Compensation Income jer 10° naP R10 cH pgNSATION INCOME c0 apter discusses the employee benefits considered as compensation income. THis cusses the types of employees, and exempt and taxable benefits. It also It dis the gap between the compensation income subject to regular income ae the fringe benefits subject to fringe benefit tax, tax this chapter, readers are expected to demonstrate: Ae nderstanding of the concept ofan employer-employee relationship : Knowledge of the classifications of employees and the tax treatment of their 3 ‘om ensation income and fringe benefits wastery of the list of employee benefits exempted under the NIRC and special jaws and the de minimis list Knowledge of the condition for exemption of employee benefits under treaty * jrinternational agreements Understanding of the concept of “employer convenience” rule and the ‘necessity of the employer” rule Understanding of the conditions of exemption of a minimum wage earner Knowledge of the classification rules for items of gross taxable compensation come 8. ilastery of the composition of “13 month pay and other benefits” for rank and file employees and managerial or supervisory employees 9, Comprehension of the fringe benefits subject to regular tax and fringe benefits subject to fringe benefits tax 3. 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 employee remuneration. However, if such person is a non-resident not engaged in trade or business in the Philippines, the employer is deemed the person paying Temuneration 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. 317‘ Chapter 10 - Compensation Income hip under Elements of employer and employee relation e a case law: 4. Selection and engagement of employees ~ reening Prog yy employees to hire. ' % ployer usually fixes and controls the > ayy 2. Payment of wages - The em fa weer to retrench or termi “ht 3. Power of dismissal - Employet has Power snable basis. Minate ey, when incurring heavy losses OF other r' eto conkeod Mob . er has po ie em ; The omproy kis accomplished. Ployeg on the 4, Power of control - 1 a means and methods by which the W‘ i i ]] the elements is n hich do not manifest 4 ot an | it whi int contract for the provision of e Ply Servicg® An arrangemen' put an independe employee relationship The following are not considered employees: | 1. Consultants ; 2. Directors without management function ; 3. Talents and artists on shows or radio broadcasts (Sonza vs. 4 Broadcasting Corporation, GR. No. 138051) BSc The income or fees of these individual business or professional income. s are not compensation income 4 Ut ap t LOYEES AS TO FUNCTION 4, Managerial employees — Those who are given powers or prerogative down and execute managerial policies and/or to hire, transfer, sus a toly off, recall, discharge, assign or discipline employees Pend, ly Those who effectively recommend such manager 2. Supervisory employees - actions if the exercise of such authority is not merely routinary or cleri the use of independent judgment tal Those who hold neither managerial nor supervisoy TYPES OF EMP! nature but requires 3, Rank and file employees - functions TYPES OF EMPLOYEES AS TO TAXABILITY 1. Minimum wage earners - Employees who ipi i ’ are recipients of minimum wa 3 They are exempt from income tax on their compensation. 7 , Regular ei - j i Re 7 iar emplogees Employees who are subject to the regular progress It must bi “ treated as regular employees. IN law. The special alien under the old Jaw ™ 318eA _ Compensation Income ot wage Earner yi um wage earner refers to a worker in the private sector who is paid the A wi wage or to an employee in the public sector with compensation income ai ore than the statutory minimum wage (i.e, those with salary grade 1 to 3) oon actual sector where he or she is assigned. in , i minimum wage refers to rate fixed by the Regional Tripartite Wage tu! gest uctivity Board of the Department of Labor and Employment or a sojmonth or P60,000/year, whichever is higher, if psi yet AX MODEL ON COMPENSATION INCOME tT com ensation income P xoxxxxx 05s ‘on-taxable compensation Se eoerer eable compensation income Poxxxex 05s COMPENSATION INCOME 58 ‘compensation income generally includes all remunerations received under “ mployer-employee relationship. an oy-TAXABLE COMPENSATION : Mandatory deductions " ‘hese includes employees’ mandatory contribution to GSIS, SSS, PhilHealth, HDMF, and union dues p. Exempt benefits 4, 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 profession 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 retirement 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 €. Benefits from SSS, under the SSS Act of 1954, as amended {Benefits from GSIS under the GSIS Act of 1937, as amended De minimis benefits - 13 month pay and other benefits not exceeding P90,000 319Chapter 10 - Compensation Income 4. Certain benefits of minimum wage earners | De minimis benefits De minimis benefits are facilities or privileges such as entertainme ‘ | services, or courtesy discounts on purchases that are of relatively smaiy 1 | are furnished by the employer merely as a means of Promoting alles goodwill, contentment, or efficiency of his employees: De minimis pe, ey petty fringe benefits exempt from income ta. fits N fits which fall within the As originally conceived, other petty fringe bene + of the de minimis list are normally treateg ey oN of de minimis even if not par! minimis and are also exempt from income tax. However, the BIR and the Department of Finance changed the rule und benefits” was restricted to mean 7 Rey, ” thy 2011 wherein the term “de minimis following: ; ; 1. Monetized unused vacation leave credits of private employee exceeding 10 days during the year 4 ay | 7 e credits paid to goy | erate 2, Monetized unused officials and employees dependents of employees not exceedin, 8 Psy 3, Medical cash allowance to per employee per semester, or P375 per month 4, Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per nn amounting to not more than P2,000 Mt 5, Uniform and clothing allowance not 2012) eg, medical allowance to cover medical anj 6. Actual Medical Assistance, healthcare needs, annual medical/executive check-up, maternity assistang and routine consultations not exceeding P10,000 per annum ’ 7. Laundry allowance not exceeding P300 per month 8. Employee achievement award, eg. for length of service or safey achievement, which must be in the form of tangible property other than cas | monetary value not exceeding P1000 or gift certificates, with an annual received by the employee under an established written plan which does na discriminate in favor of highly paid employees. 9, Gifts given during Christmas and major anniversary celebrations 1. exceeding P5,000 per employee per annum (ie, Christmas gift and anniversary gifts) 10. Daily meal allowance for overtime work and nig! exceeding 25% of the basic minimum wage on overtime meal) 11. Benefits received by agreement (CBA) and productivity incentive schemes 320 exceeding P6,000 per annum (pp, nt or graveyard shift a a per region basis (ié an employee by virtue of a collective bargaitil provided that o | |yo 40° Compensation Income we", annual monetary vaiye : Tecej rot ye schemes Combined do, V4 from both ince! ine Not ex CBA and productivi “eed P10,009 Per employee per tarsbl, ati eat nly CBA benefits ang Productiy; te that OF luctivity incent; . Xe mimi. If the amount exceeds py 00000, the ox amounting to P10,000 or less penefits Te amount is a taxable “other ble de minimis benefits 0x2 de minimis over their regul, at cess : atory limits y, Be - benefits of relatively small value that are Not j i 2 animis bene ts ‘ot included in the list of de tment of taxable de minimis benefits rank and file employees _ tax, fntinie: 3 For ensation income under the cate one oe uinimls eee comp ‘Bory “13% month Pay and other benefits” For : ¥ employees ~ taxabj, inimici > ne eet seta gs net ao ms aed tration 1: De minimis limits us ae eerie who is paid a P6009 daily rate, receives the following ized unused vacation leave credits ee unused sick leave credits 3 pa Medical assistance P 7,000 pice subsidy (P2,500 per month) 30,000 Clothing allowance 9,000 jaundry allowance 6,000 Required: Determine the taxable amount of de-minimis benefits, Solution: —Limit _ Excess Monetized unused VL P 5400 P 6000 P 0 Monetized unused SL 5,400 0 5,400 Medical assistance 7,000 10,000 0 Rice subsidy 30,000 24,000 6,000 Clothing allowance 9,000 6,000 3,000 laundry allowance 6,000 3,600 2,400 Taxable de minimis as “other benefits” P_16,800 Note: Private employees 1. The actual value of the monetized unused VL was computed as P600 x 9 while the limit was P600 x 10, 321Chapter 10 - Compensation Income ves, Monetization of sick | 2. ‘The 10-day rule applies only to vacation lea le, employees is taxable. (BIR Ruling No. 227-2013, June 20, 2013). MES op 3. The rice subsidy and laundry allowance were likewise annualized a my, monthly limit by 12, The de minimis benefits within the limits are exempt fog hy ' ite? ty, | Illustration 2 ; Ue N | Giovanni, a government rank and file employee, received the following benep | its, Monetized unused vacation leave credits (10 days) P 6,000 | Monetized unused sick leave credits (15 days) 9,000 | Uniform allowance 5,000 | Laundry allowance 4,800 | Required: Determine the amount to be included in other benefits. | Solution: | Actual __Limit_ _Excess | Monetized unused VL Pp. 6,000 exempt P 0 Monetized unused SL 9,000 exempt 0 | Uniform allowance 5,000 6,000 0 | Laundry allowance 4,800 3,600 ___1.200 | P1200 Taxable de minimis as “other benefits” Note: It is cle ar under RR5-2011 that the vacation leave and sick leave of government em, are not subject to the 10-day limit rule. lope Illustration 3 Professor Radvic was one of the Hall of Fame awardees of Youbee University, ye granted P25,000 cash as loyalty award for his 30 years of service. He was also P10,000 Christmas gift and an additional P10,000 gift during the insta Founding Day Anniversary. Besides, he was also given free lunch meals with at value of P15,000 during the same year. Required: Compute the total taxable de-minimis ben efits as other benefits, Solution: i Limit Excess Loyalty or service award P 25,000 P 0 P 25,000 Christmas and anniversary gift 20,000 5,000 15,000 Meals 15,000 0 15,000 Total taxable de minimis as “other benefits” P_55.000 Note: 1. The limit on loyalty or are no longer considered de minimis. service awards applies only if tt is given in kind. 2. Only meals for overtime or graveyard shifts are considered de minimis. Other meal benels 322/ C ompensation Income ro ° three illustrations, ifthe employee is a gn iat ane entire eat minimis shall e iets i enefits tax, 1 yee piect to fringe . it? ys SUD) Managerial or supervisory be considered as other fringe vit sn of accumulated leave credits it nal leave pay oF the commutation of unused leave credits due to Oe ny separation from employment of the employee is now treated as de rau enefits subject to the 10-day leave credit limit and is no longer exempt t inati 9 et revert termination benefits, 5 p ay and other benefits not in excess of P 90,000 3 0 sition of the “13th month pay and other benefits” will be discussed later me raxale benefits . ars. EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS Bb He penefits of non-Filipino nationals and/or non-permanent residents of the pe ores from foreign governments, embassies or diplomatic missions, and rol organizations in the Philippines are exempt from income tax. int jon from withholding tax does not mean income tax exemption gent government embassies, diplomatic missions and international pore gations are immune from income tax including the obligation to withhold Oe by virtue of international comity as embodied in several international sents towhich the Philippines is a signatory. ag gowevet this exemption from the obligation to withhold tax does not mean come tak exemption of their Filipino employees. In fact, most of the wtemational agreements to which the Philippines is a signatory limit exemption only to non-Filipino nationals and/or non-residents of the Philippines. riipino 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 Filipino employees. 323ch apter 10 - Compensation Income Ci . Fpufirmation of Tax Exemptions not automatic. Filip; one exemption of Filipino employees 5 Mereements OT under prs Clay, emptions under the terms of internat rational organizations ShoSion int with the BIR’s Internat , fi: ¢ special laws granting privi wD y ig privileges 01 epaitation for confirmation © fi oxen shal serve aS Proof of exe’ ~ ‘ ee ir] i ce e airs Division (ITAD). The CON" the employee is taxable ng” Without the confirmation cert ficate, jes oF consulate offices _ si working in Philippine _ Employees of Philippine emP= s . It should be recalled it oe “considered non-resident citizen, Sigg Philippi offices an lippine consulate ippine ‘come i therefore subject to Phi Summary of rules Philippine embassy ? tion |_ oF consulate off Taxable ler contract or special law, - _ Aliens must prove ifthere isan exemption grant und * Taxpayer TURE OF, OR NECESSARY TO, T FITS REQUIRED BY THE NA , THE 7 SISINESS OR CONDUCT OF ‘PROFESSION OF THE EMPLOYER RAD | loyer to the employees to a 1 allowances furnished by the emp r h Benefits ©! ately and effectively execute their duties as required sna le them to appropri ‘ te | e employment are exempt from income tax. This is referred to as “necessity o t employer rule.” the representation, or entertainment xpens 5 Examples: in liquidation i accordance with Specific ecifie r lg’ 1. Necessary tral that are subje requirements of s 2, Allowances which essen for expenses they incurre a. Representation and Transpo! employees under the General Appropriation Act Personnel Economic Relief Allowance (PERA) (RR10-2008) 3. Reasonable amounts of reimbursements or advances to y , employees for traveling and representation which are pre-computed on a daily basis and which are vai any employee while on assignment or duty. 324 veling, transportation, ct to an accounting 0! ubstantiation of expense. tially constitute reimbursement to government perso | din the performance of their official duties, such as: ine rtation Allowance (RATA) of public officers and |rls pence, they are not considere, joye"” pnts FOR a OR ADVANTAGE OF THE EMPLOYER pol fits OF allowan sale are intended for the furtherance of the interest of pen plo er’s busin ° ensure its smooth Operations are likewise exempt el is i « fo income t€X- This is referred to as the “convenience of the employer rule.” naples: . pxa ork-related pepe allowance and transportation allowance particularly 4. 1, employees of call centers which are operated on a 24-hour basis where employees are required to be available always for assignment and consultation (ai Ruling DA-233-07) outstation allowance for employees who will be out from office site at least 8 pours to visit lotto franchise holders for repairs and/or inspection of equipment eased by the employer (BIR Ruling No. 013-02) 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) 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 and partially employee benefits. COMPOSITION OF TAXABLE COMPENSATION INCOME 1. Regular compensation - This pertains to the fixed remunerations received by the employee every payroll period. 325Chapter 10 - Compensation Income ertains to other pep, 2. Supplemental compensation - This F “Ito the payroll per; Form, pays to employees with or without reg?! 0d, Meg, compensation, 13th 4 An adjunct category to the supplement entive pays and all Ont \ other benefit, is necessary t© oe regular or supplemental compe, ther, employee benefits not classifiable a5 "sing p90,000 is an exclusion tig Kt month pay and other benefits not © supplemental co fp income. The excess above P90,000 is added to mPensarig * | 4 "ON Illustration Jar compensation, P120,999 | 0,000 regu! 4 An employee received a th month Pay and other benefits, "ie, compensation, and P100,000 ae computed as follows: % : e : The taxable compensation income sha it 40 | R sation 00,000 - P90,00° 0.0 See vlemnental compensation [P120,000 + Pa : EBay | Taxable compensation income Sang | COME COMPENSATION IN 7 The ae compensation includes fixed remunerations due to be Tecejy, employee every period such as: 7m 2 Fixed Pooors such as cost-of-living ayy one fixed housing eee] ; representation, transportation, and other allowances paid to itp an every payroll period lye Fixed allowances | Allowances which are fixed in amounts and regularly received as Part of monthly, bi-weekly, weekly or daily salaries or wages are part ot bag compensation. This applies even if a portion of the allowances are actual , the employer's business. y Wed Exception rule on the taxability of allowances: a. Ordinary and necessary allowances for travelling, represe entertainment expense of employees incurred in the pursuit of th, trade, business or profession. . The expense is subject to accounting or liquidation. c. Any excess advances are returned to the employer. tation © employ Hence, variable and liquidated allowances are not subject to tax amounts of allowances that are retained by the employee f imse considered compensation. oor et adel Howeye, f shall t Paid vacation and sick leave allowances The paid absences of an employee applied against his vacation or sick lee credits which are normally recei i ooo ly ived as part of the regular salary is part oft 326y C ompensation Income ef sation items ome NO ots of consultants, tale; ; fee or fees ; » talents, and direc 1 etal in the business are professionay rena Who have no management incom oo cee cient ©, not compensation income of the _igns to non-employees such as ; sion: as indey : (ot the sales agent. Pendent sales agents are business a a gratuities : i ities paid dir oe 2 oe accounted Yor by ne ee by customers of the employer hic ion i Oyee to the employer are not wi asi gered as compensation income, but are to be reported a a are nor oe income tax return of the employee, other income in - of compensation paid in kind sat in kind is taxable at the fair value of one in shares, the fair value of the shares at th rece! the consideration received. If e date services were provided is vsed jon 1 Cae wing pertains to an employee in 2019: he sles P 400,000 ir otlving allowance 36,000 C ja monthly transportation allowance (P2Kx 12) 24,000 ure ction for withholding tax on compensation 10,000 metction for employee share in SSS, PHIC, and HDMF 32,000 rpetaxable compensation income shall be computed as follows: Gross salaries P 400,000 Cost-of-living allowance : 36,000 fixed monthly transportation allowance 24.000 Regular compensation income P 460,000 tess: Non-taxable compensation Mandatory deduction 32,00 Taxable compensation income 428,000 Mlustration 2 An employee who was terminated in 2019 due to business closure of the employer received the following: Unpaid 2019 salaries P 200,000 Unpaid 2018 salaries 20,000 Reimbursement for transportation expenses 10,000 Termination pay 100,000 327Chapter 10 - i Compensation Income ted 25 follows: The taxable compensation income shall be comPY p 320,000 Gross compensation income (P200K + p20K +P} Less: Non-taxable compensation 220.000 Non-taxable benefits Taxable compensation income A come to the employe, : an in : e, rtatio expense mesation income, but is also dedy, ination is beyond the employes & Sen 1. Reimbursement for transportation 2. ‘The termination pay is included ng in taxable compensation because TION SUPPLEMENTARY COMPENSATIO' sion include’ performanes the regular compensation “bss With |) Si additiona’ ee jupplementary es employee in addition to y | remunerations to 4! a period without regard to pay! 7 : ee The following are the additional compensation under cur rules: Overtime pay . Hazard pay : Night shift differential pay Holiday pay Commissions Fees, including Emoluments an' : Taxable retirement and separation pay 9, Value of living quarters or meals 10, Gains on exercise of stock options (BIR Ruling 419-2012) 11. Profit sharing and taxable bonuses Overtime, holiday, hazard, and night differential pay These constitute additional compensation, except when derived by a minim, UM y, ge earner. y director's fees (if director isan employee) d honoraria SPANAKPwnp Commissions, emoluments and honoraria Commissions are incentives intended to stimulate sales. These may be gi ven asa Prof sharing or performance bonus. Emolumeni n 1 rm . ts pertain to an| i honoraria are additional payments for attending to special tacks erase general hile ignments, Living quarters or meals Ifan employe i ivi tn " feareateyetiet — or meals in addition to salary f the y loyee of such livi orem compensation income. ead quarters or is i i Setar pata when the same was furnished y meals is included i ieoean oyer or out of necessity of th an etmployee fir mpensation income, but a busi! © employer's business, the vi iness expense. : ; 328y 10° compensation Income raft? tion plans OP" jous stock option plans, employees are given the privilege to buy shares at nde ei exercise price after meeting stipulated vesting conditions. The option will gp 98 jue when the stock of the employer increases in value above the exercise price have ve ise date. The value of the option is the discount at exercise date. * 1, stock options were not taxed at exercise date under the view that the In ier ecomes realized only when the stocks are disposed. Under current tax ise" ne discount (i.e. market price - exercise price) at exercise date is viewed as ensation in kind. ._.« from the exercise of stock options constitute a taxable compensation ns ; : a ec unless they qualify as fringe benefits subject to final tax. (RMC88-2012) income tion . . , ; sho met the vesting condition of his employer's stock option plan where he is ‘vitled to buy 10,000 of his employer's share at a strike price of P100. In 2018, Mr. ed the option when the share of his employer was selling P150/share. exercist ae years, he sold the shares for P180/share. pair value of stocks (P150 x 10,000 shares) P 1,500,000 tess: Exercise price of option (P100x 10,000) __1,000,000 ; income (discount) P__500,000 compensation ‘the compensation income shall be reported by Anthony in his 2018 income tax return. Treatment of the subsequent sale of the shares Ifthe employer corporation is a: 4. 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 by: stock transaction tax rate 60% xX1% Stock transaction tax 2 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: Selling price (P180 x 10,000) P 1,800,000 Less: Tax basis of shares sold —1500,000 Capital gains P 300,000 Multiply by: CGT tax rate ——_15% Capital gains tax P__45,000 329Chapter 10 - Compensation Income Y sale is a capital gain subje, et gain on the rar tax shi “ect tO regular shall be computeg’ they 2. Foreign corporation, then regular income tax. The gain SU! ag 5° P. 1,800,0 My Selling price (P180 x 10,000) ” {500.000 ‘ Less: Tax basis of shares id P 300,000 Capital gains ; jyear) ———30% Multiply by: oting pei Ta ve’ P150,000 Capital gain subject t0 7°80 of other capital assets will be discussed in etal) il iy 4 | The rules on dealings following chapter us ‘ Profit sharing oF ta or churning the busines’ to post a prog profit sharing 1S 4 "rng all the factor that influence profit such ag i : trong mini trative factors. It is a reward whe | uch as salesmen, division heads, key a Cay ‘ es, and sales, Pro uctivity, enjoyed by im vidual employees byall employees collectively: : iti ation. However, if mental oF additional com| jensé ifthey .. ea a jer the roductivity incentive plan of the i iy sole ee pa6g71, they should be considered as de minimis benefits, Dn pursu Ly ctivi incentive bonus The doc Incentive Act of 1990 (RA 6971) encourages private emp), to set-up productivity incentive programs: Ny ements in productivity usta, 4 is linked to improv gs through waste reduction, efficient labor utilization increase in vo! duction. Under the NIRC, productivity incentive bony “other benefits’ under #73th month pay and other beng RA 10653, productivity incentive is now a de minini, benefit. productivity incentive distinguished from profit sharing bonus tive is anchored on improvements in the factors of productin lectively by employees due to the inherent difficuly¢ Productivity incen and is usually enjoyed col dividual performance. le even if the business poses a loss. tracing productivity to in hence, it is paya! when the business post a profit. 13TH MONTH PAY AND OTHER BENEFITS "13th Month Pay and Other Benefits” includes: | 1, 13th month pay 330 It is based upon cost saving) Profit sharing is payable |yo ‘et 40 - Compensation Income cnaP er benefits : 3, christmas bonus of private employees a : cash gifts other than Christmas or anniversary gifts of private employees b. (RR2-98, as amended by RRS-2011) ee Additional compensation allowance (ACA) of government personnel (RR8-2000) 4 14 month pay, 15 month pay, etc. other fringe benefits of rank and file employees 3th month pay s The 13th month pay of government employees consists of a Christmas bonus % quivalent to one-month salary plus a P5,000 cash gift. (RA6686 as amended py RA 8441) 5, The 13th month pay of private employees is equivalent to one-month salary. * (pD 851) christmas bonus and Christmas gift The Christmas bonus or 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 toa 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 | penefits.” 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 Private employees employees Christmas bonus 13th month pay 13th month pay and other benefits |_and other benefits Christmas gift 13th month pay De minimis and other benefits Bonus vs, Gift Bonus 's performance-based and is non-discretionary to the employer while a gift is a gratuity andis discretionary upon the employer. 331y deg; Mo, Chapter 10 - Compensation Income Other fringe benefits : Other pee benefits include all other taxable — ae included in compensation income as regulat, supple Mh and other benefits under current tax rules such as: employer y 1, Employee personal expenses shouldered bY the ; 2. Taxable de minimis benefits such as: a. Excess de minimis b. Benefits not includ ed in the de minimis list Employee personal expenses vnited to, rental See peal epenses such anit rast ® Heals mi grocery, association OF club ate areal: ve nstitute fringe ‘ a Pea assume ig ee if the expense is receipted in they the employee. This fact olds . ¥ the employer. ci ts i : Taxable de minimis mee ull be which are not included in the j efits 0! ce . Al othe nefits shall not be considered as de min ould Deco nt ' inimis benefi cons; benefits. Corollary to this rule, excess de minimis De! consi et taxable ordinary fringe benefits. Tax Treatment of Other Fringe Be a, For rank and file employees ~ “other benefits” under “13 month p b. For managerial or supervisory employee - fringe benefit tax nefits treated as compensation income as ay and other benefits” treated as fringe benefit Subj " Par | d that the “other fringe benefits” of managerial or supers, It must be emphasize , ed from their "13th month pay and other benefits.” i employees are Iustration 1 The employer pays compensation. for the tuition fee of the employee in addition to his regu, The tuition fee paid is a fringe benefit which will be treated as follows: 1, Asa compensation income as part of “other benefits” under “13% month pay a other benefits” if the employee is a rank and file employee 2. Asa fringe benefit subject to fringe benefit tax if the employee is a managerial supervisory employee 3. As an exempt fringe benefit, regardless of the type of employee, if the same ws given by the employer for his convenience or business necessity such as whentie employee is required to study to acquire expertise for the future use of tit employer's business 33240- Compensation Income crt ion Zz i st receives a monthly rice allowance of P3,000 a month which is P1,000 in wr joyee inimis li ci enti 2,000 a month de minimis limit for rice allowance. 55 : ext pt 00 monthly excess constitutes a taxable de minimis benefit taxable as he nsation as part of other benefits” for a rank and file employee. It is a fringe come subject © final fringe benefit tax for a managerial or supervisory employee. ene jTMENT OF 13TH MONTH PAY AND OTHER BENEFITS f eS rovides that 13th month pay and other benefits are exempt from a odin O” compensation provided they do not exceed P90,000. It follows, werfor® “nat the excess above P90,000 is subject to the withholding tax on compensa 3.98, th ee it does not witnnording °% ace, the excess of “13th month pay and other benefits” tion. e revenue regulation implementing the fringe benefit tax, also provides cover benefits forming part of compensation income subject to the on compensation. over P90,000 should be reated as compensation income subject to regular income tax. lustration 1 government rank and file employee received the following benefits aside from the pasic pay in : christmas bonus P 70,000 cash gift 5,000 Additional compensation allowance 36,000 Personnel Economic Relief Allowance (P2,000/month) 24,000 Monetized value of vacation leave and sick leave (18 days) 9,000 7,000 Uniform and clothing allowance Required: Determine the taxable “13th month pay and other benefits.” Solution: Christmas bonus (13th month pay of gov't employees) P 70,000 Cash gift 5,000 Additional compensation allowance 36,000 Excess uniform and clothing allowance (P7,000 - 6,000) 100. Total 13th month pay and other benefits P 112,000 Less: Exclusion Threshold 90,000 P_22,000 Taxable 13th month pay and other benefits 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). . The P5,000 Christmas gift of government employees is designated by the NIRC to be part of “13th month pay and other benefits’; hence, itis not a de minimis benefit. 333Chapter 10 - Compensation Income 3. Under RR5-2011, the monetization 0 a officials is an exempt de minimis benefit wi f vacation leave and sick leave credits thout regard to the number of days Bre, ‘| Mlustration 2 . A private rank and file employee working in a remote tower station of Shai Company received the following benefit during 2019: i thy 13th month pay P i ‘ Performance bonus 3 0 00 Christmas gift 000 Danger exposure allowance (hazard pay) 6,000 Housing privilege 38,000 Uniform and clothing allowance 8,000 6,000 Laundry allowance The housing privilege pertal furnished by the employer to emp: Required: Compute the excess 13th month ins to the annual value of the employees’ livin loyees for staying on-site. 8 Wa pay and other benefits. i. Solution: | Other De minimis _Limi en P 30,000 P 5,000 P 25,000 Christmas gift 8,000 6,000 2,000 Uniform and clothing allowance Laundry allowance 6,000 3,600 Excess de minimis benefits (other fringe benefits) P 29,400 13th month pay 72, Total 13th month pay and other benefits P 101,400 Less: Exclusion threshold Taxable 13th month pay and other benefits P_11,400 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 fyi | benefits.” * Illustration 3 A managerial employee received the following benefits in 2019: 13th month pay P 95,000 Rental expense on condominium unit 18,000 Salary of personal body guard 12,000 Profit sharing 12,000 Rice allowance 32,400 Clothing allowance 7,000 Night shift differential pay 11,000 334y 40- Compensation Income f te! ap i “ ; a red peter ne ae canis 3th month pay and other benefits,” additional ot gation and te Tnge DeneRt subject to fringe benefit tax. ip oo nt ot De Other -ninimis _Limit Benefits. sowanee P 32400 P 24,000 P 8,400 iit ng alwane —2000 6.000 1,000 corde minis P 9,400 x0 benefits: ; ootet of residence pai by player 18,000 Rent personal body guar soa penefit subject to fringe benefit tax a 39,400 To ring nti P 12,000 pt differential pay val cupplemental compensation oF 23,000 113 month pay and other benefits P 95,000 108 Exclusion threshold roxable 43th month pay and other benefits P_5.000 ! NTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME tive Illustration 1 ernment rank and file employee had the following summary of his compensation and penefits in 2019: Gross compensation income P 1,044,000 Less: Employee payroll deductions Employee contribution to GSIS, PHIC; HDMF P 80,000 Employee deduction for withholding tax 64,000 144,000 Net regular payroll P 900,000 Representation and Transportation Allowance 18,000 Personnel Economic Relief Allowance 24,000 Christmas bonus 87,000 Uniform allowance 12,000 Christmas gift 5,000 Honoraria 15,000 Total compensation P_ 1,061,000 The taxable compensation income shall be computed as follows: 335- ensation Income Chapter 10 Comp fae other Terab ‘ \ Mandato! deductions P 9 Regular vomnpensation 044,000 - pg0,000) 64.009 | Supplemental compensation tb Honoraria 18,00 0 009 | ee 74000 ——— ——_ a] POP 979.095 ; p 87,000 Christmas bonus 5,000 | Christmas gift Excess De minimis: | Uniform allowance p_12,000 2 E000 OM 36,000 | +t: Total Exclusion threshold (up to 90,000) 90,000 +9000 Total n-taxable compensation p.218,000 ner benefits 8.000 __8.099 Total no! Taxable excess 43th month pay and otl sation income P98 Taxable compen! Note: 7 | 4, The taxable regular compensation income is computed as (P1,044,000 ~ P80 09, ' 2. The excess of the P90,000 threshold over the actual 13% month pay and oth 0), non-deductible to other items of compensation income. (RR3-2015) er bene is Presentation in the Income Tax Return of the employee: Gross compensation income (ie, P1,061,000 + 144,000) P 1,205,00 Less: Non-taxable compen: ae Mandatory deductions 80,000 Exempt benefits 138,000 Taxable compensation income 218.000 sation income Integrative Illustration 2 Aprivate employee derived the following remunerations and benefits in 2019. Basic compensation, net of P32,000 SSS, PHIC, PhilHealth, | HDME, union dues, and P35,000 withholdi mE ithholding tax P 533,000 Vacation expenses of the empl i Sion : ployee paid b} I Cost-of-living allowance (COLA) cael ion Pre-computed daily transportation allowance uM Rice subsidy (12 cavans worth P2,600 each) a 13th month pay 31200 Monetized unused leave credi 0 M it (1 et Uniform allowance eee 18,000 Total compensation income 2. P__714.200 3360- Compensation Income 90" able compensation income and the Bross taxable compensation income 2 not" taxi wyputed as follows: peo? ntl goon fle employee: or? De Non- Other —‘ Taxable minimis Taxable. Benefits _ Benefits — rory oe eductions 232.000 wanda mapensation (P600,000 ~ P32,000) P 568,000 gest arnt compensation a mime PAY 21,000 ,000 couA ortation allowance P 16,000 = paily tans : P OP 601,000 otal : igh month Pay P 50,000 ther be benefits: idb 1 vacation expense paid by employer 24,000 excess de minimis benefits: ice subsidy P 31,200 24,000 7,200 Monetized VL 10,000 10,000 : Monetized SL 8,000 : 8,000 Uniform allowance 9.000 6,000 Total P_ 58,200 P 56,000 P 92,200 P 601,000 Exclusion threshold 90,000 €- 99.000 Total P146.000 P 2,200 otal non-taxable compensation P.178,000 taxable 13th month pay and other benefits - 2.200—> 2.200 Taxable compensation income P Note: 1. The P568,000 basic compensation may also be computed as P533,000+P35,000. Note that the withholding tax is not an exclusion from gross income. 2, The limit of the monetized unused VL is computed as P18,000 x 10/18 = P10,000. The SL pay is computed as P18,000 x 8/18 = P8,000, 3. The vacation expense shouldered by the employer is a fringe benefit forming part of compensation income of a rank and file employee under “other benefits.” Presentation in the Income Tax Return of the employee: Gross compensation income* P 781,200 Less: Non-taxable compensation income Mandatory deductions P 32,000 Exempt benefits —— 146,000 __178,000 Taxable compensation income P_603,200 ‘?714,200 net pay + (P32,000 + P35,000) payroll deductions 337Chay ter 10 - Compensation Income Income Tax Due The in come tax due of the employee would be compu rod ae follows: _Tas— Taxable incot 0 Hag p 603,200, ae imi p 30,000 ' Less: Lower init of appleable bros a at Paes 50,800 | Multiply by: incremental tax rate : | Income tax due 0,800 : ‘ ‘ Over ___ButNot Over \ \ 250,000.00 400,000.00 ,00 600,000.00 000,000.00 Note: Check the complete Individual Income T@* Tal Fora a Non- other Taxable “minimis Taxable ‘ion: Ir p_32.000 Mandatory deductions P 568,000 Regular compensation ; Supplemental compensation 21,000 Overtime pay 12,000 COLA Daily transportation allowance 16,000 Sania Total zi p 50,000 13th month pay - Exclusion threshold (up to 90,000) 50,0004 -50,000 Total Pp 66,000 P 0 Excess 13th month pay & other benefit eel Ae Taxable compensation income P.601,000 (ther fringe benefits Vacation expense paid by employer P 24,000 Excess de minimis benefits Rice subsidy p 31,200 24,000 P 7,200 Monetized unused VL 10,000 10,000 - Monetized SL 8,000 0 8,000 Uniform allowance 9,000 6,000 3,000 Total 59,200 P 106,000 P 18,200 Total non-taxable compensation P 138,000 Excess de minimis benefits - 18 200 18,200 Total fringe benefits subject to final tax p_42,200 33810° Compensation Income te + ; i ha? oss compensation income is computed as follows: neo perations and benefits ot! i e benefit subject to final tax P 781,200 es Fr apensation income —42.200 ae 00 2.739.000 ation in the Income Tax Return of the employee: pres? mmpensation income Gross or taxable compensation income ve ess! a P 32,000 gxempt benefits 138,000 walt compensation income P-601,000 come Tax Due fe income tax due of the employee would be computed as follows: taxable income : P 601,000 less: Lower limit of applicable bracket —400,000 P 30,000 r pxcess P 201,000 ' Multiply by: incremental tax rate 25% __ 50.250 | Income tax due P_0,250 ' | [Over ___ButNotOver _ BasicTax Plus % _ Ofexcess over | [50,000.00 400,000.00 0 20% 250,000.00 1-47 400,000.00... 800,000.00 30,000 25% 400,000.00 800,000.00 _2,000,000.00 130,000 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: Jaxable fringe benefits P 42200 Divide by: Gross-up by rate Grossed-up monetary value aT eee 64,923 Multiply by: Tax rate Fringe benefits tax = en The fringe benefits tax is a final tax which be paid by the employer to the government. Itis 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 339Chapter 10 - Compensation Income 2. Other benefits (HHON) a. Holiday pay b. Hazard pay c. Overtime pay d. Night shift differential pay e} should be presente, i fits, Since the foregoing are legally exempted an its taxable COMPENSAiOn i, ay, | taxable compensation and educted in the co | Illustration ed by C50 Company, derived the ¢, | Ms. Alona, a minimum wage earner employ’ lh | benefits during the yea" | —_ p 124,000 Basic minimum wage 1100 13% month pay Bo 0 Overtime pay 30, Night shift differential PaY 15,000 Hazard pay 15,000 Holiday pay P 275,000 Total tributions Less: SSS, philHealth, HDMF ©0} p270.000 Net total - i ted as follows: The taxable compensation income should be compu’ tion income P 275,000 Gross compensal ion i a Less: Non-taxable compensation income 5000 Mandatory deductions , Exempt benefits 7 a Taxable compensation income Pu = Since the basic minimum wage and HHON are exempt benefit, they must be remove inthe reportable amount of taxable compensation income. The would be no tax duein this case. Receipt of other taxable income by MWEs Previously under RR10-2008, a minimum wage earner loses the special privileg| of tax exemption if they derive other taxable income. However, this rule was! Court in Soriano et al. vs. secretary of Finance ani nullified by the Supreme Commissioner of! ‘Internal Revenue, G. the minimum wage ear! fits even if they receive 0 d to tax if their other taxa Consequently, foregoing bene! may be subjectet year. ther ble 340 GR No. 184450 dated 24 January 2017. ner is still exempt from income tax from the ation. However, the) taxable compens: income exceeds the P: 250,000 for te) | |‘ef 10- Compensation Income a : Gh gin 1: With other taxable compensation income wus, minimum wage employee, was able to close a sal 1 i) ‘ les deal for her employer a the year. She received the following compensation during the year: ™ ee jmum wage, net of mini asic m0 mandatory deductions P 160,800 B month pay 14,000 yoliday me 4,000 ime P 4 70,000 oe shift differential pay 15,000 azard PAY 10,000 Hetgsharing bonus 12,000 commission income —— 370,000 otal BR _655,800 he taxable compensation income should be computed as follows: Gross compensation income (i.e., P 655,800 + P 8,000) P 663,800 <5; Non-taxable compensation income le Mandatory deductions P 8,000 Exempt benefits 273,800 281,800 taxable compensation income P__382,000 Mary's tax due shall be computed as: Taxable compensation income P 382,000 Less: Lower limit of the income bracket where the taxable income qualifies 250,000 P 0 Excess P 132,000 Multiply by: ——20% ___ 26,400 Total tax due P__26,400 Illustration 2: With business income Jun, a minimum wage employee, do part-time business after work. He received total minimum wage of P290,000 inclusive of P11,000 13 month pay but net of P5,000 mandatory deductions. He also received a performance bonus of P20,000 and earned 300,000 from his side-line business. Jun’s taxable income shall be computed as follows: Gross compensation income (i.e, P 290K + P SK + P20K) P 315,000 Less: Non-taxable compensation income Mandatory deductions P 5,000 Exempt benefits —— 290,000 ___295,000 Taxable compensation income PB 20,000 Net income from business —— 300,000 Taxable income P__320,000 341