Investors who will establish companies in the Philippines should understand the obligations around the 13th-month pay and Christmas bonuses.
The 13th-month pay is exempt from tax. It is up to a limit of PHP 90,000 (approx. US$1,800) and is mandatory. Meanwhile, the Christmas bonus is at the discretion of the employer.
The 13th-month salaries and Christmas bonuses in the Philippines are important aspects of HR policy.
A key topic that often prompts questions is the distinction between the two systems and the tax rules surrounding them. The bonus payments, while distinct, can interact to create diverse tax outcomes.
What is the Distinction Between 13th Month Pay and Christmas Bonuses?
The key distinction between the 13th-month salary and the Christmas bonus is that the former is mandatory by law for all non-managerial staff. The latter is at the discretion of the employer.
Furthermore, the 13th-month salary must be paid on or before December 24. It has become common for employers to pay half at the beginning of the school year. Many employees have children to send to school, therefore, this is considered. The rest of the payment is given in the days running up to Christmas.
In contrast, there is no set date for Christmas bonuses. There is no set amount either. That depends on the employer.
Who Are Eligible and How to Calculate the 13th Month Pay?
Employees excluded from the 13th-month pay fall into the following categories:
- Employees covered by civil service law
- Housekeepers and persons in the personal service of another
- Employees paid on a commission or task basis
The 13th-month pay is calculated as one-twelfth (1/12) of the employee’s basic salary within one calendar year. Alternatively, if the employee is paid on a monthly basis, this is the equation that is followed:
How is the Taxation of 13th Month Pay Computed?
In January 2018, the government issued the Tax Reform for Acceleration and Inclusion (TRAIN) law. As a result, this raised the limit of PHP 82,000 (US$1640) 13th-month pay tax exemption to PHP 90,000 (US$1,800).
Should the payment exceed the limit, the excess amount will be added to the employee’s salary and included in the income tax calculation.
Giving Christmas bonuses is not an obligation of the employer. It is not enforceable. Rather, it is an act to show gratitude and appreciation for one’s employees in recognition of their hard work, services, and continued dedication to the company.
How the Christmas Bonus Taxes are Computed
The taxation of Christmas bonuses is split into two parts: the performance-based incentives and the nonperformance-based bonuses (also known as ‘other benefits’).
How is the taxation of Performance-Based Incentives computed?
Collective Bargaining Agreements (CBAs) and productivity incentive schemes are subject to a PHP 10,000 (US$200) tax-free limit. If the Performance-based Bonus exceeds PHP 10,000, the whole amount (not just the excess) will be considered as Other Benefits.
Additionally, it will be included in the aforementioned PHP 90,000 tax-free limit. Again, any excess is taxable.
How is the taxation of Nonperformance-Based Incentives (‘Other Benefits’) computed?
Other Benefits fall into the same category as the 13th-month pay and are subject to the same limit.
In other words, no tax to pay. That means if the combined other employee benefits and the 13th-month pay total is less than PHP 90,000. If it is over the limit, the excess amount will be subject to income tax.
How the Combined Bonus Taxes are Computed
If Other Benefits (13th-month pay and nonperformance-based incentives) already go over the tax-free limit, the performance-based incentives will automatically be subject to the normal income tax rate.
An employee earns PHP 10,000 in performance-related incentives. No tax is payable on this bonus.
An employee earns PHP 15,000 (US$300) in performance-related incentives and PHP 20,000 (US$400) in other benefits. No tax is payable as well.
HOWEVER, if an employee earns PHP 20,000 in performance-related incentives, as well as PHP 80,000 (US$1,600) in other benefits, tax is payable on the excess. Based on the combined total, it is PHP 10,000 more than the limit. Again, PHP 90,000 is the limit.
Furthermore, the taxation guidelines on 13th-month pay and Christmas bonuses are easy to remember. Still, foreign investors are advised to use the services of registered tax advisors in the Philippines.
That should ensure compliance with current regulations and avoid any future problems.