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TYPES OF EMPLOYEES

1. As to function
 Managerial employees
 Supervisory employees
 Rank & file employees

2. As to taxability
 Minimum wage earners – exempt from taxation, unless their other taxable income exceeds
₱250k
 Statutory minimum wage – is the higher between:
a. the rate fixed by the Regional Tripartite Wage and Productivity Board of the DOLE or
b. ₱5,000/month or ₱60,000/year

 Rules of change in status as a Minimum wage earners during a year


a. Employee becomes a minimum wage earner during a year – he shall be taxable
up to the date he become such

Note: This rule shall also apply if the employee transfers to an employer paying salary
at the minimum wage or transfers to a region with higher minimum wage

b. Employee ceases to be minimum wage earner during the year– he shall be


taxable from the date he ceases to become such

Note: This rule shall also apply if the employee transfers to an employer paying salary
above the minimum wage or transfers to a region with lower minimum wage

c. Employee ceases to be minimum wage earner due to disqualification – he shall


be taxable if he earns an income exceeding ₱250,000.

 Regular employees (includes special aliens)– subject to the regular individual progressive tax

 Benefits necessary to the trade, business, or conduct of profession of the employer


 Necessity of the employer rule – 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, such as:

a. Necessary travelling, transportation, representation, or entertainment expenses


subject to accounting or liquidation in accordance with specific requirement of
substantiation of expense
b. Allowances which constitute reimbursement to government personnel for
expenses incurred in the performance of their official duties, such as:
 Representation and Transportation Allowance (RATA)
 Personnel Economic Relief Allowance (PERA)
c. Reasonable amounts of reimbursements or advances to employees for travelling
and representation which are pre-computed on a daily basis and paid to any
employee while on assignment or duty

Note: These items do not form part of the compensation income of the employee,
thus, these benefits are exempt because these items are not benefits but rather
mere advances and replenishments of supposed to be direct cash outflows from
the employer, but, in the perspective of employer, these are items of allowable
deductions as business expenses.

 Benefits for the convenience or advantage of the employer


 Convenience of the employer rule – benefits or allowances intended for the
furtherance of the employer’s business or to ensure its smooth operations are exempt
from income tax, such as:
a. Work related mobile phone and transportation allowance
b. Outstation allowance for employees that will be out from office at least 8hrs. to
visit lotto franchise holders for repairs and inspection of equipment leased by the
employer
c. Grant of housing privilege for employees working at distant or remote facilities
even if the house is distanced from the facility in compliance to labor safety
standards
d. Car incentives to employed on-call medical doctors
e. Scholarship grants to employees under contract to remain in service for a period
upon study completion
f. Housing privilege of military officials of the AFP located inside or near military
camps

Note: These items do not form part of the compensation income of the employee,
thus, these benefits are exempt. Unless such benefit is unreasonably excessive
(hybrid expenses), hence, it is taxable fringe benefit.

1. Taxable Compensation Income


 Regular compensation – pertains to fixed remunerations received by the employee every payroll
period
a. Basic Salary, including paid absences from vacation and sick leave credits and Cost of living
allowance (COLA)
b. Fixed allowances paid every payroll period, except:
 Thos fall under the Necessity of the employer rule
 Those subject to accounting or liquidation, unless an excess is retained by the employee
 Any excess advances returned to the employer

 Supplemental compensation – pertains to other performance-based remunerations to employees


with or without regard to the payroll period
a. Excess in ₱90,000 from the “13th month pay and other benefits”
b. Overtime pay
c. Hazard pay
d. Night shift differential pay
e. Holiday pay
f. Fees, including director’s fee if he is an employee
g. Commissions to employees
h. Emoluments and honoraria
i. Taxable retirement and separation pay
j. Value of living quarters or meals, except if it falls under Convenience of the employer rule
k. Gain on exercise of stock options at exercise date (Gain = market price – exercise price),
except when it qualifies as fringe benefit subject to fringe benefit tax (i.e. managerial and
supervisory has received such gain)
l. Profit sharing and taxable bonuses, except when it falls under Productivity incentive bonus
as it is now considered part of de minimis benefit
VALUATION OF COMPENSATION PAID IN KIND
1. Fair value of the properties at the date received
2. Fair value of the shares at the date services were rendered

WITHHOLDING TAX ON COMPENSATION


 A method of collecting the income tax at source (i.e. employer) upon payment of the compensation
which applies to all employed individuals whether citizens or aliens

 Computation procedure
1. Determine the total regular monetary & non-monetary compensation, segregating non-taxable
benefits, mandatory contributions and supplemental compensation
2. Identify the bracket that applies in no.1 for the basic tax and the incremental tax rate (p. 343)
3. Add supplemental compensation to the excess of the regular compensation from the
compensation range and multiply the sum to the incremental tax rate
4. Add the basic tax and incremental tax

 Year-end tax adjustment – annual tax due may not equal the total withholding tax
1. Under-withholding – shall be deducted on the final payroll of the employee for the taxable year
2. Over-withholding – shall be refunded to the employee

 Benefits not subject to withholding tax on compensation – items below are not considered
compensation income, hence, they are exempt from withholding
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
4. Remuneration for casual labor not in the ordinary 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 govt. or an
international organization – still taxable as compensation income but is exempt from
withholding
6. Damages paid by employer to employees
7. Proceeds of life insurance
8. Amounts received by an insured employee as a return of premium
9. Compensation for injury and sickness
10. Income exempt under treaty
11. 13th month pay and other benefits not exceeding ₱90k
12. GSIS, SSS, Philhealth, union dues, & other contributions
13. Compensation income of minimum wage earners, including:
 Holiday pay
 Hazard pay
 Overtime pay
 Night shift differential pay
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

 Deadline of filing withholding tax remittance


1. Monthly remittance (BIR Form 1601-C)
 On or before the 10th day of the following month the tax was withheld
 Except, taxes withheld from December which shall be remitted on or before the 15 th day of
January

2. Annual remittance (BIR Form 1604-CF)


 On or before January 31 of the following calendar year

Note: The employer shall furnish each employee-taxpayer a copy of BIR Form 2316 or the
“Certificate of Compensation Payment or Income Tax Withheld” on or before January 31 of the
succeeding year.

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