COMPENSATION INCOME
-there’s employer-employee relationship.
-all remuneration for services performed
-whether appointed or elected
Compensation
Benefits (exceeds
Taxable
90k)
Others
Remuneration
Exempt
Benefits (90k or
less)
Not taxable
De Minimis
benefits
Fringe
benefits
Forms of Compensation
G.R. – if the those compensation are for the convenience of the employer it is not taxable.
1. Compensation paid in kind - T
2. Living quarters and meals - Convenience of employer – NT
Convenience of employee- T
3. Facilities and privileges of relatively small values (de minimis benefits)
4. Tips and gratuities- T (hindi winiwitheld)
5. Pensions, retirement and separation pay – T, exempt if has a formal arrangement with the BIR
6. Fixed or variable transportation representation and other allowances- RATA - EXEMPT
7. Vacation and sick leave allowances
VACATION LEAVE FOR Private employees- 10 days only
For government, vacation leave and sick leave- EXEMPT.
8. Deductions made by employer from compensation of employee
9. Rmuneration for services as employee of NRA individuals/ foreign entity - T
10. Compensation for services performed outside PH. -T
DE MINIMIS BENEFITS
- NOTES: relatively small value, exempt of income tax.
Minimum wage earners – exempt 1. Monetized unused vacation leave credits of
Regular employees- regular progressive income tax 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 P250
per month or 3,000 per year
4. Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per month amounting to not more than P2,000 . or
24,000 per year
5. Uniform and clothing allowance not exceeding P6,000 per annum
6. Actual Medical Assistance, e.g., medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations not exceeding P10,000 per annum
7. Laundry allowance not exceeding P300 per month or 3,600 per year
8. Employee achievement award, e.g., for length of service or achievement, which must be in the form of tangible
property other than cash or gift certificates, with an annual monetary value not exceeding P10,0000 received by
the employee under an established written plan which does not discriminate in favor of highly paid employees.
9. Gifts given during Christmas and major anniversary celebrations 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 (must not exceed P10,000, per employee per taxable year, otherwise taxable for the entire
amount as “other benefits”)
NOTE: Pag na exceed, ang excess ng de minimis benefits ay ilalagay sa other benefit, kapag na reach na ang 90k
doon na magignng taxable- sir win
BENEFITS EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS
●Employee benefits of non- Filipino nationals and/or non-permanent residents of the Philippines from foreign
governments, embassies or diplomatic missions, and international organizations in the Philippines are exempt
from income tax.
● Exemption from withholding taxes does not mean income tax exemption
▪ Foreign government embassies, diplomatic missions and international organizations- exempt to income tax and
as well obligation to withholding tax.
▪ However, this exemption from the obligation to withhold tax does not mean income tax exemption of their
Filipino employees. In fact, most of the international agreements to which the Philippines is a signatory limit
exemption only to non-Filipino nationals and/or non-residents of the Philippines.
Filipino (Resident citizen) employees of foreign governments, international missions and organizations are
taxable as a rule except only to employees of the following organizations:
1. United Nations (UN)
2. Specialized Agencies of the United Nations
3. Australian Agency for International Development (AUSAID)
4. Food and Agriculture Organization (FAO)
5. World Health Organization (WHO)
6. United Nations Development Programme (UNDP)
7. International Organization for Migration (IOM)
8. International Seabed Authority (ISA)
These organizations have exemption provisions that extend even to their Filipino employees. Other aid agencies or
international organizations may have tax free provisions in their articles of agreement for Flipino employees.
Confirmation of Tax Exemptions for Filipino stated
above.
▪ The exemption of Filipino employees is not
automatic.
▪ Filipinos claiming exemptions under the terms of
international agreements or under provisions special
laws granting privileges to international organizations
shall file application for confirmation of tax
exemption with the BIR's International Tax Affairs
Division (ITAD). The confirmation shall serve as proof
of exemption. Without the confirmation certificate, the
BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO, THE TRADE, BUSINESS OR CONDUCT OF
PROFESSION OF THE EMPLOYER
-necessity of the employer rule
- exempt from income tax since not an income but an expense
BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER (Convenience of the employer
rule)
-hybrid expenses
-exempt from income tax.
COMPOSITION OF TAXABLE COMPENSATION INCOME
1. Regular compensation – fixed remunerations
2. Supplemental compensation- other performance-based pays.
*13th month pay and other benefit- exceeds 90k. (the excess will be taxable)
REGULAR COMPENSATION INCOME
1. Basic Salary
2. Fixed allowance
Non-compensation items
1. Fees- personal income
2. Commissions to non-employees
3. Tips and gratuities
SUPPLEMENTARY COMPENSATION
●The following are the additional compensation under current tax rules:
1. Overtime pay
2. Hazard pay
3. Night shift differential pay
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 (BIR Ruling 119-2012)
11. Profit sharing and taxable bonuses
13TH MONTH PAY AND OTHER BENEFITS (exempt if not exceeds 90k)
1. 13th month pay
a. The 13th month pay of government employees consists of a Christmas bonus equivalent to one-month salary
plus a P5,000 cash gift. (RA 6686 as amended by RA 8441)
b. The 13th month pay of private employees is equivalent to one-month salary. (PD 851)
2. Other benefits
a. Christmas bonus of private employees
b. Cash gifts other than Christmas or anniversary gifts of private employees (RR2-98, as amended by RR5-2011)
c. Additional compensation allowance (ACA) of government personnel (RRB-2000)
d. 14th month pay, 15th month pay, etc.
e. Other fringe benefits of rank and file employees
Other fringe benefits
supplementary or 13tn 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:
a. Excess de minimis
b. Benefits not included in the de minimis list.
TAXABILITY OF MINIMUM WAGE EARNERS (MWE)
● MWEs are exempt from income tax on the ff.:
1. Basic minimum wage
2. Other benefits (Holiday pay, Hazard pay, Overtime pay, Night shift differential pay)
-exempt even if they are earning from other sources.
- they may be subjected to tax if their other taxable income exceeds the P250,000 for the year.
Rules of change in status as a Minimum Wage Earner during a year
1. When an employee becomes a MWE during the year, he shall be subject to income tax only on compensation
earned before becoming a MWE
This rule may also apply in cases of:
a. Transfer to an employer paying salary at the minimum wage
b. Transfer of employment t0 a region with higher minimum wage
2. When an employee ceases to be a minimum wage earner during the year due to to increase in salary, only the
income for the rest of the year is taxable.
This rule applies in cases of:
a. Transfer to an employer paying salary above the minimum wage
b. Transfer of employment to a region with lower statutory minimum wage
3. When an employee ceases to be a minimum wage earner during the year by disqualification (i.e., earning
taxable income)
* Note that if the taxable income of the employee does not exceed P250,000 for the year, there will be no income
tax due for the period under the tax table.
Treatment of Cost-of-living Allowance of MWEs
● Under RM 023-2011, COLA which forms part of the new wage rates prescribed to be the statutory minimum
wage should be treated as part of the minimum wage and shall not be treated as a separate or other benefit.
THE WITHHOLDING TAX ON COMPENSATION
●It applies to all employed individuals whether citizens or aliens.
●The employer is constituted as the withholding agent.
Procedural computation of the withholding tax on compensation
Year-end Tax Adjustment
-The total amount withheld on every payroll
1. Determine the total monetary and non-monetary
date may not exactly match the annual tax due.
compensation of the employee for the payroll period:
Due to this, the income of the employee needs
monthly, semi-monthly, weekly or daily. Segregate non-
to be reckoned at the end of the year and
taxable benefits, mandatory contributions and supplemental
adjustment is made as necessary. Any under-
compensation.
withholding shall be deducted on the final
2. Determine the bracket that applies to the regular
payroll of the employee. An over withholding
compensation of the employee for the applicable payroll
shall be refunded to the employee.
period. Determine the basic tax for the bracket.
3. Add supplemental compensation to the excess of the regular
BENEFITS NOT SUBJECT TO WITHHOLDING TAX
compensation. Subject the total to the incremental tax rate for
ON COMPENSATION UNDER RR2-98, AS
the bracket.
AMENDED:
4. Total the basic tax and the incremental basic tax.
1. Remunerations received as incidents of
employment
2. Remuneration paid for agricultural labor and paid entirely in products of the farm where the labor is performed
3. Remuneration for domestic services
Note that the minimum wage for domestic workers or "kasambahay prescribed under Sec. 24, Art. IV of RA 10361
or the Domestic Workers Act or Batas Kasambahay of 2013 ranges from P1,500 to P2,500 a month too low
compared to the tax exempt minimum wage for commercial, industrial, or agricultural workers.
4. Remuneration for casual labor not in the course of an employers trade or business treated as other income
5. Compensation for services by a citizen or resident of the Philippines for a foreign government or an
international organization
6. Damages paid by the employer to employees
7. Proceeds of life insurance
BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION UNDER RR2-98, AS AMENDED:
8. Amounts received by an insured employee as a return of premium 9. Compensation for injuries or sickness
10. Income exempt under treaty
11. 13th month pay and other benefits not exceeding a total of P90,000 12. GSIS, SSS, PhilHealth, and other
contributions
13. Compensation income including overtime pay, holiday pay, night shift differential pay, and hazard pay of
Minimum Wage Earners 14.
14. Compensation income of employees in the public sector if the same does exceed those of minimum wage
earners in the non-agricultural sector
These listed benefits are not considered compensation income; hence, they are exempt from the withholding tax
on compensation.
