Republic of the Philippines

President Ramon Magsaysay State University

College of Accountancy and Business Administration
(Formerly Ramon Magsaysay Technological University)
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

College/Department College of Accountancy and Business Administration

Course Code BA Core 3

Course Title Income Taxation

Place of the Course in the Program Major Subject

Semester & Academic Year First Semester AY 2020-2021

CHAPTER 9-COMPENSATION INCOME

Introduction
This chapter discusses the employee benefits considered as compensation income. It discusses the types of
employees, and exempt and taxable benefits. It also delineates the gap between the compensation income subject to
regular income tax and the fringe benefits subject to fringe benefit tax.

Intended Learning Outcomes

1. Knowledge of the concept of an employer-employee relationship
2. Knowledge of the classification of employees and the tax treatment of their compensation income and
fringe benefits
3. Mastery of the list of employee benefits exempted under the NIRC and special laws and the de minimis list
4. Knowledge of the condition for exemption of employee benefits under treaty or international agreements
5. Mastery of the compensation of “13th month pay and other benefits” for rank and file employees and
managerial or supervisory employees
6. Comprehension of the fringe benefits subject to regular tax and fringe benefits subject to fringe benefits tax

Discussion
EMPLOYER-EMPLOYEE RELATIONSHIP

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

Employee – refers to any individual who is 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:

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 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.

The following are not considered employees:

1. Consultants
2. Directors without management function
3. Talents and artists on TV shows or radio broadcasts (Sonza vs. ABS-CBN Broadcasting Corporation, G.R.
No. 138051)

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 judgement
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 and are exempt from income
taxation
2. Special aliens – (classification removed, already taxable as regular employees)
3. Regular employees – Employees who are subject to the regular progressive income tax

Minimum Wage Earner

A 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 income of not more than the statutory minimum wage (i.e., those with salary
grade 1 to 3) in non-agricultural sector where he or she is assigned.

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

To be considered as a minimum wage earner, the employee must not have other income aside from their minimum
wage and exempt benefits. A recipient of a minimum wage but with other taxable income is a regular employee.

THE TAX MODEL ON COMPENSATION INCOME

Gross compensation income P xxx,xxx

Less: Non-taxable compensation __xxx,xxx
Taxable compensation income P xxx,xxx

GROSS COMPENSATION INCOME

Gross compensation income generally includes all remuneration received under an
Employer-employee relationship.

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NON-TAXABLE OR EXEMPT COMPENSATION

A. Mandatory Deductions
These includes employees’ mandatory contribution to GSIS, SSS, Philhealth, HDMF and union dues

B. Exempt Benefits
C. Benefits excluded and/or exempted under the NIRC and special laws
D. Benefits exempt under treaty or international agreements
E. Benefits necessary to the trade, business, or conduct of profession of the employer
F. Benefits for the convenience or advantage of the employer

A. 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
e. Benefits from SSS, under the SSS Act of 1954, as amended
f. Benefits from GSIS, under the GSIS Act of 1937, as amended
2. Employee mandatory contributions to GSIS, SSS, Philhealth, HDMF, and union dues
3. Certain benefits of minimum wage earners
4. De minimis benefits
5. 13th month pay and other benefits not exceeding P90,000

Exempt benefits of minimum wage earners

1. Basic minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential pay
5. Hazard pay

To be exempt from regular income tax, a minimum wage earner must not have other items of taxable income aside
from these employee benefits.

De minimis benefits
De minimis benefits are facilities or privileges such as entertainment, medical services, or courtesy discounts on
purchases that are of relatively small value and are furnished by the employer merely as a means of promoting the
health, goodwill, 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 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

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 3. Medical cash allowance to dependents of employees not exceeding P1500 per employee per semester, or
P375 per month
4. Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per month amounting ti not more than P1,500
5. Uniform and clothing allowance not exceeding P6,000 per annum (RR8-2012)
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
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 celebration not exceeding P5,000 per employee
per annum (i.e., 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 (i.e., overtime meal)
11. Benefits received by an employee by virtue of collective bargaining agreement (CBA) and
productivity incentive 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. (RA
10653, effective January 1, 2015 under RR3-2015)

Taxable de minimis benefits

1. Excess de minimis over their 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 – taxable de minimis is treated as fringe benefit subject to final
fringe benefit tax (RR5-2011 and RMC20-2011)

DETERMINATION OF EXCESS DE MINIMIS BENEFITS

Illustration 1: De minimis limits

Eugene, a private employee who is paid a P600 daily rate, receives the following benefits during the year 2018:

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days
Medical assistance P7,000
Rice subsidy (P2, 000 per month) 24,000
Clothing allowance 8,000
Laundry allowance 6,000

Required: Determine the taxable amount of de-minimis benefits

Solution:
_ Actual___ _Limit____ Excess__
Monetized unused VL P 5,400 P 6,000 P 0
Monetized unused SL 5,400 0 5,400
Medical assistance 7,000 10,000 0

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Rice subsidy 24,000 18,000 6,000
Clothing allowance 8,000 5,000 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 was computed as P600 x 9 while the limit was P600 x 10.
2. The 10-day rule applies only to vacation leavers. Monetization of sick leaves of private employees is
taxable. (BIR Ruling No. 227-2013, June 20, 2013).
3. The rice subsidy and laundry allowance were likewise annualized by multiplying their monthly limit by 12.
The de minimis benefits within the limits are exempt from income tax.

Illustration 2
Claro, a government rank and file employee, received the following benefits:

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: Determinate the amount to be included in other benefits.

Illustration 3
Lloyd was one of the Hall of Fame awardees of Youtubee University. He was granted P25, 000 cash as loyalty
award for his 30 years of service. He was also gives P10, 000 Christmas gift and an additional P10, 000 gifts during
the institution’s Founding Day Anniversary. Besides, he was also given free lunch meals with a total value of P15,
000 during the same year.

Required: Compute the total taxable de-minimis benefits as other benefits.

Communication 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.

B. 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 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 exemption only
to non-Filipino national and/or non-residents of the Philippines.

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Filipino 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.

Employees of the 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

C. 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 income tax. This 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) (RR10-2008) 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 the 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 benefits since they are mere advances or

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replenishments of what are supposed to be direct cash outflows from the employer; hence, they are not considered as
compensation income.

D. BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER

Benefits or allowances which intended for the furtherance of the interest of the employer’s business or to ensure
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 medical doctor’s on-call who are required to report on duty anytime.
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 deliberately granted to include a benefit for the employee, the portion of the expense
representing provisions 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.

GROSS TAXABLE COMPENSATION INCOME

Classification of gross 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 the performance-based pays to employees with or
without regard to the payroll period.
3. 13th month pay and other benefit – This is a residual category which generally includes incentive pays
and all other taxable employee benefits.

The amount of 13th month pay and other benefits not exceeding P90, 000 is as exclusion from gross income. The
amount in excess of P90, 000 is considered as supplemental compensation.

Illustration
An employee received P400, 000 regular compensation, P100, 000 supplemental compensation, and P90, 000 13 th
month pay and other benefits.

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The gross taxable compensation income shall be computed as follows:
Regular compensation P 400,000
Supplemental compensation 100,000
13th month pay and other benefits (P90, 000 – P90, 000) _______ 0,000
Gross taxable compensation income P 500,000

REGULAR COMPENSATION INCOME

The regular compensation includes fixed remuneration due to be received by an employee every period such as:
1. Basic salary
2. Fixed allowance such as cost-of-living allowance, fixed housing allowance, representation, transportation,
and other allowances paid to an employee every payroll period

Fixed Allowances
Allowances which are fixed in amounts and regularly received as part of the basic monthly, bi-weekly, weekly or
daily salaries or wages are part of regular compensation.

Exception rule on the taxability of allowances:

a. If the allowance is an ordinary and necessary travelling, representation, or entertainment expense of
employee in the pursuit of his 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
2. Commissions to non-employees such as independent sales agents are business income to the sales agent.
3. Tips and gratuities

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.

Illustration 1
The following pertains to an employee in 2018:

Gross salaries P 400,000

Cost-of-living allowance 36,000
Fixed monthly transportation allowance (P2Kx12) 24,000
Deduction for withholding tax on compensation 10,000
Deduction for employee share in SSS, PHIC, and HDMF 32,000

The gross taxable compensation income shall be computed as follows:

Gross salaries P 400,000

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Cost-of-living allowance 36,000
Fixed monthly transportation allowance 24,000
Gross compensation income P 460,000
Less: Non-taxable compensation 32,000
Gross taxable compensation income P 428,000

Illustration 2
An employee who was terminated in 2018 due to business closure of the employer received the following:

Unpaid 2018 salaries P 200,000

Unpaid 2017 salaries 20,000
Reimbursement for transportation expenses 10,000
Termination pay 100,000

The gross taxable compensation shall be computed as follows:

Gross compensation income (P200K + P20K + P100K) P320,000
Less: Non-taxable compensation _____100,000
Gross taxable compensation income P 220,000

SUPPLEMENTARY COMPENSATION

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

to the regular compensation with or 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. Frees, 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

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 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 quarter or meals in addition to salary for services rendered, the value to the
employee of such living quarters or meals is included to compensation income. However, when the same was

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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

Under various stock option plans, employees are given the privilege to buy shares at an agreed exercise price after
meeting stipulated vesting conditions. The option will have value when the stock of the employer increases in value
above the exercise price at exercise date. The value of the option is the discount at exercise date.

Illustration
Mr. Ryan met the vesting condition of the employer’s stock option plan where he is entitled to buy 10,000 of his
employer’s share at a strike price of P100. Mr. Anthony exercised the option when the share of his employer was
selling P150/share.

The discount of P500, 000, computed as [(P150 – P100) x 10,000], shall be reported and treated as additional
compensation income of Mr. Ryan.

Treatment of the subsequent of the shares

If the employer is a:
1. Domestic corporation, and the sale of the stock is made:
a. Through the PSE, the sale is subject to a transaction tax ½ of 1% of the gross selling price.
b. Directly to buyer, the net gain on the sale is subject to the 5%-10% capital gains tax.
2. Foreign corporation, the net gain on the sale is a capital gain subject to the regular income tax.

Profit sharing or taxable bonus

Profit sharing 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.

Productivity incentive bonus

The productivity incentive Act of 1990 (RA 6971) encourages private employees to set-up productivity incentive
program.

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

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 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 (RR8-2000)
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 consist of a Christmas bonus 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 regulation cannot attend the law they implement, RR5-2011 should be interpreted to
apply only to Christmas gift 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. Gift
Bonus is performance-based and is non-discretionary to the employer while a gift us 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, supplementary or 13th 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 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.

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TAX-TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS
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 the regular income tax.

Illustration 1
A government rank and file employee received the following benefits aside from the basic pay in 2020:

Christmas bonus P 50,000

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
Uniform and clothing allowance 5,000

Required: Determine the taxable “13th month pay and other benefits”

Illustration 2
A private rank and file employee working in a remote tower station of SKT Telecom received the following benefit
during 2019:
13th month pay P 67,000
Performance bonus 15,000
Christmas gift 22,000
Danger exposure allowance (hazard pay) 6,000
Housing privilege 38,000
Uniform and clothing allowance 7,000
Laundry allowance 6,000

The housing privilege pertains to the annual value of the employees living quarters furnished by the employer for
staying on site.

Required: Compute the excess 13th month pay and other benefits.

Solution:

De minimis Limit Other Benefits

Christmas gift
Uniform and clothing allowance
Laundry allowance
Excess de minimis benefits (other fringe benefits)
13th month pay
Total 13th month pay and other benefits
Less: Exclusion threshold

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Taxable 13th month pay and other benefits

Illustration 3
A managerial employee received the following benefits in 2019:

13 month pay P 75,000

Rental expense on condominium unit 18,000
Salary if personal body guard 12,000
Profit sharing 12,000
Rice allowance 21,600
Clothing allowance 6,000
Night shift differential pay 11,000
Productivity incentive bonus 8,000

Required: Determine the taxable “13th month pay and other benefits” additional compensation, and fringe benefit
subject to fringe benefit tax.

INTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME

Integrative illustration 1
A government rank and file employee had the following summary of his compensation and benefits in 2019:

Gross compensation income P 324,000

Less: Employee payroll deductions
Employee contributions to GSIS, PHIC; HDMF P 32,000
Employee deduction for withholding tax 34,000 66,000
Net regular payroll P 258,000
Representation and Transportation allowance 18,000
Personnel Economic Relief Allowance 24,000
Christmas bonus 27,000
Uniform allowance 5,000
Christmas gift 5,000
Honoraria 15,000
Total compensation P 352,000

The gross taxable compensation income is_________________________

Integrative Illustration 2
A private employee derived the following remunerations and benefits in 2019:

Basic compensation, net of P24, 000 SSS, PHIC, PhilHealth, HDMF, union dues, and P30, 000 withholding tax.

Overtime pay P 246,000

Productivity incentive 21,000
Vacation expenses of the employee paid by the employer 24,000

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Coast-of-living allowance (COLA) 12,000
Pre-computed daily transportation allowance 16,000
Rice subsidy (12 cavans worth P2, 100 each) 25,000
Monetized unused leave credit (10 VL and 8 SL) 18,000
Uniform allowance 9,000
Total compensation income P 422,000

The non-taxable compensation income and the gross taxable compensation income shall be _________________

Presentation in the Income Tax Return of the employee:

Gross compensation income P 417,000

Less: Non-taxable compensation income 108,000
Gross taxable compensation income P 309,000

TAX TREATMENT OF GROSS TAXABLE COMPENSATION INCOME

The ultimate taxation of gross taxable compensation income will depend upon the type of
employee involved. The following table summarizes the rules:

Types of employee Income tax treatment

Regular employee Progressive tax
Special employee Progressive tax
Minimum wage earner Exempt

Illustration
An employee with a total exemption of P75, 000 received the following remunerations and benefits during the year:

Gross salaries P 300,000

Supplemental compensation 80,000
13th and 14th month pay 87,000
Other fringe benefits 34,000

Required: Compute the gross taxable compensation income and the income tax due to the
Employee is a:
1. Regular employee
a. Rank and file employee
b. Managerial or supervisory employee
2. Special alien employee

TAXABILITY OF MINIMUM WAGE EARNER (MWE)

Under RR10-2008, a minimum wage earner loses special privilege of tax exemption for the year when he or she
derives other income such as:
1. Taxable income from employment
This may include taxable allowances, commissions, honoraria, fringe benefits, other benefits in excess of P82, 000,
and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay, and night shift differential
pay.

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In other words, this pertains to fixed allowances, and non-exempt supplemental compensation to MWEs. The receipt
of 13th month pay and other benefits will not automatically disqualify an MWE unless the same exceeds P82, 000.

2. Taxable income outside employment

This may include from conduct of trade, business, or practice of profession except those subject to final tax and
other income subject to regular income tax.

In the first case of disqualification, the employee shall be subject to withholding tax on compensation similar to
other regular employees. In the second case of disqualification, however, the employee is exempt from withholding
tax but he or she must file an annual income tax return. (RR10-2008)

1. Jun, a minimum wage employee, do part-time business after work. He received total minimum
wage of P290,000 inclusive of P11,000 13th month pay but net of P5,000 mandatory deductions. He also
received a performance bonus of P 20,000 and earned P300,000 from his side-line business.

Jun’s taxable income shall be computed as follows:

Gross compensation income (i.e. P290K + P5K + P20K0 P 315,000

Less: Non-taxable Compensation income
Mandatory deductions P 5,000
Exempt benefits 290,000 295,000
Taxable compensation income P 20,000
Net income from business 300,000
Taxable income P 320,000

2. Mary, a minimum wage employee, was able to close a sales deal for her employer during the
year. She received the following compensation during the year:

Basic minimum wage, net of

P8,000 mandatory deductions P 160,800
th
13 month pay 14,000
Holiday pay 4,000
Overtime pay 70,000
Night shift differential pay 15,000
Hazard pay 10,000
Profit sharing bonus 12,000
Commission income 370,000
Total P 655,800

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.

Illustration 1
Anthon had a basic pay of P400/ day when the minimum wage was P382/day. He is also receiving overtime pay and
the year-end 13th month pay. On July 1, 2019, the Regional Wages and Productivity Board increased the minimum
wage by P22/day to P404/day. Anthon’s employer increased his salary to the minimum P404/day.

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Anthon shall be taxed on his income from January 1 to June 30 because he is not yet a minimum wage earner. The
employer shall regularly deduct the withholding tax on compensation from his salary but shall stop withholding by
June 30. Anthon’s compensation starting July 1 including overtime pay and year-end 13th month pay shall be tax
exempt.

If the exact amount of income taxes had been withhold by the employer for the January 1 to June 30 compensation,
Anthon need not file an income tax return. Otherwise, Anthon shall file an adjustment return reflecting his
compensation from January 1 to June 30 and shall pay the tax still due or claim for refund in case of excess
withholding.

This rule may also apply in case of:

a. Transfer to an employer paying salary at the minimum wage
b. Transfer of employment to a region with higher minimum wage

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

Illustration 2
Andrea is a minimum wage earner. She was promoted and was given a salary raise above the minimum wage
starting August 1, 2019.

Andrea shall be exempt from income tax from January 1 to July 31 because she is a minimum wage earner. Effective
August 1, 2014, Andrea shall be subject to tax. The employer shall start deducting the withholding tax on
compensation from Andrea’s salaries effective the same date.

If the employer properly withheld the income tax for the period August 1 to December 31, Andrea need to file an
income tax return, otherwise, she shall file an adjustment return reflecting her compensation for the same period
and shall pay the tax still due or claim for refund in case of excess withholding.

This rule applies in case 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)

Illustration 4
Mr. Jones is a minimum wage earner, In November 2017, he received a one-time commission if P500.

His entire compensation income in 2015 including the minimum wage shall be subject to income tax. It should be
emphasized again that an employee with other taxable income is not a minimum wage earner despite the fact that he
or she is a recipient of a minimum wage.

The employer shall withhold income tax for the salaries of Mr. Jones fir the entire year.

In all of the three illustrations, if the personal exemption of the employee exceeds their reportable compensation
income, there is no need to file an income tax return.

Treatment of Cost-of-living Allowance of MWEs

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Under RMO23-2011, COLA which firms 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

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.

TREATMENT OF WITHHOLDING TAX ON COMPENSATION

To the employee, the withholding tax on compensation is a tax credit which is deductible against his consolidated or
annual income tax due.

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.

If an employee has no other sources of income subject to regular tax aside from his compensation, he may apply for
substituted filing of 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.

ACTIVITY:

READ BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION UNDER RR-98, AS

AMENDED

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