Summary Notes on Compensation Income

Employer-Employee Relationship
perfoms any service of
" Employer - refers to any person for whom an individual
whatever nature as employee of such person.
remuneration
has control over the payment of the employee
is
However, if such person is an NRA-NETB in the Philippines, the employer
deemed the person paying remuneration on their behalf.
and includes officer.
Employee - refers to any individual who is a recipient of wages
employee, or elected official of the Government of the Philippines or any political
officer of a
subdivisions,agency, or instrumentality thereof. The term also includes an
corporation.

Elements of Employer-Employee Relationship Under Case Law

1. Selection and engagement of employees
2. Payment of wages (employer)
3. Power of dismissal (employer)
4. Power of control (employer)
employer-employee
An arangement which does not manifest all the elements is not an
relationship but an independent contract for the provision of services.

Types of Employees as to Function

1. Managerial employees
2. Supervisory employees
3. Rank-and-file employees

Types of Employees as to Taxability

1. Minimum wage eamers Employees who are recipients of minimum wage. They are
exempt from income tax on compensation.
progressive income tax.
2. Regular employees are those who are subject to the regular

Minimum Wage Earner

a worker in the private sector who is paid the minimum wage
income of not more than the
an employee in the public sector with compensation
statutory minimum wage

Tax Model on Compensation Income

Gross compensation income XX

Less: Non-taxable compensation income

Taxable compensation income XX

Gross compensation income - generally includes all remuneration received under an

employer
employee relationship.
Non-taxable compensation
a. Mandatory deductions employees' mandatory contribution to GSIS, SSS, PhilHealth,
HDME, and union dues.
b. Exenpt benefits Benefits that are:
excluded/exempted under the NIRC and special laws
exempt under treaty or international agreements
necessary to trade, business, or conduct of profession of the employer (necessity
of the employer rule)
for the convenience or advantage of the employer (convenience of the employer
rule)

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 goverment officials and employees
b. Exempt ternination benefits
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

2. 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/her employees.
" RR5- 2011
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
1,500/semester per employee, or 250 per mnonth
4. Rice subsidy not exceeding 2000 or 1sack of 50 kg rice/month not exceeding
2000
5. Uniform and clothing allowance not exceeding 6,000/annum
6 Actual mnedical assistance not exceeding 10,000/annum
7. Laundry allowance not exceeding 300/month
 8. Employee achievement reward - must be form of tangible personal property
not exceeding 10,000/anum, under an established written plan, does not
discriminate in favor of highly paid employees
9. Gifts given during Christmas and major anniversary celebrations not exceeding
5,000/annum per employee
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 10,000 per employee taxable year
Note: if the amount exceeds 10,000, 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

1. For rank-and-file employees treated as other compensation income under the category
"13th-month pay and other benefits"
2. For managerial and supervisory employees - treated as fringe benefits subject to final
fringe benefit tax
Commutation of accumulated leave credits (teminal leave pay) 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 no longer accepted as part of exempt
termination benefits.
3. 13th-month pay and other benefits not in excess of 90,000
4. Certain benefits of minimum wage earners

Benefits exempt under treaty or international agreements

Benefits required by the nature of, or necessary to, the trade, business, or conduct of
profession of the employer (Necessity of the Employer Rule)
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.
 trade, business, or profession of the
These are not income but are expenses of the
employer that are incured or paid through the employee.

(Convenience of the Employer

Benefits for the convenience or advantage of the employer
Rule) furtherance of the interest of the
" Benefits or allowances which are intended for the
are likewise exempt from income
employer's business are to ensure its smooth operations
tax

expenses and are not

These types of employer spending are regarded as business personal consumption
considered as employee rewards because they are not intended for the free
business to ensure the
or disposal of the employees but as implements of the employer's
employer 's convenience.

Compositions of Taxable Compensation Income

1. Regular compensation -remuneration received by the employee payroll period with or
2. Supplemental compensation - other perfomance-based pays to employees
without regard to the payroll period.
13th-month pay and other benefits incentive pays and all other taxable employee
benefits not classifiable as regular or supplemental. Exchusion is up to 90,000, and excess
is added to supplemental compensation.

Regular Compensation Income - fixed renmunerations

1. Basic salary
2. Fixed allowances such as cost of living allowance (COLA), fixed housing allowance,
representation, transportation, and other allowances paid to an employee every payroll
period.
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.
" Compensation in kind is taxable at the fair value of the consideration received.

Supplementary Compensation - additional compensation

1. Overtime pay
2. Hazard pay
3. Night shift differential pay
4. Holiday pay
5. Commissions
 6. Fees, including director's fees - if 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 ring and taxable bonuses
13th Month Pay and Other Benefits include:
1. 13-month pay
For government employees - consists of Christmas bonus equivalent to one-month
salary plus a 5000 cash gift.
" For private employees - equivalent to one-month salary.
2. Other benefits
a. Christmas bonus of private employees
b. Cash gifts other than Christmas or anniversary gifts of private employees
c. Additional compensation allowance (ACA) of government personnel
d. 14-month pay, 154-month pay, etc.
e. Other fringe benefits of rank-and-file employees
Other Fringe Benefits
1. Employee personal expenses shouldered by the employer
2. Taxable de minimis benefits such as;
Excess de minimis
Benefits not included in the de minimis list

Treatment
a. For rank-and-file employees - treated as compensation income as part of other
benefits in 13-month pay and other benefits
b. For nanagerial and/or supervisory employees - as fringe benefit subject to fringe
benefit tax

Taxability of Minimum Wage Earners (MWEs)

Minimum wage earners are exempt from income tax on the following:
1. Basic minimum wage
2. Other benefits
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential pay
presented as non-taxable compensation income and deducted in the amnount of
taxable compensation income.

Receipt of Other Taxable Income by Minimum Wage Earners

 benefits even if they
The MWEs are still exempt from income tax from the foregoing
to tax if their other taxable
receive other taxable compensation. However, they may be subjected
income exceeds the 250,000 for the year.

During the Year

Rules of Change in Status as a Minimum Wage Earner
be subject to income tax
1. When an employee becomes a MWE during the year, he shall
only on compensation before becoming a MWE. to increase in salary, only
2. When an employee ceases to be a MWE during the year due
the income for the rest of the year is taxable.
disqualification (i.e. earning
3. When an employee ceases to be a MWE during the year by
taxable income), he shall be taxable as a regular employee.

as part of the minimum

Treatmnent of COLA of Minimum Wage Earners - should be treated
wage and shall not be treated as separate or other benefits.

The Withholding TAx on Compensation method of collecting the income tax at sorce upon
citizens or aliens. The
receipt of the income tax. It applies to all employed individuals whether
employer is constituted as the withholding agent.

Procedural Computation
employees for the
1. Determine the total monetary and non-monetary compensation of the
payroll period. Segregate nontaxable 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 for the incremental tax rate for the bracket.
4. Total the basic tax and the incremental basic tax.
 P8,000,000 P8,000,000
P2,000,000 P2,000,000
P800,000 P800,000
P400,000 P400,000
TAXPAYERS
over over
P250,000
over
over over
P250,000
overover
over
due
Tax excess due
Tax excess
excess
excess excess
excess
excess excess
INDIVIDUAL
above of above of
of of 35% of of 35%
2022 of +30%
25% 32% Onwards
2023
Year of
20%25%30%
excess excess
Year +
P2,410,000 +
(0%) +
None + P130,000 (0%)
None + 05,500
FOR P30,000P490,000 +
+ P402,500
P102,500
P22,500
to of of
2018
TABLES 20% 15% P2,2
Year
Taxpayers
INCOME P8,000,000 P8,000,000
P2,000,000 P2,000,000
P400,000
P800,000 P400,000
P800,000
REVISED
income
Taxable income
Taxable
individual
below
and
P250,000 to P250,000 to
below
and
to to to P2,000,000
P8,000,000
Above to to to P2,000,000
P250,000
P400,000
P800,000 P400,000
P250,000 P8,000,000
Above
P800,000
for
table
Above
Above
Above
Above Above Above
Above Above
tax
ncome

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Appendix