CHAPTER 10

COMPENSATION INCOME

EMPLOYER-EMPLOYEE RELATIONSHIP

Employer - refers to any person for whom an individual performs any service of whatever nature as
employee of such person.

An employer is the person who has control over the payment of the employer remuneration. However, if
such person is a non-resident not engaged in trade or in the Philippines, the employer is deemed the
person paying remuneration in their behalf.

Employee - refers to any individual who is a recipient of wages and includes officer, employee or elected
official of the Government of the Philippines or any political subdivisions, agency or instrumentality
thereof. The term also includes an officer of a corporation.

Elements of employer and employee relationship under case law:

1. Selection and engagement of employees. There is a screening process for employees to hire.

2. Payment of wages - The employer usually fixes and controls the payment of wages.

3. Power of dismissal Employer has power to retrench or terminate employees when incurring
heavy losses or other reasonable basis.

4. Power of control - The employer has power to control the employee on the means and methods
by which the work is accomplished.

An arrangement which do not manifest all the elements is not an employer- employee relationship but an
independent contract for the provision of services.

The following are not considered employees:

1. Consultants

2. Directors management function

3. Talents and artists on TV shows or radio broadcasts (Sonza vs. ABS-CBN Broadcasting
Corporation, G.R. No. 138051)

The income or fees of these individuals are not compensation income but are business or professional
income.

TYPES OF EMPLOYEES AS TO FUNCTION

1. Managerial employees - Those who are given powers or prerogatives to lay down and execute
managerial policies and/or to hire, transfer, suspend, lay- off, recall, discharge, assign or discipline
employees.
2. Supervisory employees - Those who effectively recommend such managerial actions if the exercise of
such authority is not merely routinary or clerical in nature but requires the use of independent judgment.

3. Rank and file employees - Those who hold neither managerial nor supervisory functions.

TYPES OF EMPLOYEES AS TO TAXABILITY

1. Minimum wage earners - Employees who are recipients of minimum wage. They are exempt from
income tax on their compensation.

2. Regular employees - Employees who are subject to the regular progressive income tax.

It must be noted that the "special alien" classification was removed into law by virtue of a presidential
veto to the TRAIN law. The special alien under the old law must be treated as regular employees.

Minimum Wage Earner

Minimum wage earner refers to a worker in the private sector who is paid the minimum wage or to an
employee in the public sector with compensation minimum wage or to an employee in the public sector
with of not more than the statutory minimum wage (ie.. those with salary grade 1 to 3) in the non-
agricultural sector where he or she is assigned.

The statutory minimum wage refers to rate fixed by the Regional Tripartite Wa and Productivity Board of
the Department of Labor and P5,000/month or P60,000/year, whichever is higher. Employment te

THE TAX MODEL ON COMPENSATION INCOME

Gross compensation income

Less: Non-taxable compensation

Taxable compensation income

GROSS COMPENSATION INCOME

Gross compensation income generally includes all remunerations received und an employer-employee
relationship.

NON-TAXABLE COMPENSATION

A. Mandatory deductions

These includes employees' mandatory contribution to GSIS, SSS, PhilHealt HDMF, and union dues

B. Exempt benefits

1. Benefits excluded and/or exempted under the NIRC and special laws

2. Benefits exempt under treaty or international agreements

3. Benefits necessary to the trade, business, or conduct of of the employer

4. Benefits for the convenience or advantage of the employer

EXEMPT BENEFITS UNDER THE NIRC, AS AMENDED, AND SPECIAL LAWS

1. Remunerations received as incidents of employment

A. Exempt benefits under RA 7641 including exempt retirement gratuities to government officials and
employees

b. Exempt termination benefits

C. 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

g. COVID-19 benefits to health workers under RA 11494 (BAYANIHAN 2)

a. Special Risk Allowance

b. Actual Hazard Duty Pay

c. Compensation paid to private and public health workers who have contracted COVID-19 in the
line of duty

2. De minimis benefits

3. 13 month pay and other benefits not exceeding P90,000

4. Certain benefits of minimum wage earners

De minimis benefits

De minimis benefits are facilities or privileges such as entertainment, medical services, or courtesy
discounts on purchases that are of relativensment, medical are furnished by the employer merely as a
means of provely small value and podwill contentment, or efficiency of his employees. De minimis benefits
are petty fringe benefits exempt from income tax.

As originally conceived, other petty fringe benefits which fall within the purview of de minimis even if not
part of the de minimis list are normally treated as de minimis and are also exempt from income tax.

However, the BIR and the Department of Finance changed the rule under RR5- 2011, as last amended by
RR 11-2018 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 P250 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 (RR11- 2018)

6 Actual Medical Assistance, e.g., medical allowance to cover medical and 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

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 value not exceeding
P10,000 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 Gifts per
employee per annum (L. Christmas gift and anniversary gifts)

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 overtime meal)

11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentives 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 that only CBA benefits and productivity incentives amounting to P10,000 or less is de minimis. If the
amount exceeds P10,000, 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

a. For rank and file employees - taxable de minimis is treated as other compensation income under the
category "13th month pay and other benefits

b. For managerial and supervisory employees - the taxable de minimis is treated as fringe benefit
subject to final fringe benefit tax

Note to readers: Many follow the practice of treating excess de-minimis benefits as part of 13 month pay
and other benefits regardless of whether the employee is a managerial supervisory or rank and file. This
treatment is based on the erroneous use of the phrase "income tax as well as withholding tax on
compensation income" in section 2 of RR5-2011. This inadvertence was subsequently clarified and
corrected by then Commissioner Henares as "fringe benefits tax" under RMC20-2011. It must be clarified
therefore that the excess de-minimis benefits of managerial or supervisory employees is subject to final
fringe benefits tax and is not part of 13 month pay and other benefits.

Commutation of accumulated leave credits

The terminal leave pay or the commutation of unused leave credits 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 is no longer exempt as part of exempt termination benefits.

13th month pay and other benefits not in excess of P 90,000

The composition of the "13th month pay and other benefits" will be discussed later under taxable benefits.

BENEFITS EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS

Employee benefits of non-Filipino nationals and/or non-permanent residents of the Philippines from
foreign embassies or diplomatic missions, and international organizations in the Philippines are exempt
from income tax.

Exemption from withholding tax does not mean income tax exemption

Foreign government embassies, diplomatic missions and international organizations are immune from
income tax including the obligation to withhold income tax by virtue of international comity as embodied in
several international agreements to which the Philippines is a signatory.

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 only to non-Filipino nationals and/or non-residents of the Philippines.

Filipino employees of foreign governments, international missions, and organizations are taxable as a rule
except only to employees of the following erganizations:

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 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
Filipino employees.

Confirmation of Tax Exemptions

The exemption of Filipino employees is not automatic. Filipinos claiming exemptions under the terms of
international agreements or under provisions of special laws granting privileges to international
organizations shall file an 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 employee is taxable.
Employees of Philippine embassies or consulate offices

It should be recalled that employees working in Philippine embassies or Philippine consulate offices are
not considered non-resident citizens and are therefore subject to Philippine income tax.

Summary of rules

Foreign embassy, missions, or Philippine embassy or consulate

organization office
In the Philippines
- Filipino citizens Taxable N/A
- Aliens Exempt N/A
Abroad
- Filipino citizens Exempt Taxable
- Aliens Exempt Exempt
*Taxpayer must prove if there is an exemption grant under contract or special law.

BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO, THE TRADE BUSINESS OR
CONDUCT OF PROFESSION OF THE EMPLOYER

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 from tax. This is referred to as
"necessity of the employer rule."

Examples:

1. Necessary traveling, transportation, representation, or entertainment expenses that are subject to an

accounting or liquidation in accordance with specific requirements of substantiation of expense.

2. Allowances which essentially constitute reimbursement to government personnel for expenses they
incurred in the performance of their official duties, such as:

a. Representation and Transportation Allowance (RATA) of public officers and employees under
the General Appropriation Act

b. Personnel Economic Relief Allowance (PERA) (RR10-2008)

3. Reasonable amounts of reimbursements or advances to employees for travelling and representation

which are pre-computed on a daily basis and which are paid to any employee while on assignment or
duty.

These amounts given to the employee are not income but are expenses of the trade, business or
profession of the employer that are incurred or paid through the employee. These are not employee
benefits since they are mere advances or replenishments of what are supposed to be direct cash outflows
from the employer; hence, these are not considered as compensation income.

BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER

Benefits or allowances which are intended for the furtherance of the interest of the employer's business to
ensure its smooth operations are likewise exempt from income tax. This is referred to as the "convenience
of the employer rule

Examples:

1. Work-related mobile phone allowance and transportation allowance particularly to employees of call
centers which are operated on a 24-hour basis where employees are required to be available always for
assignment and consultation (BIR Ruling DA-233-07)

2. Outstation allowance for employees who will be out from office site at least 8 hours to visit lotto
franchise holders for repairs and/or inspection of equipment leased by the employer (BIR Ruling No. 013-
02)

3. Grant of housing privilege to employees working at distant or remote facilities even if the dwelling is
distanced from the facility in compliance to labor safety standards (BIR Ruling No. 055-99)

4. Car incentives to employed on-call medical doctors

5. Scholarship grants to employees under contract to remain in service for a specified period upon
completion of the study

6. Housing privilege of military officials of the AFP located inside or near the military camps.

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

However, if the expense is unreasonably excessive making it depart from the nature of a reasonable
business expense such as when it is deliberately granted to include a benefit for the employee, the portion
of the expense representing provision or privilege to the employee is considered a taxable fringe benefit.
These types of expense are regarded as "hybrid expenses" because they are partially business expense
partially employee benefits.

COMPOSITION OF TAXABLE COMPENSATION INCOME

1. Regular compensation - This pertains to the fixed remunerations received by the employee every
payroll period.

2. Supplemental compensation - This pertains to other performance-based pays to employees with or

without regard to the payroll period.

An adjunct category to the supplemental compensation, 13th month pay and other benefit, is necessary
to contain incentive pays and all other taxable employee benefits not classifiable as regular or
supplemental compensation. 13th month pay and other benefits not exceeding P90,000 is an exclusion
from gross income. The excess above P90,000 is added to supplemental compensation.

Illustration

An employee received P400,000 regular compensation, P120,000 supplemental compensation, and

P100,000 13th month pay and other benefits.

The taxable compensation income shall be computed as follows:

Regular compensation P 400,000

Supplemental compensation [P120,000+ (P100,000-P90,00)] 130.000

Taxable compensation income P 530.000

Regular Compensation Income

The regular compensation includes fixed remunerations due to be received by an employee every period
such as:

1. basic salary

2. Baxed sallowances such as cost-of-living allowance, fixed housing allowance Basic Fepresentation,
transportation, and other allowances paid to an employe every payroll period

Fixed allowances

Allowance which are fixed in amounts and regularly received as part of the basie monthly, bi-weekly,
weekly or daily salaries or wages are part of regular compensation. This applies even if a portion of the
allowances are actually used in the employer's business.

Exception rule on the taxability of allowances:

a. Ordinary and necessary allowances for travelling, representation or entertainment expense of

employees incurred in the pursuit of the employer trade, business or profession.

b. The expense is subject to accounting or liquidation.

c. Any excess advances are returned to the employer.

Hence, variable and liquidated allowances are not subject to tax. However, amounts of allowances that
are retained by the employee for himself shall be considered compensation.

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.

Non-compensation items

1. Fees

Retainer fees of consultants, talents, and directors who have no management function in the
business are professional income, not compensation income of the recipient.

2. Commissions to non-employees such as independent sales agents are busines income to the sales
agent.

3. Tips and gratuities

 Tips and gratuities paid directly to an employee by customers of the employer which are not
accounted for by the employee to the employer are not considered as compensation income, but
are to be reported as "other income" in the income tax return of the employee.

Valuation of compensation paid in kind

Compensation in kind is taxable at the fair value of the consideration received. If received in shares, the
fair value of the shares at the date services were provided is used.

Note:

1. Reimbursement for transportation expense is not an income to the employee

2. The termination pay is included in gross compensation income, but is also deducted as nos taxable
compensation because the reason of termination is beyond the employee's contra

SUPPLEMENTARY COMPENSATION

Supplementary or additional compensation includes performance-based to an employee in addition to

the regular compensation with t or additional compensation includes without regard to the payroll period.

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

11. Profit sharing and taxable bonuses

Overtime, holiday, hazard, and night differential pay

These constitute additional compensation, except when derived by a minimum wage earner.

Commissions, emoluments and honoraria

Commissions are incentives intended to stimulate sales. These may be given as a profit sharing or
performance bonus. Emoluments pertain to any pay in general while honoraria are additional payments
for attending to special tasks or assignments.
Living quarters or meals

If an employee receives free living quarters or meals in addition to salary for services rendered, the value
to the employee of such living quarters or meals is included in compensation income. However, when the
same was furnished to an employee for the convenience of the employer or out of necessity of the
employer's business, the value thereof is not compensation income, but a business expense.

Stock option plans

To motivate employees, employers give stock options to employees allowing them to earn additional
rewards on the appreciation of the stock price of the company. The option will have value when the value
of the stock of the employer exceeds the exercise price fixed at the grant date.

Types of options

1. Equity-settled options - entitles employees to purchase shares of stocks of the employer at a pre-
determined exercise price fixed on the grant date

2. Cash-settled options - entitles the employee to receive in cash the excess of the fair value of stocks
over the exercise price without actually delivering stocks

Upon the exercise of the option, the excess of the book value or fair value of the stocks, whichever is
higher, less the exercise price set at grant date is treated as follows:

a. Additional compensation income-if the employee is a rank and file

b. Fringe benefits- if the employee is a managerial or a supervisory employee

This rule is applied regardless of the type of the option. (RMC 79-2014)

Illustration-equity-settled option

Mr. Anthony, a rank and file employee, received a stock option from his employer, ABC, Inc., entitling him
to buy 10,000 of ABC's share at a strike price of P100. In April 2021, Mr. Anthony exercised the option
when ABC shares was selling P150/share. The shares had a book value of P145/share in the latest
published financial statements of ABC, Inc. After two years, he sold the shares for P180/share.

Fair value of stocks (P150 x 10,000 shares) P 1,500,000

Less: Exercise price of option (P100 x 10,000) 1,000,000

Compensation income (discount) P 500,000

Note:

1. The P150/share fair value is used since it is higher than the P145/share book value.

2. For listed shares, the fair value of the stock is based on the simple average of high and low. on the
exercise date. For non-listed shares, the book value per share is simply used in the absence of an over-
the-counter (OTC) market price available.

3. The compensation income shall be reported by Anthony in his 2021 income tax return.

4. If Mr. Anthony is a supervisory or managerial employee, the P500,000 shall not be treated as a
compensation but as a fringe benefit subject to a gross-up fringe benefits tax.
Treatment of the subsequent sale of the shares

If the employer corporation is a:

1. Domestic corporation, and the sale of the stocks is made:

a. through the PSE, the sale is subject to the stock transaction tax of 60% of 1% of the gross
selling price. The tax would be computed as:

Selling price (P180 x 10,000) P 1,800,000

Multiply stock transaction tax rate 60% x 1%

Stock transaction tax P 10.800

The tax will be withheld by the broker who effected the sale. The gain from the sale of the stocks
would not be subject to income tax.

b. directly to buyer, the net gain on the sale is subject to the 15% capital gains tax. The tax shall
be computed as follows:

Less: Tax basis of shares sold P 1,800,000

Selling price (P180 x 10,000) P 1,500,000

Capital gains P 300,000

Capital gains P 300,000

Multiply by: CGT tax rate 15%

Capital gains tax P 45,000

2. Foreign corporation, the net gain on the sale is a capital gain subject to the regular income tax. The
gain subject to regular tax shall be computed as follow:

Selling price (P180 x 10,000) P 1,800,000

Less: Tax basis of shares sold P 1,500,000

Capital gains P 300,000

Multiply by: Holding period rate (>1 year) 50%

Capital gain subject to regular tax P 150,000

The rules on dealings in other capital assets will be discussed in Chapter 12.

Illustration-cash-settled option

Mr. Anthony, a supervisor, received a cash-settled stock option from his employe ABC, Inc., entitling him
to receive increase closing share pricte exercise date over the strike price of P100/share covering 10,000
ABC shares. O March 23, 2021, Mr. Anthony exercised the option. ABC shares traded P156/share high,
P146/share low and closed P150/share at the Philippine Stock Exchange. The volume weighted average
traded price was P148/share. ABC shares had a book vala of P153/share in the latest published financial
statements.

Based on the ABC, Inc.'s option plan, Mr. Anthony shall receive cash instead of stoco amounting to:

Fair value of stocks (P150 x 10,000 shares)

Less: Exercise price of option (P100 x 10,000)

Cash (Fringe benefit subject to final tax)

What if the option is an equity-settled option?

P 1,500,000

P 500,000

If the option would have been an equity-settled option, Mr. Anthony shall receive the following number of
ABC shares pursuant to the terms option plan:

Fair value of stocks (P150 x 10,000 shares)

Less: Exercise price of option (P100 x 10,000)

P 1,500,000

Increase in value of stocks covered by the option

P 500,000

Divide by: Exercise day closing price

Number of shares

150

Under the regulations, the fair value of listed stocks is the simple average of high low, computed as (P156
+ P146)/2 = P151/share. Purs simple RMC 79-2014, fringe benefits would be valued based on the
P153/share higher book value

of shares

Multiply by:

Stocks (Fringe benefit subject to final tax)

153 P510,000

The subsequent sale of the stocks would be subject to There would be no income tax on the realized
gained the stock transaction tax.

Profit sharing or taxable bonus

Profit is a reward for churning the business to post a profit. It is a compensation for controlling all the
factors that influence profit such as marketing and sales, productivity, and administrative factors. It is a
reward which can be enjoyed by individual employees such as salesmen, division heads, key officers, or
by all employees collectively.

Bonuses are supplemental or additional compensation. However, if they are linked solely to productivity
under the productivity incentive plan of employer pursuant to RA 6971, they should be considered as de
minimis benefits.

Productivity incentive bonus The Productivity Incentive Act of 1990 (RA 6971) encourages private
employers set-up productivity incentive programs.

A productivity incentive is linked to improvements in productivity usually in terms of cost savings through
waste reduction, efficient labor utilization, or increase in volume of production. Under the NIRC,
productivity incentive bonus is considered as part of "other benefits" under "13th month pay and other
benefits". Under the revision of RA 10653, productivity incentive is now a de minimis benefit.

Productivity incentive distinguished from profit sharing bonus Productivity incentive is anchored on
improvements in the factors of production and is usually enjoyed collectively by employees due to the
inherent difficulty of tracing productivity to individual performance. It is based upon cost savings; hence, it
is payable even if the business poses a loss. Profit sharing is payable only when the business post a
profit.

13TH MONTH PAY AND OTHER BENEFITS

"13th Month Pay and Other Benefits" includes:

1. 13th month pay

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)

Additional compensation allowance (ACA) of government persone (RRB-2000)

d. 14th month pay, 15th month pay, etc.

e. Other fringe benefits of rank and file employees

13th month pay

a. The 13th month pay of government employees consists of a Christmas bona equivalent to one-month
salary plus a P5,000 cash gift. (RA6686 as amended by RA 8441)

b. The 13th month pay of private employees is equivalent to one-month salary. (PD 851)
Christmas bonus and Christmas gift The Christmas bonus of government employees is their 13th month
pay. In private companies, the term "Christmas bonus" may pertain to the 13th month pay, a separate
incentive pay, or to a profit sharing.

Christmas bonus of private employees which is a non-performance-based incentive pay is part of other
benefits. Christmas bonus in the nature of profit sharing should be treated as additional compensation
income, not as "other benefits." The nature of the Christmas bonus of private employees shall determine
its tax classification.

The Christmas gift of government employees is specifically designated as part of "13th month pay and
other benefit" under Sec. 32(B)(7)(e)(i) of the NIRC. RR5- 2011 includes Christmas gift in the list of de
minimis benefits. But since revenue regulations cannot amend the law they implement, RR5-2011 should
be interpreted to apply only to Christmas gifts of private employees.

Hence,

Government employees

Private employees

Christmas bonus

13th month pay and other benefits

13th month pay and other benefits

Christmas gift

13th month pay and other benefits

De minimis
Bonus vs. GifR Bonus is performance-based and is non-discretionary to the employer while a gift is a
gratuity and is discretionary upon the employer.

Other fringe benefits

Other fringe benefits include all other taxable fringe benefits not specifically included in compensation
income as regular, suppleme bare fors 130t month pay 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

Employee personal expenses

Employee personal expenses such as, but not limited to, rental of 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 fact holds true even if the expense is receipted in the
name of the employer.

Taxable de minimis benefits

All other benefits of relatively small 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 as 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."

TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS

RR2-98 provides that 13th month pay and other benefits are exempt from withholding on compensation
provided they do not exceed P90,000. It follows, therefore, that the excess above P90,000 is subject to
the withholding tax on

compensation. RR3-98, the revenue regulation implementing the fringe benefit tax, also provides that it
does not cover benefits forming part of compensation income subject to the withholding tax on
compensation.

Hence, the excess of "13th month pay and other benefits" over P90,000 should be treated as
compensation income subject to regular income tax.

Note on government employees:

1. Personnel Economic Relief Allowance is not subject to income tax and withholding tax (Under RR8-
2000, as affirmed by RR10-2008).

2. The P5,000 Christmas gift of government employees is designated by the NIRC to be part of "13th
month pay and other benefits"; hence, it is not a de minimis benefit.

3. Under RR5-2011, the monetization of vacation leave and sick leave credits of government officials is an
exempt de minimis benefit without regard to the number of days.

Note: Private employees

1. Performance bonus is a supplemental or additional compensation.

2. The laundry allowance limit is computed as P300 x 12 = P3,600.

3. Christmas gift is a de minimis benefit for private employees under RR5-2011.

4. The housing privilege is exempt under the convenience of the employer rule.
5. The "13th month pay and other benefits" of rank and file employees includes "other fringe benefits."

Note:

1. The taxable regular compensation income is computed as (P1,044,000-P30,000).

2 The excess of the P90,000 threshold over the actual 13th month pay and other benefits is non-
deductible to other items of compensation income. (RR3-2015)

Income Tax Due

The income tax due of the employee would be computed as follows:

Taxable income

Less: Lower limit of applicable bracket

Excess

Multiply by: incremental tax rate

Income tax due

Tax

P 601,000

400.000

P 30,000
P 201,000

25%

50,250

P 80.250

Over

250,000.00

But Not Over

Basic Tax

Plus % Of excess over

30,000

20%

25%

250,000.00

130,000

30%
800,000.00

The fringe benefits tax on managerial or supervisory employees The fringe benefits of managerial or
supervisory employees is subject to a grossed-up final tax at the rate of 35%, computed as follows:

Taxable fringe benefits.

Divide by: Gross-up by rate Grossed-up monetary value

Multiply by: Tax rate

Fringe benefits tax

P 42,200

P 64,923

65%

35%

P 22,723

The fringe benefits tax is a final tax which be paid by the employer to the government It is presumed
withheld out of the fringe benefits of the managerial or supervisory employee. The detailed rules on fringe
benefit taxation will be discussed in the following chapter. It is merely shown here for you to obtain
preliminary understanding.

TAXABILITY OF MINIMUM WAGE EARNERS (MWE)

Minimum wage earners are exempt from income tax on the following:

1. Basic minimum wage 2. Other benefits (HHON)

a. Holiday pay

b. Hazard pay

Overtime pay

d. Night shift differential pay

These shall be presented as exempt benefits under non-taxable compensation income. Since exempt
from income tax, the exempt benefits of MWEs shall not be subject to withholding tax.

Receipt of other taxable income by MWEs

MWEs are still exempt from income tax on the foregoing exempt benefits even if they are earning other
taxable items of compensation or other income from concurrent employers, trade, business or practice of
a profession.

MWEs are subject to tax only to the extent of income other than the aforementioned exempt benefits.
(RR11-2018) Hence, additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable amount of P90,000, taxable allowances and other taxable income given by the
same employers to MWEs are subject to withholding tax. Despite this, it must be noted that MWEs will
actually pay income tax only if their total taxable income exceeds P250,000 for the year.

Rules of change in status as a Minimum Wage Earner during a year

1. When an employee becomes a minimum wage earner during the year, he shall be subject to income
tax only on compensation earned before becoming a minimum wage earner.

2. When an employee ceases to be a minimum wage earner during the year due to increase in salary,
only the income for the rest of the year is taxable

3. When an employee ceases to be a minimum wage earner during the year by

(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 RMC23-2011, 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 a separate or other benefit.

THE WITHHOLDING TAX ON COMPENSATION

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

Reproduced herein is the withholding tax table for semi-monthly compensation:

REVISED WITHHOLDING TAX TABLE

DAILY

Compensation Range

P 685 and below

P 685 P

1.095
3

P1,096-

P2,192 P

P5,479 P

P 21,918 and above

P2,191

5,478

21.917

Prescribed Withholding Tax

0.00 +20% over P685

P82.19 25% aver 1,096

P 356.16 P+30% over P 2,192

P 1,342,47 +32% over P

0.00
P6,602.74 +35% over? 21,918

5,479

WEEKLY

Compensation Range

P 4,808 and below

P 4,808-P 7,691

Prescribed Withholding Tax

0.00

P7,692 P 15,384

P 576.92

P 15.385 P 38,461
P38,462 P 153.845

P153,846 and above

0.00

+20% over 4,808

P+25% over P 7,692

P 2,500.0

+30% over P 15. 385

SEMI-MONTHLY

P 9,423.08

+32% over 38,462

P 46,346 15 • 35% over?

153.846

4
Compensation Range

P 10,417 and below

16,666 P 10,417 P

P 16,667 P 33,332

P33,333- P83.332

P383.333-P

P333.333 and above

360

Chapter 10 Compensation Income

nescribed wthholding Tax

ANINTHLY

Compensation Range

REVISED 0.00

WITHHOLDING TAX TABLE

0.00

+20% over P10,417

1

P 20,833 and below

P 20,833 P

Prescribed Tax

0.00

33,332 0.00

P 1,250

P 5,416.67

+25% over 16,667

P+30% over P

P 33,333-р

P 2,500.00 P+25% over P

P66,667 P

P 10,833.33 + 30% over P

+20% over

20,833

33.333

66,667

P 20,416.67 +32% over P 83,333

P166,667-P

P40,833.33 32% over P 166,667

Procedural computation of the withholding tax on compensation

P 100,416.67 +35% over P

P 666,667 and above

P 200,833.33 +35% over P

1. Determine the total monetary and non-monetary compensation of the employee for the payroll period:
monthly, semi-monthly, weekly or daily. Segregate non-taxable 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 to the
incremental tax rate for the bracket. 4. Total the basic tax and the incremental basic tax.

Year-end Tax Adjustment

It must be noted that the total amount withheld on every payroll date may not exactly match the annual tax
due. Due this, the income of the employee needs to be reckoned at the end of the year and adjustment is
made as necessary. Any

362

Chapter 10 Compensation Income

inder-withholding shall be deducted on the final payroll of the employee. An over- vithholding shall be
refunded to the employee.

R32-98, AS AMENDED: TO WITHHOLDING TAX ON COMPENSATION UNDER

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 employer's 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 Under RMC 31-2013, this is not compensation income subject to withholding,
but it is still taxable compensation income; hence, it must be reported by the employee.

6. Damages paid by the employer to employees

7. Proceeds of life insurance

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, and other contributions

13. Compensation income including overtime pay, holiday pay, night shift differential pay, and hazard pay
of Minimum Wage Earners

14. Compensation income of employees in the public sector if the same does not 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.

DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON

COMPENSATION

Employers shall file the BIR Form 1601-C (Monthly Remittance Return of Income

Taxes on Compensation) on or before the 10th day of the following month

the withholding was made except for taxes withheld for December which shall be
filed/paid on or before January 15 of the succeeding year.

Employers are also required to BIR Form 1604-CF (Annual Information Return before January 31 of the
following calendar year in which the compensation income payments and passive income payments were
made.

Employers shall furnish each employee-taxpayer Tax withheld Form 2315 Employers of Compensation
Payment or Income Tax Withheld) on or be January 31 of the succeeding year.

Penalties are subject to the same penalties discussed in Chapter 4 for nom for Non-compliance
compliance of withholding tax requirements.

Treatment of the Withholding Tax on Compensation If the employee has other items of income that are
subject to regular income tax such as income from business or profession, income from other employment
or casual income, he must file a consolidated income tax return to include such items of income for the
entire taxable year. The withholding tax on compensation is credited against the total tax due in the
consolidated income tax return.

Substituted filing of tax return

Under the substituted filing system, the employer files the income tax return of the employee. If the
amount of tax is correctly withheld by the employer, the employee no longer needs to file an annual
income tax return.