Compensation Income
Elements of employer and employee
relationship under case law
• Selection and engagement of employees
• Payment of wages
• Power of dismissal
• Power of control
Types of employees as to function
• Managerial employees
• Supervisory employees
• Rank and file employees
Type of employees as to taxability
• Minimum wage earners (MWEs)
• Regular employees
Tax Model on Compensation Income
Gross Compensation Income
Less: Non-taxable compensation
Taxable Compensation Income
P xxx,xxx
xxx,xxx
P xxx,xxx
Tax Model on Compensation Income
a. Gross Compensation Income – generally includes al remunerations
received under an employer-employee relationship
b. Non-taxable compensation
a. Mandatory deductions – mandatory contributions to GSIS/SSS, Philhealth,
HDMF, and union dues
b. Exempt benefits
a.
b.
c.
d.
Benefits excluded and/or exempted under the NIRC and special laws
Benefits under treaty or international agreements
Benefits necessary to the trade, business or conduct of profession of the employer
Benefits for the convenience or advantage of the employer
Exempt benefits under NIRC and special laws
• Remunerations received as incidents of employment
• De minimis benefit
• 13th month pay and other benefits not exceeding P90,000.
• Certain benefits of MWEs
De Minimis Benefits
• 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 to promote the health, goodwill,
contentment and efficiency of his employees.
• Petty fringe benefits exempt from income tax
De Minimis Benefits
• Monetized unused vacation leave credits of private employees not
exceeding 10 days during the year
• Monetized unused vacation and sick leave credits paid to government
employees
• Medical cash allowance to dependents of employees not exceeding
P1,500 per employee per semester, or P375 per month
• Rice subsidy not exceeding P2,000 or 1 sack of 50kg rice per month
amounting to not more than P2,000
• Uniform and clothing allowance (P6.000 per annum max)
De Minimis Benefits
• Actual medical assistance (P10,000 max per annum)
• Laundry allowance (P300 per month max)
• Employee achievement award (P10,000 per annum max)
• Gifts given during Christmas and major anniversary celebrations
(P5,000 per annum max)
• Daily meal allowance for overtime work and night or graveyard shift
(max of 25% of the basic minimum wage per region)
• Benefits received by an employee by virtue of a CBA and productivity
incentive schemes (P10,000 max per annum)
Taxable De Minimis Benefits
• Excess de minimis over their regulatory limits
• Other benefits of relatively small value that are not included in the list
of de minimis benefits.
Treatment of taxable de minimis benefits
• Rank and file – treated as other compensation income under 13th
month and other benefits
• Managerial and supervisory – treated as fringe benefit subject to final
fringe benefit tax
Benefits under treaty or international
agreements
Foreign embassy, missions, or
organization
Philippine embassy or consulate
office
-Filipino
Taxable* (must prove exemption)
N/A
-Aliens
Exempt
N/A
-Filipino
Exempt
Taxable
-Aliens
Exempt
Exempt
In the Philippines
Abroad
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 the employment
• Exempt from income tax
• Regarded as business expenses
Benefits for the convenience or advantage of
the employer
• Convenience of the employer rule – intended for the furtherance of
the interest of the employer’s business or to ensure its smooth
operations
• Exempt from income tax
• Regarded as business expenses except if it is unreasonably excessive
Composition of taxable compensation income
• Regular compensation – fixed remunerations
• Supplemental compensation – performance-based pays
Illustration:
An employee received P400,000 regular compensation, P120,000
supplemental compensation and P100,000 13th month pay and other
benefits
Regular compensation
Supplemental compensation [120,000+(100,000-90,000)]
Taxable compensation
P 400,000
130,000
P 530,000
Regular Compensation Income
• Basic salary
• Fixed allowances (COLA, fixed housing allowance, representation,
transportation, and other allowances paid to an employee every
payroll)
Supplementary Compensation
•
•
•
•
•
•
•
•
•
•
•
Overtime pay
Hazard pay
Night shift differential pay
Holiday pay
Commissions
Fees, including director’s fees (if director is employee)
Emoluments and honoraria
Taxable retirement and separation pay
Value of living quarters or meals
Gains on exercise of stock options
Profit sharing and taxable bonuses
13th Month Pay and Other Benefits
• 13th month pay
• Other Benefits
•
•
•
•
•
Christmas bonus of private employees
Cash gifts other than Christmas or anniversary gifts of private employees
Additional compensation allowance of government personnel
14th month pay , 15th month pay, etc.
Other fringe benefits of rank and file employees
Tax Treatment of 13th Month Pay and other
Benefits
• Exempt from withholding on compensation provided they do not
exceed P90,000
• The excess above P90,000 is subject to the withholding tax on
compensation. (Treated as compensation income subject to regular
income tax.)
Taxability of Minimum Wage Earners (MWE)
• Exempt from the ff:
• Basic minimum wage
• Other benefits
•
•
•
•
Holiday [ay
Hazard pay
Overtime pay
Night shift differential pay
Rules in change of status as MWE
• When an employee becomes a MWE during the year, he shall be
subject to income tax only on compensation earned before becoming
a MWE.
• When an employee cease to be a MWE during the year due to
increase in salary, only the income for the rest of the year is taxable.
Withholding Tax on Compensation
• Method of collecting the income tax at source upon receipt of the
income
• Applies to all individuals whether citizens or aliens
• Employer is the withholding agent
Deadline of Filing and Remittance of the
Withholding Tax on Compensation
• BIR Form 1601-C (Monthly Remittance Return of Income Taxes
Withheld on Compensation) – on or before the 10th day of the
following month the withholding was made
• Taxes withheld on December shall be filed/paid on or before January
15 of the succeeding year.
• BIR Form 1604-CF (Annual Information Return of Income Taxes
Withheld on Compensation and Final Withholding Taxes) – on or
before January 31 of the following calendar year.
• BIR Form 2316 – on or before January 31 of the succeeding year
Deadline of Filing and Remittance of the
Withholding Tax on Compensation
• Penalties for non-compliance
• Treatment of withholding tax on compensation
• Substituted filing of tax return
-End-