CHAPTER 10 – COMPENSATION INCOME
public sector with
Elements of employer and employee
relationship under case law:
1. Selection and There is a screening
engagement of process for employees
employees to hire.
The employer usually
2. Payment of wages fixes and controls the
payment of wages.
Employer has power to
retrench or terminate
employees when
3. Power of dismissal
incurring heavy losses
or other reasonable
basis.
The employer has
power to control the
employee on the means
4. Power of control
and methods by which
the work is
accomplished.
TYPES OF EMPLOYEES AS TO FUNCTION
Those who are given
powers or prerogatives
to lay down and execute
1. Managerial managerial policies
employees and/or to hire, transfer,
suspend, layoff, recall,
discharge, assign or
discipline employees.
Those who effectively
recommend such
managerial actions if the
exercise of such
2. Supervisory
authority is not merely
employees
routinary or clerical in
nature but requires the
use of independent
judgement.
Those who hold neither
3. Rank and file
managerial nor
employees
supervisory functions.
TYPES OF EMPLOYEES AS TO TAXABILITY
Employees who are
recipients of minimum
1. Minimum wage
wage. They are exempt
earners
from income tax on their
compensation.
Employees who are
2. Regular employees subject to the regular
progressive income tax.
Minimum wage earner Refers to a worker in the
private sector who is
paid the minimum wage
or to an employee in the
compensation income of
not more than the
statutory minimum wage
in the non-agricultural
sector where he or she s
assigned.
Exempt benefits:
1. Remunerations
received as incidents of
employment
a. exempt retirement
benefits
b. exempt termination
benefits
c. benefits from the US
Veterans Administration
d. social security,
retirement gratuities,
pensions, and similar
benefits from foreign
gov’t agencies and other
institutions, private or
1. Benefits excluded
public
and/or exempted under
e. benefits from SSS
the NIRC and special
f. benefits from GSIS
laws
g. COVID-19 benefits
- Special Risk Allow.
- Actual Hazard Duty
Pay
- 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
Employee benefits of
non-Filipino nationals
and/or non-permanent
residents of the
2. Benefits exempt Philippines from foreign
under treaty or governments,
international embassies or diplomatic
agreements missions, and
international
organizations in the
Philippines are exempt
from income tax.
Benefits or allowances
furnished by the
employer to the
3. Benefits necessary to
employees to enable
the trade, business, or
them to appropriately
conduct of profession of
and effectively execute
the employer
their duties as required
by their employment and
exempt from income tax.
4. Benefits for the Benefits or allowances
convenience or which are intended for
advantage of the the furtherance of the
employer interest of the
employer’s business or
 to ensure its smooth - includes performance-
operations are likewise based remunerations to
Supplementary
exempt from income tax. an employee in addition
Compensation
to the regular
compensation with or
TAX MODEL ON COMPENSATION INCOME without regard to the
Gross compensation income P xxx,xxx payroll period.
Less: Non-taxable compensation xxx,xxx__ 1. Overtime pay
Taxable compensation income P xxx,xxx 2. Hazard pay Constitute additional
3. Night shift differential compensation, except
pay when derived by MWE
DE MINIMIS BENEFITS 4. Holiday pay
1. Monetized unused Incentives intended to
Not exceeding 10 days
vacation leave credits of 5. Commissions stimulate sales. May be
during the year
private employees given as a profit sharing
2. Monetized unused or performance bonus.
vacation and sick leave 6. Fees, including director’s fees
credits paid to Full Pertain to any pay in
government officials and general, additional
7. Emoluments and
employees payments for attending
honoraria
3. Medical cash Not exceeding P1,500 to special tasks or
allowance to per employee per assignments.
dependents of semester, or P250 per 8. Taxable retirement and separation pay
employees month When employee
Not exceeding P2,000 receives free living
or 1 sack of 50-kg rice quarters or meals in
4. Rice subsidy
per month amounting to addition to salary for
not more than P2,000 services rendered, the
Not exceeding P6,000 value to the employee of
5. Uniform and clothing
per year, P500 per such living quarters or
allowance
month meals is included in
Not exceeding P10,000 9. Value of living compensation income.
6. Actual Medical quarters or meals When furnished to an
per year, P2,500 per
Assistance
quarter employee for the
Not exceeding P300 per convenience of the
7. Laundry allowance employer or out of
month
8. Employee Not exceeding P10,000 necessity of the
achievement award annual monetary value employer’s business,
9. Gifts given during the value thereof is not
Not exceeding P5,000 compensation income,
Christmas and major
per employee per year but a business expense.
anniversary celebrations
10. Daily meal Not exceeding 25% of The excess of the book
allowance for overtime the basic minimum value or fair value of the
work and night or wage on a per region stocks, whichever is
graveyard shift basis higher, less the exercise
11. Benefits received by price set at grand date is
an employee by virtue of 10. Gains on exercise of treated as follows:
Do not exceed P10,000 stock options a. Additional
a collective bargaining
per employee per compensation income –
agreement and
taxable year rank and file employees
productivity incentive
schemes b. Fringe benefits –
managerial or
supervisory employees
Includes fixed 11. Profit sharing and taxable bonuses
remunerations due to be
received by an
employee every period 13TH MONTH PAY AND OTHER BENEFITS
such as: a. for government
1. Basic salary employees consists of a
2. Fixed allowances Christmas bonus
Regular Compensation equivalent to one-month
(cost-of-living allowance,
fixed housing allowance, 1. 13th month pay salary plus a P5,000
representation, cash gift.
transportation, and other b. for private employees
allowances paid to an is consist to one-month
employee every payroll salary
period) 2. Other benefits
 Government & private
employees:
a. Christmas bonus
13th month pay and
other benefits
Government employees:
13th month pay and
b. Cash gifts other benefits
Private employees:
De minimis
c. additional compensation allowance of
government personnel
d. 14th month pay, 15th month pay, etc.
1. Employee personal
expenses shouldered by
the employer
e. Other fringe benefits
2. Taxable de minimis
of rank and file
benefits such as:
employees
a. Excess de minimis
b. Benefits not included
in the de minimis list

Tax treatment of Other Fringe Benefits

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

TAX TREATMENT OF 13TH MONTH PAY AND

OTHER BENEFITS
The excess above
P90,000 is subject to the
RR2-98 provides that withholding tax on
13 month pay and
th
compensation.
other benefits are The excess of “13th
exempt from withholding month and other
on compensation benefits” over P90,000
provided that they do should be treated as
not exceed P90,000. compensation income
subject to regular
income tax.