After incorporating a company, it is essential to know how to calculate your employees’ salaries and benefits correctly. In this article, we are going to take a closer look at the wage system and payroll in the Philippines.
Some of the common questions foreign companies have related to payroll are whether there are mandatory bonuses? What does “holiday pay” mean in the Philippines? Is the 13th-month pay taxable? What’s the easiest way to manage payroll in the Philippines? Keep reading to get answers to these questions and more.
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Managing Payroll in the Philippines
In the Philippines, employers are responsible for withholding taxes from their employees’ salaries. As such, the company must compute its employees’ taxable income before distributing their salaries.
It sounds simple enough until you encounter things like holiday pay and night shift differential. Employees and employers must also pay mandatory benefit contributions. Filipino employees expect their employers to take care of this, but it can be quite confusing for employers.
A common solution is to outsource payroll management to a professional service provider like Emerhub. Our payroll experts can take care of computing mandatory benefits and taxes. We handle payment to relevant government institutions.
Stop worrying about payroll. Leave that to us.
Payroll Management with Emerhub.
Computing Taxable Income for Payroll in the Philippines
Taxable income is the employee’s gross income after making relevant salary adjustments.
The basic formula for calculating taxable income is:
Taxable Income = (Basic Salary + Additional Pay) – Deductions
Additional pay can refer to additional income because of holiday pay or overtime and night shift differential rates. Deductions include mandatory government contributions and salary deductions due to attendance or internal policies. We discuss these in further detail below.
Holiday Pay in the Philippines
Employees asked to work on a public holiday must receive holiday pay. Holiday pay is the employee’s daily rate adjusted by the holiday rate. Holiday rates depend on whether it is a regular holiday or a special non-working holiday.
Holiday Pay Rates
|Type of Holiday||Special Hourly Rate|
|Regular Holiday||200% of the basic daily rate|
|Special Non-working Holiday||130% of the basic daily rate|
Employees not asked to work on a regular holiday will still receive their basic daily rate. On the other hand, the “No Work, No Pay” principle applies to special holidays. Therefore, employees not asked to report on a special holiday are not eligible for any sort of compensation. However, you are free to give employees their basic daily rate even if they did work on a special holiday.
Holidays in the Philippines
|New Year’s Day||January 1||January 1|
|Araw ng Kagitingan||April 9||April 9|
|Maundy Thursday||April 9||April 1|
|Good Friday||April 10||April 2|
|Labor Day||May 1||May 1|
|Independence Day||June 12||June 12|
|Eid’l Fitr||May 25||May 13|
|Eid’l Adha||Not officially declared yet by the Philippine Government||Not officially declared yet by the Philippine Government|
|National Heroes Day||August 31||August 30|
|Bonifacio Day||November 30||November 30|
|Christmas Day||December 25||December 25|
|Rizal Day||December 30||December 30|
|Lunar New Year||January 25||February 12|
|EDSA People Power Revolution Anniversary||February 25||February 25|
|Black Saturday||April 11||April 3|
|Ninoy Aquino Day||August 21||August 21|
|All Saints’ Day||November 1||November 1|
|Day after All Saints’ Day*||November 2||November 2|
|Feast of the Immaculate Conception of Mary||December 8||December 8|
|Christmas Eve*||December 24||December 24|
|Last Day of the Year||December 31||December 31|
* Listed officially as “Additional special (non-working) day in the Philippines’ Official Gazette
Overtime Pay and Night Shift Differential in the Philippines
Working hours in the Philippines cannot exceed eight hours in a day, not including the mandatory one-hour lunch break. If your employee works beyond eight hours, you must pay overtime wages.
Employers must also take note of the night shift differential rate. The night shift differential rate applies to employees working at any point between 10:00 pm and 6:00 am.
Both the overtime and night shift differential rates apply to the employee’s hourly rate.
Overtime and Night Shift Differential Rates
|Type of overtime||Hourly rate|
|Overtime – Normal Working Day||125%|
|Overtime – Rest Day||130%|
|Night Shift Differential Rate||110%|
If an employee entitled to these rates works on a holiday, you must stack rate adjustments.
Salary Deductions in the Philippines
If your employee comes in late or leaves work early, you can make deductions to his or her salary. You can also deduct from your employee’s salary if he or she takes unpaid leaves.
In addition to that, you can also deduct from your employees’ salaries if you have relevant company-specific policies. These may include car or housing loans from the company, healthcare plans, or other dues.
Mandatory Contributions in the Philippines
In the Philippines, employees make mandatory government contributions of which employers also pay a share.
- Social Security System (SSS). Contributions made to the SSS depend on the employee’s salary. However, there is a fixed ceiling amount for employees with a monthly salary of PHP 20,000 or more. Employers also pay a share for the employee’s SSS contributions.
- Philippine Health Insurance Corporation (PhilHealth). PhilHealth provides a national health insurance program in the Philippines. PhilHealth contribution is 3% of the employee’s salary each month. The employee and employer pay an equal share for PhilHealth.
- Home Development Mutual Fund (Pag-IBIG). The Pag-IBIG fund is responsible for a national savings program and also offers loans and housing programs. The employer and employee each pay a fixed amount of PHP 100 per month for PAG-IBIG.
Accurately computing your employees’ taxable income is a confusing task with all the possible salary adjustments. It’s especially difficult if you don’t have a legal entity in the Philippines which complicates the whole process. One way around this is to hire employees through an Employer of Record like Emerhub.
Hire employees in the Philippines without setting up a legal entity.
Use Emerhub as your Employer of Record.
How to Compute Taxes for Payroll in the Philippines
The higher the employee’s taxable income, the higher the tax rate. Note, however, that employees with annual wages totaling PHP 250,000 or less are tax-exempt. Employers typically deduct taxes from employees on a monthly or semi-monthly basis.
The table below details income tax rates in the Philippines:
|Annual Taxable Income||Tax Rate|
|Up to 250,000||0%|
|Over 250,000 – up to 400,000||20% of the excess over 250,000|
|Over 400,000 – up to 800,00||PHP 30,000 + 25% of the excess over PHP 400,000|
|Over 800,000 – up to 2,000,000||PHP 130,000 + 30% of the excess over PHP 800,000|
|Over 2,000,000 – up to 8,000,00||PHP 490,000 + 32% in excess over PHP 2,000,000|
De Minimis Benefits in the Philippines
De minimis benefits refer to additional compensation of small value given by the employer apart from the basic salary. These benefits are non-taxable.
De minimis benefits in the Philippines include:
- Meal allowance during overtime work. Up to 25% of the basic minimum wage
- Unused leave credits converted to cash. Maximum of 10 days per year
- Rice subsidy. Up to PHP 1,500 (approx. USD 30) per year
- Medical cash allowance. Up to PHP 750 (approx. USD 15) per semester or PHP 125 (approx USD 2.50) per month
- Uniform and clothing allowance. Up to PHP 5,000 (approx. USD 100) per year
- Laundry allowance. Up to PHP 300 (approx. USD 6) per month
- Medical benefits. Up to PHP 10,000 (approx. USD 200) per year
- Gifts. This applies to gifts given for Christmas, festivals, or special circumstances in the employee’s life such as marriage or a death in the family. Up to PHP 5,000 (approx. USD 100) per year
- Employee achievement awards. These can be in forms other than cash or gift vouchers. Up to PHP 10,000 (approx. USD 200) per year.
It might be tempting to come up with a pay structure that maximizes the de minimis benefits in order to reduce the amount of taxes paid. To some extent it is reasonable, however, also take into account the amount of time that goes into calculating and reporting the benefits compared to the saved costs.
Emerhub’s payroll consultants will advise you on how to structure the salaries.
13th Month Pay
Employees who have worked in the company for at least one month must receive 13th-month pay. Employees must receive their 13th-month pay no later than the 24th of December each year. 13th-month pay amounting to PHP 90,000 or less is non-taxable.
The 13th-month pay is the employee’s total basic salary for the year divided by 12. If the employee has been with your company for less than a year, he or she must receive a prorated amount relevant to his or her period of employment. The prorated amount also applies to employees leaving the company before the end of the year.
Note that job applicants usually don’t include the 13th salary into their salary expectations – they assume it’s on top of whatever amount they agreed to be paid.
Payroll Management with Emerhub
Save yourself from the hassles of navigating payroll management in the Philippines. Emerhub can take all the pain of doing local payroll out of your hands. We will take care of all computing income taxes, special rates, and contributions. We will also handle payment to the employee and relevant government institutions.
Instead of learning a new system in a new country, let our payroll experts help you. Fill out the form below to get started or send us an email at [email protected].