How to compute taxable and non-taxable bonuses in the Philippines

Most income is taxable, especially when you earned it during employment. In the same way, you generally have to pay tax on income derived from selling goods or providing services for. Payroll services are fully aware that there are taxable incomes with a certain threshold for tax considering time and attendance. But not all have tax payments attached to it. There are also certain types of income that are excluded from tax like an income in which somebody has already paid tax on. 

What about the 13th month pay and other forms of bonuses? For others, 13 may be an unlucky number but 13 has now been a source of good news and blessings in the Philippines. It started out when minimum wage earners during the 1970s struggled to put food on the table when the cost of living increased, thus the 13th month pay was signed into law by Former President Ferdinand E. Marcos. Since then, a great deal has happened in the area of labor law and employee relations. 

The emergence of the Tax Reform and Acceleration and Inclusion (TRAIN) act law that took effect on January 1, 2018 changed and revolutionized many aspects of the old labor law. The TRAIN law affects the employee’s income tax return rates, value-added tax regulations, new estate tax rates, other excise taxes and donor’s tax rates. Payroll services had to adapt to this change and implement it as required by law.

Along with the 13th month pay law, 13^th month pay is  now non-taxable given a threshold for tax from the employers.  The law stipulates an exemption on 13th month pay and also other bonuses  and it has been increased from P82,000 to P90,000. As such, benefits including 13th month pay, fringe benefits and other benefits below P90,000 generally are non-taxable income.

In addition, to protect employees from seemingly abusive employees, the Productivity Incentive Bonus under Republic Act 6971 and the Social Amelioration Program Cash bonus for sugar industry employees has been created and approved which is  stipulated under Republic Act 6982. These two types of bonuses are examples of law-regulated bonuses

The Philippine government has mandated the 13th month pay and bonuses discretionary according to the employer. It is important for the company’s payroll services  to observe this. And also significant for the employee to determine the correct amount of money that they are entitled to receive as their 13th month pay. 

How can one compute the 13th month pay?

Consider this example:

An employee has worked for a particular company for 10 months out of the twelve months. The 13th month pay is certainly based on the employee’s tenure of service. If the basic salary is P30,000, the compensation is prorated for ten months, from the 12 month-period. Take note that the basic salary is the earnings given to an employee before deductions, contributions and other employer deductions like personal loan, unpaid leaves and tardiness. The computation of the 13th month pay based on the basic salary is shown below:

P30,000 x 10 months = P300,000 /12 = P25,000 (13th Month Pay) 

Additional things to know about 13th Month Pay:

1. Mandatory

   The 13th month pay is mandatory.  Even for a month-long stint with a company, regardless of the position, the employees are entitled to this benefit. It is essentially, “one-twelfth (1/12) of an employee’s basic monthly salary throughout a calendar year, as mentioned on Sec. 2 of Presidential Decree 851. Its schedule may vary from one employer to another but it has to be given on or before the 24th of December. The employees can file a complaint when 13th month pay is given late or not given at all.

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2. Taxable

   It is taxable , but thanks to the TRAIN law, the 13th month pay is now non-taxable given a threshold. Anyone engaged in an employee-employer relationship is entitled to the 13th month pay and other benefits. The threshold for tax exemption on 13th-month pay and other bonuses from the employers has been increased from P82,000 to P90,000. Benefits including fringe, de minimus benefits, and other benefits below P90,000 are non-taxable.

3. Prorated

   It is essentially, “one-twelfth (1/12) of an employee’s basic monthly salary throughout a calendar year, as mentioned on Sec. 2 of Presidential Decree 851. So, the company divides the whole calendar year of basic compensation by the number of months the employee has rendered service. If the employee has worked for a year or more, this would mean that the employee is eligible to receive the entire amount.

Things to know about other bonuses:

Other than the 13th month pay, there are bonuses which are company- initiated. 

1. Voluntary

   All bonuses like Christmas bonus, in essence, are voluntary. It may be given when the company’s sales hit a certain quota or whatever the reason may be. These bonuses are usually released at the company’s discretion, usually Christmas, hence the name Christmas bonus.

2. Non-taxable

   As mentioned, this is not obligatory but voluntary. A bonus like Christmas bonus is not under any legislation so there is no tax imposed on it. Depending on the company’s decision, bonuses can be in the form of cash, gifts and vouchers.

3. No fixed amount
   

   Bonuses do not have a fixed amount or computation. Companies provide bonuses for several reasons: remarkable performance, quota-buster, company’s overall yearly performance, give-aways, length of tenure, etc.

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Easy HR helps your HR team manage employees through robust record-keeping and payroll functions.

Click to Learn More.

Easy HR helps your HR team manage employees through robust record-keeping and payroll functions.

Click to Learn More.