]

Rice allowanc 32,400

ce 7 000
Clothing allowance '

Night shift differential pay 11,000

 Required: Determine the taxable " 1 3 th month pay and other benefits," additions

compensation, and the fringe benefit subject to fringe benefit tax,

» · j ! ' , Dy t ' r t r
' , • t ' 4 . 8 ¥ i

Solution:
Other »
De

minimis Limit _Benefits t '

. '
P 32,400 P 24,000 P 8,400 ·
Rice allowance
• 7000 6,000 1,000
Clothing allowance
P 9,400
Excess de minimis
¢
1,
Other fringe benefits:
18,000
Rent of residence paid by employer
1 2, 0 00
• Salary of personal body guard , , . '

Total fringe benefit subject to fringe benefit tax P 39,400

I t &+ Mr. T i

t
Profit sharing "» ·: i s "
• «a P.12,000 • f

Night shift differential pay 11,000

.{

Total supplemental compensation P 23,000

. .

. , «; • • • ' . ,

T o tal 13 month pay and other benefits P 95,000

Less: Exclusion threshold • 90,000

• 1 .

Taxable 13th month pay and other benefits P 5000

i · ' i ' rt +

INTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME

¢

Integrative Illustration 1

A government rank and file employee had the following summary of his compensation

and benefits in 2 0 2 1 :

4 f

Gross compensation income ' P 1,044,000

· '

Less: Employee payroll deductions

.1 . ,

Employee contribution to GSIS, PHIC; HDMF P 80,000

·3°. Employee deduction for withholding tax 64,000 144,000

Net regular payroll P 900,000

Representation and Transportation Allowance 18,000

.
Personnel Economic Relief Allowance + · , , ,, , 24,000

Christmas bonus 87,000

Uniform allowance
I • !rt tt
12,000

Christmas gift s .
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 P 80,000 - '

Regular compensation (P1,044,000 - P80,000) p 964,000

Supplemental compensation

Honoraria 15,000

RATA 18,000
.
PERA « 24,000 ' 4

Total p O,P 979,000

1 3 t h_ m o n t h pay and other benefits:

•

Christmas bonus P 87,000

Christmas gift 5,000

Excess De minimis:

Uniform allowance P 1 2, 0 0 0 P 6,000 6,000

Total P 12,000 P 48,000 P 98,000 I •

Exclusion threshold (up to P90,000) 9 0, 0 0 0 4 - 9 0 , 0 0 0

Total P138000 P 8,000

Total non-taxable compensation P 2 1 8, 0 0 0

Taxable excess 13th month pay and other benefits - 8, 0 0 0 -

8,000

Taxable compensation income P 987,000

Note:

1. The taxable regular compensation income is computed as (Pl,044,000 - PS0,000).

2. The excess of the P90,000 threshold over the actual 13 month pay and other benefits is

non-deductible to other items of compensation income. (RR3-2015)

Presentation in the Income Tax Return of the employee:

• I

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

Less: Non-taxable compensation income

p 80,000
Mandatory deductions

Exempt benefits 138,000 2 1 8, 0 0 0

Taxable compensation income P 987.000

Integrative Illustration 2

A private employee derived the following remunerations and benefits in 2 0 2 1 :

Basic compensation, net of P 3 2 , 0 0 0 SSS, PHIC, PhilHealth,

p 533,000
HDMF, union dues, and P 3 5 , 0 0 0 withholding tax
21,000
Overtime pay

Vacation expenses of the employee paid by employer 24,000

12,000
Cost-of-living allowance (COLA)
16,000
Pre-computed daily transportation allowance
31,200
Rice subsidy ( 1 2 cavans worth P 2 , 6 0 0 each)
50,000
13th month pay
18,000
Monetized unused leave credit ( 1 0 VL and 8 SL)
9,000
Uniform allowance
p 714,200
Total compensation income
 The non-taxable compensation income and the gross taxable compensation income

shall be computed as follows: ,

For a rank and fle 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 P 0 P 601,000

13th month pay and other benefits:

1 3 th month pay P 50,000

Other benefits:

Vacation expense paid by employer 24,000

Excess de minimls benefits:

Rice subsidy P 31,200 24,000 7,2O0

Monetized VL 10,000 10,000 I"'

Monetized SL 8,000 8,000

Uniform allowance 9,000 6,000 3000

Total P 58200 P 56,000 P 92,200 P 601,000

Exclusion threshold 90,000 + - 9 0 0 00

Total I ,
P 14 6. 0 00 P 2,200

Total non-taxable compensation PR 1 7 8, 0 0 0

Taxable 1 3 th 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 that

the withholding tax is not an exclusion from gross income.

2. The limit of the monetized unused VL is computed as P18,000 x 10/18 = P10,000. The SL

pay is computed as PlS,000 x 8 / 1 8 = P8,000. f

3. The vacation expense shouldered by the employer is a fringe benefit forming part 0

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

·P714,200 net pay + (P32,000 + P35,000) payroll deductions

i +
Income Tax Due
The income tax due of the employee would be computed as follows:

1ax
Taxable income P 603,200

+ »Less: Lower limit of applicable bracket 400.000 P 30,000

4

j Excess ' P 203,200

j Multiply by: incremental tax rate 25% .50.800

; Income tax due P 80 . 80 0
I

; Over Buut N lot Over Basic Tax Of excess over

' 250,000.00 400,000.00 250,000.00

l
i- -. i00, 000. r.00
u 9

Hr
?"""
FE:::"._""w
r"__4
800,000.00 • 1 10.00 130,000 30% 800.000.00

Note: Check the complete Individual Income Tax Table in Chapter 7 or in the Appendix.

For a managerial or supervisory employee:

De Non- Other Taxable

Minimis Taxable. Benefits Benefits

Regular and supplementary compensation:

Mandatory deductions P 32000

Regular compensation P 568,000

Supplemental compensation

Overtime pay 21,000

12,000
COLA
4
Daily transportation allowance 16,000 . . .

P 601,000
Total

13th month pay and other benefits

13th month pay P 50,000

Exclusion threshold (up to P90,000) 5 0, 000 - 5 0.0 00

Total P 66,000 P 0

Qt 0
Excess 13th month pay & other benefit

Taxable compensation income R 601.000

Ocher fringe benefits

P 24,000
Vacation expense paid by employer

Excess de minimis benefits

Rice subsidy P 3 1 ,2 0 0 24,000 P 7,200

Monetized unused VL 10,000 10,000

Monetized SL 8,000 0 8,000

Uniform allowance 9000 6.000 . 3.000 V

Toal R .58 .200 P 1 06. 000 P 18.200

Total non-taxable compensation R L 8.

hue s de minimis benefits - 18.200 1 8. 2 00

Tout fringe benefits subject to final tax R .1.00

 The gross compensation income is computed as follows:
I

Total remunerations and benefits p 781,200

Less: Fringe benefit subject to final tax 42,200 I

Gross compensation income P 739,000

' i ; F · , I

Presentation in the Income Tax Return of the employee:

I

Gross compensation income P 739,000

I

Less: Non-taxable compensation income

Mandatory deductions P 32,000

I

Exempt benefits ? 106,000 1 38,0 00

Taxable compensation income P. 6 0 1.0 0 0 I

Income Tax Due I

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

I

Tax

Taxable income • P 601,000 I

+ »Less: Lower limit of applicable bracket 400,000 P 30,000

Excess T P 201,000 I

Multiply by: incremental tax rate 25% 50,250

I

Income tax due P 80,250

Over But Not Over Basic Tax Plus% Of excess over

I

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

, __
4 400,000.00 800,000.00 30,000 ! 25% 400,000.00
'» I

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

The fringe benefits tax on managerial or supervisory employees '

The fringe benefits of manageriaJ or supervisory employees is subject to a grossed-up

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

Taxable fringe benefits p 42,200

Divide by: Gross-up by rate 65%

I

Grossed-up monetary value p 64,923

I

Multiply by: Tax rate 35% I

Fringe benefits tax P 22.723

The fringe benefits tax is a finaJ tax which be paid by the employer to the government I

It is presumed withheld out of the fringe benefits of the managerial or s u p e rvi s o r¥ [

employee. The detailed rules on fringe benefit taxation will be discussed in t'
following chapter. It is merely shown here for you to obtain preliminaY

understanding. J

TAXABILITY OF MINIMUM WAGE EARNERS (MWE)

I

Minimum wage earners are exempt from income tax on the following:

1. Basic minimum wage I

2. Other benefits (HHON)

I

a. Holiday pay

rr I
 b. Hazard pay : · ·

c. Overtime pay

d. Night s h i ft differential pay

These shall be presented as exempt benefits under non-taxable compensation

income. Since exempt from income tax, the exempt benefits of MWEs shall not be

subject to withholding tax.

Illustration

Ms. Guevarra, a minimum wage earner employed by CSO Company, derived the

following benefits during the year:

Basic minimum wage P 124,000

13 month pay 11,000

+

I I

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, H D M F 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 s ti ll 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.

r· ]
 Illustration 1: With other taxable compensation income

Mary Dela Fuente, a minimum wage employee, was able to close a sales deal for %,

employer during the year. She received the following compensation during the year:

Basic minimum wage, net of

P8,00O mandatory deductions P 160,800

13 month pay 14,000
Holiday pay 4,000

Overtime pay 70,000

Night shift differential pay 15,000

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 (ie, P 655,800 + P 8,000) P

Less: Non-taxable compensation income

Mandatory deductions P 8,000

Exempt benefits 273.800 281.800

Taxable compensation income
E 382.000

Exempt benefits consist of the following:

'

Basic minimum wage P 160,800

13 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
R 273800
: F J4
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 p 0

2
250.000
Excess p
132,000
Multiply by:
20% 26,400
· Total tax due
P 26,400
' '

Illustration 2: With business income i»

Jun, a minimum wage employee, do part-time business after work. He received total

minimum wage of P290,000 inclusive of P 1 1 , 0 0 0 13 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

·a Exempt benefits
290,000 - 295,000

Taxable compensation income . .

' .. P 20,000

Net income from business 300,000

+
Taxable income P 3 2 0, 0 00
, w g

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 .

tt , .

Illustration 1

Anth ony h ad a basic pay of P4 00 /d a y wh en the min imum wag e wa s P382/d a y. H e

is al so r eceiving o v e rti me pay a nd the ye ar-end 1 3 th mo nth pay. O n 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

P4 04/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

36 +on compensation from his salary but shall stop withholding by June 30. Anthony's

·+i +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 s a l a ry 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 mini m um wage earner. Sh e w as p r omo t e d and w as given a salary

, · : raise above the m inim u m wage starting August 1, 2 0 2 1 .

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 forthe 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.

Ii t i t '
I ' , '

This rule applies in cases of:

a. Transfer to an employer paying salary above the minimum wage

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) : T

' } t r g

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.
1 I

', • i '

Treatment of Cost-of-living Allowance of MWEs

Under R M C 2 3 - 2 0 1 1 , 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

4 « t +

Reproduced herein is the withholding tax table for semi-monthly compensation:

+ 4+ l

REVISED WITHHOLDING TAX TABLE

DAILY
I
1
II
2
II
3
II
4
II
5
II
6
J
P 685 and P 68 5 - P P 1,096­ P 21,918 and
P 2,192-P P5,479-P
Compensation Range
below 1,095 P2,191 above
5,478 21,917

Prescribed

Withholding Tax
t
G .. oo
+ 2 0% over
P82.19

+ 2 5 % over P
P 356.16

+ 30% over P
P 1,342.47

+ 3 2 % over P
P 6,602.74

+ 35%over P

21,918
P685 1,096 2,192 5,479

1 2 6
WEEKLY 3 4 5 '
I II II II I
II

P 153,846 and '

P 4,808 and P 4 , 8 08 - P P 7,692-P P 1 5 , 3 85 - P P 38,462-P
Compensation Range
above
below 7,691 15,384 38,461 153,845 -
p 46,346.15
0.00 P 576.92 P 2,500.0 P 9 , 4 2 3 . 08
i
Prescribed
+ 35%over"
0.00 + 2 0% over P + 25% over P + 30% over P + 32% over
Withholding Tax
153,846_
4,808 7,692 15, 385 38,462

6 _,
M-MONTHLY 1 2 3 4 s
I II I
- II II
�-

P 10,417 and P 10,417-P P 1 6 , 667 - P P 33,333­ P 3 83 , 3 3 3 . P

P 333,333 0"
Compensation flange
above
below 16,666 33,332 P83,332 333,332
 . 'J

REVISED WITHHOLDING TAX TABLE

0.00 P 1,250 P 5,416.67 P 20,416.67 P 100,416.67

Prescribed

withholding Tax
+20% over + 25% over P + 30% over P + 32% over P + 35% over P

•
P10,417 16,667 33,333 83,333 333,333

[MONTHLY 1 2 3 4 5 6
It
II II II II II I

P 20,833 and P 20,833-P P 33,333-P P 66,667-P P 166,667-P P 666,667 and

Compensation Range
below 33,332 66,666 I 166,666 666,666 above

+ 0.00 P 2,500.00 P 10,833.33 P40,833.33 P 200,833.33

Prescribed
+ 20% over P + 25% over P + 30% over P + 32%over P + 35% over P
Withholding Tax
20,833 33,333 66,667 166,667 666,667

=
Procedural computation of the withholding tax on compensation
•
I,

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

0 ' r , l
·' 1
compensation. 1

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.
l

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 t ax . « ,

Illustration 1: Weekly payroll period

• T t t 1 ) l

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 P l , 0 0 0 non-taxable benefits.

t j i t l i t

Marudo's taxable compensation shall be computed as:

{ I I, I 1

Gross compensation P 10,000 ( t

'

Less: Mandatory contributions

p
500

Non-taxable benefits ( • I 1,000 r 1,500

Taxable income P 8.,500

" % '

\ I
'

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:

t i
I
I Tax
' t r ' • ·» '
p 8,500
Regular compensation income e '
•

7, 6 9 2
p 5 7 6. 9 2
Less: Base amount at Column No. 3 - weekly

Excess P 808
• 25% 202.00
Multiply by: Incremental tax rate •1 ' . . I

p
Total withholding tax on compensation I
778.92
'
t «
' +

• , ' , t
 The amount of compensation income that will be released to Marudo shall be:
t

Gross compensation P 10,000.00

f

.'
4

Less: Mandatory contributions P 500

Non-taxable benefits 1.000 1.500.00

p 8,500.00
Taxable income
d
,A

Less: Withholding tax on compensation 278.92

Net payroll due to Marudo E 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 and 30 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 P2,40O. • ,

Penoy's semi-monthly regular compensation is P33,800, computed as (P70,000­

P2,400)/2. This qualifies under Column 4 under the semi-monthly payroll period. ABC

Company shall compute the withholding tax on compensation as follows:

, '

Tax
p 33,800
Regular compensation income
p 5,416.67
Less: Base amount at Column No. 4 - semi-monthly 33.333

Excess P 467

Add: Supplemental compensation 12,000

p 12,467
Total t - l
'
Multiply by: Incremental tax rate 30% 3,740.10
p 9,156.77
Total withholding tax on compensation g

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 , 1 5 6, 7 7

Net payroll due to Penoy ' P 36,643.23

The procedures discussed herein are also applicable for daily or monthly payroll

periods 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 no"

exactly match the annual tax due. Due to this, the income of the employee nee

to be reckoned at the end of the year and adjustment is made as necessary. B

 under-withholding shall be deducted on the final payroll of the employee. An over­

withholding shall be refunded to the employee.

t d
t
'

BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION UNDER

RR2-98, AS AMENDED:

1, Remunerations received as incidents of employment

2. Remuneration paid for agricultural labor and paid entirely in products of the

farm where the labor is performed

,3. Remuneration for domestic services " a1 »

Note that the minimum wage for domestic workers or "kasambahay" prescribed under

Sec. 24, Art IV of RA 1 0 3 6 1 or the Domestic Workers Act or Batas Kasambahay of

2013 ranges from P1,500 to P2,S00 a month - too low compared to the tax exempt

m i n i m u m 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 RMC 3 1 - 2 0 1 3 , 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

1 1. 1 3 th 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 non-agricultural sector

These listed benefits are not considered compensation income; hence, they are

exempt from the withholding tax on compensation.

DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON

COMPENSATION
Employers shall file the BIR Form 1 6 0 1 - C (Monthly Remittance Return of Income

Taxes Withheld on Compensation) on or before the 10 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.

363
 on 0me

Employers are also required to fle BIR Fo r m 1604-CF (Annual Information Retum
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.

Penalties for Non-compliance
Employers are subject to the same penalties discussed in Chapter 4 for non­

compliance of withholding tax requirements.

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.