COMPENSATION INCOME

Tax 43 | Business and Income Taxation

Prepared by Atty. Melody R. Po, CPA
 FORMULA FOR DETERMINING TAXABLE
COMPENSATION INCOME

Gross compensation income xxx

Less: Non-taxable/exempt income xxx
Taxable compensation income xxx
 COMPOSITION OF TAXABLE COMPENSATION INCOME

1. Regular compensation – fixed remunerations

received by the employee every payroll period

• Basic salary
• Fixed allowances such as cost-of-living-
allowance, fixed housing allowance,
representation, transportation, and other
allowances paid to an employee every payroll
period

2. Supplemental compensation
COMPOSITION OF TAXABLE COMPENSATION INCOME
Supplemental compensation or additional compensation:
1. Overtime pay
2. Hazard pay
3. Night shift differential
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
TAX TREATMENT OF 13th month pay and Other Benefits
 13th Month Pay and Other Benefits received by officials and
employees of public or private entities not exceeding P90,000.
 13th month pay and other benefits includes:
1. 13th month pay
2. Other benefits
2.1 Christmas bonus of private employees
2.2 Cash gifts other than Christmas or anniversary gifts of private
employees
2.3 Additional compensation allowance (ACA) of government
personnel
2.4 14th month pay, 15th month pay, etc.
2.5 Other fringe benefits of rank and file employees

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

equivalent to one-month salary plus a P5,000 cash gift, while that of a private
employees is equivalent to one-month salary.
De minimis benefits
These 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.
BIR and the Department of Finance changed the rule under RR5-2011 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 P375 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.
5. Uniform and clothing allowance not exceeding P6,000 per annum
6. Actual medical assistance not exceeding P10,000 per annum.
7. Laundry allowance not exceeding P300 per month
8. Employee achievement award with an annual monetary value not exceeding
P10,000
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 not exceeding
P10,000 received by the employee under an established written plan
which does not discriminate in favour of highly paid employees.
9. Gifts given during Christmas and major anniversary celebration not
exceeding P5,000 per employee per annum
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
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: Only CBA benefits and productivity incentive amounting to

P10,000 or less is de minimis. If the amount exceeds P10,000, the entire
amount is a taxable “other benefits”.
 WHAT ARE TAXABLE DE MINIMIS
BENEFITS?

1. Excess de minimis benefits 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:

1. For rank and file employees- taxable de minimis

benefits are treated as other compensation
income under the category “13th month pay and
other benefits”
2. For managerial and supervisory employees-
taxable de minimis benefits are treated as fringe
benefits subject to final fringe benefits tax
Determination of Excess De Minimis Benefits

Example 1:
Alexander, a private employee who is paid a P600 daily rate,
received the following benefits during the year 2022:

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) 30,000
Clothing allowance 9,000
Laundry allowance 6,000

Required: Determine the taxable amount of de minimis benefits subject

to tax.
Determination of Excess De Minimis Benefits

Example 2:
Giovanni, a government rank and rile 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 subject to tax.
Determination of Excess De Minimis Benefits

Example 3:

Professor Romeo was one of the Hall of Fame awardee 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: Determine the amount to be included in other

benefits subject to tax.
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:
2.a Excess de minimis
2.b Benefits included in the de minimis list

Employee personal expenses such as, but not limited to rental or residence,
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 facts hold true even if the expense is receipted in the
name of the employer.

Taxable de minimis benefits are benefits relatively small in 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 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”.
Example 1:
An employee received 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. Which should be included as part of the
taxable compensation income of the taxpayer and
which is not?

Example 2:
The employer pays for the tuition fee of the
employee in addition to his regular compensation. How
should the tuition be treated for income taxation
purposes?
COMPUTATION OF TAXABLE
COMPENSATION INCOME
Example 1:
A government rank and file employee received the following
benefits aside from the basic pay in 2022:
Christmas bonus P 70,000
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 subject to income tax.
Example 2:
 A private rank and file employee working in a remote tower station of Snail Internet
Company received the following benefits during 2022:

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

Required: Compute the excess 13th month pay and other benefits subject to income
tax.
Example 3:
A managerial employee received the following benefits in 2022:

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

Required: Determine the taxable “13th month pay and other benefits”,
additional compensation, and the fringe benefit subject to fringe benefit
tax.
Example 4:
A government rank and file employee had the following summary of his
compensation and benefits in 2022:

Gross compensation income P 1,044,000

Less: Employee payroll deductions:
Employee contribution to GSIS, PHIC, HDMF P 80,000
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 12,000
Christmas gift 5,000
Honoraria 15,000
Total Compensation P 1,061,000

Required: Compute for the taxable compensation income.

Example 5:
A private employee derived the following remunerations and benefits in 2022:

Basic compensation, net of P32,000 SSS, PHIC, PhilHealth, HDMF

union dues, and 35,000 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

Required: Compute for the taxable compensation income

End

Sources:
• Income Taxation, 2023 Edition, Banggawan