COMPENSATION INCOME

Prepared by: Johann Reginald B. Piquero

 LEARNING OBJECTIVES

At the end of the chapter, the student will be able

to:
1. Define compensation income;
2. Identifythe broad classification of gross
compensation income;
3. Describe the tax base of compensation income;
and
4. Discuss the valuation of compensation income.
 DEFINITION AND CONCEPT

Compensation income means all

remuneration for services performed by an
employee for his/her employer under the employer-
employee relationship, unless expressly excluded by
the Tax Code.
An employee refers to an individual
performing a service under an employer-employee
relationship.
An employer refers to any person for whom an
individual performs or performed any service, of
whatever nature, under an employer-employee
Composition of Gross Compensation Income

1. Salary, wage, or fee

2. Commission
3. Honoraria
4. Allowances
5. Thirteenth month pay and other benefits
6. Holiday pay, overtime pay, night shift differential, and
hazard/emergency pay
7. Separation pay
8. Retirement pay
9. Sick leave and vacation leave
10.Fringe benefits
 SALARY, WAGE, OR FEE

Salary is generally earnings paid on a

regular interval. Wage is paid on an hourly or
daily basis. Fee implies payment to an
individual who is of authority such as
director’s fee, legal fee, accountant’s fee, or
fee for conduct of religious ceremony
(marriage, baptismal, or masses).
 COMMISSION

Commission refers to payments

made based on a certain percentage of
output, for example, salesman
commission or underwriter’s
commission.
 ILLUSTRATION 4.1

Angel, a sales executive of C & E Publishing

Company, has a monthly basic pay of ₱ 24, 000. She
is entitled to 2% commission on the sales volume in
excess of ₱ 10 million. During the current taxable
year, Angel’s actual sales has reached ₱ 12 million.

 Compute the gross compensation income of Angel

for the current taxable year.
 Answer

Basic salary ( ₱ 24,000 x 12) ₱ 288,000

Commission 40,000
( ₱ 12,000,000 – ₱ 10,000,000) x 2%

Gross compensation income ₱ 328,000

 HONORARIA

Honoraria are earnings derived from

services usually undertaken by individuals
considered experts in a particular field. An
example is honoraria given to an employee
who delivers a lecture during the company’s
seminar or workshop. Honorarium is usually
given to an employee on account of his/her
additional services rendered to the business.
 ALLOWANCES

Allowances may either be fixed or

variable. An allowance is considered fixed
when it is attached to the position or
office, and it is variable when it changes
accordingly as influenced by certain
factors such as number of visitors,
distance of travels, and frequencies of
seminar.
Cont.

In general, fixed or variable

transportation, representation, and other
allowances that are received by a public
officer or employee, or officers or employee
of private entity, in addition to the regular
compensation fixed for his/her position or
office, are compensation subject to
withholding tax.
 COMMON TYPES OF ALLOWANCES

1. Cost of living allowance (COLA). The Cola of

government officials and employees are not
taxable. It does not form part of the basic
salary.
2. Representation and travelling allowance
(RATA). The RATA regularly received by an
employee shall form part of the taxable
compensation income.
3. Personnel Economic Relief Allowance (PERA).
This type of allowance is nontaxable if received
by government officials and employees.
 ILLUSTRATION 4.2

Princess holds a supervisory position at Mainit

Company with a monthly salary rate of ₱ 30,000. In
addition to her basic pay, she is entitled to 5%
commission on net sales and is provided RATA of ₱
8,000 monthly.
During the year, Mainit Company has gross sales
of ₱ 8,500,000. Sales returns and allowances
amounted to ₱ 280,000. The company maintained a
mark up of 60% to cover the operating expenses.

 Compute the gross compensation income of Princess

for the current taxable year.
 ANSWER

Basic salary ( ₱ 30,000 x 12 months) ₱ 360,000

Commission [5% x ( ₱ 8,500,000 - ₱ 280,000)] 411,000

RATA ( ₱8,000 X 12) 96,000

Gross compensation income ₱ 867,000
 13th Month Pay and Other Benefits

Thirteenth (13th) month pay is equivalent to the

mandatory one-month basic salary of officials and
employees of the government, national or local,
including government owned or controlled
corporations, and private offices receive after the
12th month pay.
The 13th month pay is computed by dividing the
total basic salary during the year by 12 months.
Cont.

Other benefits include Christmas bonus,

productivity incentive bonus, loyalty award,
gifts in cash or in kind, and other benefits of
similar nature actually received by officials
and employees of both government and
private offices.
Cont.

De minimis benefits are those given by an

employer to its employees on top of their
regular salaries for the general welfare of the
latter. They are referred to as de minimis
benefits because they are usually of
relatively small value; hence. They are
considered non-taxable.
Cont.

Otherwise stated, any amount in

excess of ₱ 90,000 is taxable. Thus, the 13th
month pay, cash gifts, and bonuses not
exceeding ₱ 90,000 are not taxable nor be
subject to withholding tax.
 ILLUSTRATION 4.3

Nicanor is the Vice-President for Operations of

Walay Ayo Company , with an annual salary of ₱
720,000. At the end of the year, he received a cash
gift of ₱ 90,000 in addition to his 13th month pay
equivalent to his one-month salary.

 Compute the gross compensation income of

Nicanor.
 ANSWER

Annual salary ₱ 720,000

Cash gift ₱ 90, 000
13th month pay ( ₱ 720,000/12) 60,000 ₱ 150,000
Gross compensation income ₱ 870,000
 HOLIDAY PAY, OVERTIME PAY, NIGHT SHIFT
DIFFERENTIAL, AND HAZARD EMERGENCY PLAN

Hazard pay shall mean the amount paid by the

employer to employees who were actually assigned
to danger or strife-torn areas, disease-infested
places, or in distressed or isolated stations and
camps, which expose them to great danger of
contagion or peril to life.
Holiday pay, overtime pay, night shift
differential pay, and hazard pay are generally
taxable.
 ILLUSTRATION 4.4

Hyzel was paid on a statutory minimum wage of ₱

12,000 per month. In addition, she received holiday pay
and overtime pay of ₱ 15,000 during the year.
 Is the income of Hyzel taxable?
 No. RR 8-2018 on RA 10963 (TRAIN Law) provides that
minimum wage earners shall be exempt from the
payment of income tax based on their statutory
minimum wage rates. The holiday pay, overtime pay,
night shift differential pay, and hazard pay received by
such earner are, likewise, exempted.
 SEPARATION PAY

Separation pay may be taxable

or non-taxable. Separation pay is
taxable if the employee voluntarily
separates himself from employment
(e.g., resignation).
Separation pay is non-taxable on
account of the following:

1. Prolonged sickness
2. Disability
3. Death
4. Reorganization of the company
5. Bankruptcy of the company
 ILLUSTRATION 4.5

Peter, a chemical engineer of Piyaya Company,

recently tendered his resignation from the company
because he got a favorable financial offer from Laguna
Company. With a monthly rate of ₱ 18,000, his total
basic salary for his 10-month stay at Piyaya amounted to
₱ 180,000. He was given a hazard pay equivalent to
100% of his one-month basic salary because of his
exposure to chemicals at Piyaya and an overtime pay of
5% of his total salary for 10 months. Peter also received
₱ 25,000 upon his resignation.
 Determine the gross compensation income of Peter
from Piyaya Company.
 ANSWER

Basic salary for 10 months ₱ 180,000

Hazard pay 18,000
Overtime pay (₱ 180,000 x 5%) 9,000
Separation pay 25,000
Gross compensation income ₱ 232,000

 The separation pay of ₱ 25,000 will form

part of the gross taxable income because
the separation is voluntary.
 RETIREMENT PAY
As a general rule, retirement pay is taxable. The
exceptions are the following:
1. Retirement pay from SSS or GSIS.
2. Retirement pay from employer, provided the following
requirements are complied with:
a. The retirement plan of the company has been approved
by the Commissioner of the BIR.
b. The retiree should have been connected with the
company for 10 years.
c. The retiree should be at least 50 years old.
d. The retiree availed the retirement for the first time.
e. The retirement plan is fair and equitable to all
employees regardless of position.
 ILLUSTRATION 4.6
Johnny, with a monthly salary of ₱ 20,000, has
recently retired from Alto Company on December 31 of
the current year as the company’s electrician for the
last 10 years. In view of his retirement, he received
from SSS his lump sum retirement of ₱ 600,000 and ₱
300,000 from Alto Company with retirement plan duly
approved by the BIR Commissioner.
Before his employment with Alto Company,
Johnny was connected with A1-One Company for 12
years and received retirement pay upon his separation
from this company.
 Determine the gross compensation income of Johnny
for the year.
 ANSWER

Basic salary (₱ 20,000 x 12 ₱ 240,000

months)
Retirement pay from Alto 300,000
Company
Lump sum payment from SSS 600,000
Gross compensation income ₱ 1,140,000
Cont.

It must be noted however, that the

retirement pay the retiree received from his
most recent employer, Alto Company, is
taxable even though he has rendered 10
years of service because he had previously
received a retirement pay. Hence, the
taxable compensation income is ₱ 540,000 (₱
240,000 + ₱ 300,000).
 SICK LEAVE AND VACATION LEAVE

The salary of an employee on vacation or sick

leave, which is paid to him/her not withstanding
his/her absence from work, constitutes taxable
compensation income.
However, the cash value of unutilized vacation
leave of 10 days or less for the calendar year, which
is paid to the employee, is not subject to tax and
neither subject to creditable withholding tax.
 ILLUSTRATION 4.7

Alfred, with a monthly salary of ₱

24, 000, is an employee of Best
Corporation. He was on leave for one
month but was paid his salary while on
leave.
 Determine the taxable income
 ANSWER AND ANALYSIS

Alfred is taxable on his gross

compensation of ₱ 288,000 (₱ 24,000 x 12
months), although he did not render service
for one month because he was fully paid.
If he decided to have his unutilized leave
credits for 10 days or less converted into cash,
the amount would not be a taxable
compensation income.
 FRINGE BENEFITS

Fringe benefits means any good ,

service, or other benefit furnished or
granted in cash or in kind by an
employer to an individual employee in
addition to his/her basic salary.
Fringe benefits may be subject to final tax or basic
tax. The guidelines are as follows:

1. Ifthe recipient of the fringe benefit is a rank-and-

file employee, the amount is subject to basic tax;
hence, it becomes part of the gross compensation
income.
2. Ifthe recipient is occupying a supervisory or
managerial position, the fringe benefit is subject
to final tax, otherwise known as fringe benefit
tax.
 FORMS OF FRINGE BENEFITS

1. Living quarters or meals

2. Payment of income tax
3. Payment of insurance premium
4. Share in company’s profit
5. Bonuses and awards for exemplary
performance
END 