7 Features of Staff Leasing in the Philippines

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By: Garry Pagaspas, CPA

Taking into account the advantages of Filipino talents (e.g. English speaking, attitude towards work, manpower cost, and work efficiency, among others) Philippines has become a top pick for back-office support operations of foreign accounting and consulting firms abroad and that of business process outsourcing (BPO) operations in Philippines dealing directly with foreign clients, if not with the parent entity for the delivery of quality services.

Approaches for Philippine set-up could vary depending on many factors such as a more long-term set-up or a short-term exploratory set-up. For a long-term set-up, setting up a local entity in the Philippines could be good, while for short-term exploratory set-up, some would resort to special arrangements with staffing or manpower agencies, Business Process Outsourcing (BPO) in Philippines, accounting firms or local consulting firms for staff leasing in Philippines, or sometime referred to under professional employer organization (PEO) or employer of record (EOR) in Philippines.

Notably, there seems no prescribed guidelines issued by government agencies specifically applicable to staff leasing in the Philippines or professional employer organization (PEO) or employer of record (EOR) in Philippines but it seems to simply adopt the labor laws, rules, and regulations related to it. Accordingly, let me share my personal views on some features of these staff leasing arrangements in Philippines that you may find useful for your Ph set-up:

1. Binding legal agreement for staff leasing in Philippines

For the purpose, legal agreement should be executed to formalize the staff leasing arrangement by and between your company abroad or using their parent entity abroad – e.g. Singapore or Hong Kong entity and the staff leasing entity in Philippines. Some would use a direct Staff Leasing Agreement setting forth the terms and conditions – staff leasing entity as employer housing employees on its office (unless under work from home arrangement) and your company abroad utilizing the team for your outputs and paying prescribed fees – e.g. set-up fees, monthly fees, and termination fees.

The rest would take the arrangement with the staff leasing entity as service provider for some defined output with the staff leasing employees handling delivery of the services under the supervision of your company representatives abroad.

2. Local entity as staff leasing employer in Philippines

Normally, under staff leasing agreement in Philippines, the staff leasing entity in Philippines acts as employer of your team in Philippines and for this, staff leasing is at times termed as “employer of record” (EOR) or “professional employer organization” (PEO) in Philippines. Employment status may vary under the rules – e.g. probationary employment, regular employment, contractual basis, or project-based employee depending on the terms agreed upon. Other terms and conditions of employment could likewise be imposed by the employer and could be arranged based on your preferences, to the extent that it is aligned with the local labor rules.

As an employer, they are under obligation to its employees as imposed by the Labor Code of the Philippines, as amended, such as on payment of wages and benefits mandated by law, dealing with mandatory contributions, and security of tenure, among others. On this scope, they take their risk relative to such obligations.

3. Compensation, fees and charges for staff leasing in Philippines

Under staff leasing arrangement, your company abroad utilizing staff leasing employees in Philippines would undertake to pay employee compensation – those owing to the employee for every payroll period; employer share on mandatory contributions for social security, housing and health insurance; and related employee benefits imposed by labor rules such as 13th month pay, leave credits, maternity benefits, among others. On top of that, some arrangements would impose a one-time set-up fee for each employee for hiring and other related works, a monthly administrative fee as a percentage of monthly compensation or a fixed amount that could cover their time charges for recurring works like payroll computations and government remittances, applicable local taxes, if any, and at times, a termination fee upon your decision to end the arrangement.

4. Staff Leasing employee’s disciplinary action under local entity

In Philippines, security of tenure is given much emphasis under our labor rules, and employees could only be terminated on justifiable reasons – e.g. just or authorized causes specifically provided by the rules along with prescribed due process and cannot simply be terminated at will of the employer like in other countries. If you intend to discipline staff leasing employees in Philippines, closely coordinate with the staff leasing employer in Philippines for proper handling – e.g. sending of memorandum to employees, hearing out employees’ side for the required opportunity to be heard under the rules, and sending management decision on the alleged violation of the staff leasing employees. Failure to comply with the rules could be a ground for staff leasing employees to file a case for illegal termination in Philippines or any appropriate case with the labor department.

5. Mandatory Philippine reporting compliance for staff leasing employees

Employers in the Philippines carries certain obligations such as withholding taxes on compensation every payroll period along with remitting them monthly to the tax authorities and filing related quarterly and annual reports; withholding employee welfare contributions for social security, housing mutual fund, and health insurance along with remitting them monthly and filing related quarterly reports with such respective government agencies; and such other reports required such as 13th month pay reporting to the labor department. These obligations are normally undertaken by the local staff leasing company in the Philippines and they would ensure compliance, otherwise, penalties would be imposed for failure to comply.

6. Doing business in Ph/ Permanent Establishment implications

One concern of the foreign company abroad entering into staff leasing arrangement is whether or not the same would create a permanent establishment in Philippines under the applicable tax treaty or would be tantamount to doing business in the Philippines that is required to register with the Securities and Exchange Commission (SEC) under the Revised Corporation Code (RCC) and applicable foreign investment laws. This could be a technical legal area, and such implication could depend on the terms and conditions of the staff leasing in the Philippines.

7. Setting-up own entity and employing your staff leasing team

As soon as you realize the long-term advantages of your Philippine team, you may then decide to set-up your own entity in the Philippines and take them out from the staff leasing arrangement so they become employees of your Ph entity taking into account the experience and familiarity that they have working on your account. Normally, staff leasing arrangement would have termination provisions which could vary from a simple notification to some monetary considerations to be allowed to convert them as your employees. For the purpose, please pay attention the termination provisions to avoid issues that could lead to legal battle and more headaches.

Author’s Profile:

Garry Pagaspas, CPA is a currently the Managing and Tax Partner of G. Pagaspas Partners & Co. CPAs (independent member firm of Allinial Global, 2^nd largest accounting association worldwide based on International Accounting Bulletin’s 2023 released survey) based in Makati City with Global Outsourcing offices in Kalibo, Aklan. He is likewise the President at Tax and Accounting Center, Inc., the training and consulting company he founded in relation to his passion for teaching and helping out Ph entrepreneurs and foreign investors to Philippines.

Views in this article is personal to the author, not equivalent to a professional opinion and does not represent that of the organizations he is connected with. For your feedback or related concerns on staff leasing or employer of record in Philippines, you may send mail at info(@)taxactgcenter.ph (please exclude open and close parenthesis on the @ sign.

December, it is that time of the year again. Parols hanging from the balcony, Jose Mari Chan on everyone’s car radio and the most anticipated 13^th month pays for employees in the Philippines. However, for employers with a large employee population, 13th-month pay can be complicated, strenuous, and sometimes even time-consuming. So, what is 13^th month pay in the Philippines? Let us unpack that.

Brief History of 13^th month pay in the Philippines 

Pursuant to Presidential Decree No. 851 (1975), employers in the private sector in the Philippines are required to pay 13th month pay to all employees receiving at least PhP1,000.00 a month basic salary, regardless of the nature of employment, who have rendered at least one month of service. The decree was originally imposed to “further protect the level of real wages from the ravage of worldwide inflation” and in the spirit of Christmas and New Year, employers are to show their concern and appreciation towards the working masses. In August 1896, the Malacañang released the Memorandum Order No. 28 modifying the existing decree requiring all employers (not just those receiving PhP1,000 basic pay a month) to pay their employees a 13^th month pay on or before the 24^th day of December. 13^th month pay in the Philippines is an important mandated benefit to grant as there is neither request nor application of exemption allowed for delay or non-issuance and employers who are found to be in violation of such may be subjected to sanctions. 

Who is eligible (and who is not)?

According to the DOLE’s guidelines under Labor Advisory no. 25 of 2023, 13^th month pay in the Philippines is given to rank-and-file employees regardless of their designation, position, or employment status. Resigned or separated employees who have rendered at least a month of work are also eligible to receive the compensation, given as part of their final pay.

Under the labor rules, rank-and-file employees entitled 13^th month pay in the Philippines are those employees who are not in managerial or supervisory positions. Supervisory employees as defined by Presidential Decree No. 442 are “those who, in the interest of the employer, 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 judgment” while managerial employees are those ” who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees”. In general, both supervisory and managerial employee classifications are not mandatorily covered by 13^th month pay in the Philippines since the purpose of 13^th month pay is to give an additional incentive for low-earning employees. Workers paid by results such as commission or task base, household helpers and contractual workers are also not eligible to receive the pay. However, it is within the employer’s prerogative to issue a bonus for their hard work and service. In cases in which the company accidentally issued the benefit to those non-eligible for 13^th month pay in the Philippines, the employer is entitled to retract it, unless covered by the non-diminution rule under the labor rules in the Philippines.

Coverage of 13^th month pay – how do we calculate it? 

The basic calculation for 13^th month pay is the total basic salary pay of the employee for a year divided by 12 (months). Basic pay refers to “all remunerations or earnings paid by an employer to an employee for services rendered” (P.D No. 851). It is important to emphasize that basic pay is the minimum requirement to cover in the computation and compensation from leaves, overtime pay, premium pay and company allowances may be included according to the employer’s discretion.  Furthermore, other year-end benefits such as 14^th month pay and bonuses such as Christmas and performance bonuses are not required by the law, and it is within the company’s discretion to issue one.

However, employees who have rendered less than a year of service, for instance, employees hired in the middle of the month or employees separated before the year ends are calculated and issued a prorated 13^th month pay. For instance, employee Z started a job as a Data Analyst with a basic salary of Php50,000.00 and started working on July 17. The employer may calculate their 13^th month pay as follows: 

You can calculate the daily rate based on the Estimated Equivalent Monthly Rate (EEMR), prescribed by DOLE (Department of Labor and Employment) in their Handbook. 

When to pay 13^th month pay in the Philippines 

Although establishments should issue their employees the benefit on or before December 14, DOLE encourages employers to release it early, ensuring that their workers have enough budget to prepare for the festivities.

“Although meron silang elbow room na hanggang December 24, sana magbigay sila nang mas maaga. Kung maaari nga, unang linggo pa lang ng Disyembre nang hindi naman magkumahog ang ating mga manggagawa at kanilang pamilya sa pagba-budget,” (Although there is an elbow room until December 24, we hope that employers released 13^th month pay early. If possible, release it in the first week of December so that employees would not struggle and their family with budgeting) DOLE Secretary Laguesma stated in an interview last November 8, 2023.  

DOLE Report Compliance for 13^th month pay in the Philippines

As stated in the 2023 Handbook on Workers’ Statutory Monetary Benefits provided by (DOLE) Bureau on Working Conditions, employers must submit a report to DOLE about the issuance of 13th-month pay in the company. This can be submitted to the nearest regional office or through their website DOLE ERS not later than January 15 of the following year. Although DOLE have not released a template, the report should include the name of the establishment and its address, its product and/or services, total employment and total employees benefitted from the pay, amount granted per employee and the name, position and telephone number of person disclosing the information. Non-compliance of the benefit and the submission report can be considered as a money claim case that should be forwarded to the court.  

Last thoughts 
13^th month pay is a year-end mandatory benefit that motivates employees to finish the year strong. Though it may be complicated, DOLE released related advisories to guide establishments to properly comply. Furthermore, our company offers services that aim to guide and assist you in smooth and easy transactions that would ensure compliance with related labor rules so that you can celebrate the festive season without any hassle. 

“Happy Holidays!”, one of the most common expressions we heard every December in the Philippines as the Yuletide season is fast approaching. Employees in Philippines are inclined to expect to receive the 13th month pay, Christmas Bonus, and the likes. As they receive the last payslip during the year, the employees understand that employers withheld taxes as part of its obligation to the nation and to help to the coffers of the Philippine government. You might be wondering what are the tax implications of this benefits received from the employer, is it taxable and up to what extent?

Under the withholding tax rules, 13th-month pay and other benefits are exempted from income tax, and hereunder quoted:

“(B) Exemption from withholding tax on compensation. – The following income payments are exempted from the requirements of withholding tax on compensation but may be subject to income tax depending on the nature/sources of income earned by the individual recipient.
xxx xxx xxx
(11) Thirteenth-month pay and other benefits. –
(a) Thirteenth month pay equivalent to the mandatory one (1) month basic salary of official and employees of the government (whether national or local), including government-owned or controlled corporations, and/or private offices received after the twelfth-month pay.
(b) Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind, and other benefits of similar nature actually received by officials and employees of both government and private offices, including the Additional Compensation Allowance (ACA) granted and paid to all officials and employees of the National Government Agencies (NGAs) including State Universities and Colleges (SUCs), Government-Owned and/or Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and Local Government Units (LGUs)”

Based on the above, let me share the following basic features of the Tax Exempt benefits given by the employer in the Philippines.

Republic Act (R.A.) No. 10963 classified 13th month and other benefits with an amount not exceeding P90,000 as income tax exempt in the Philippines. Prior to this, in 1994, R.A. No. 7833 provides that tax exempt other benefits of not exceeding P12,000 is integrated with 13th month and other benefits which the aggregate should not exceed P30,000. In 1998, R.A. No. 8424 removed the limitation of P12,000 from other benefits and that the 13th month and other benefits of not exceeding P30,000 is considered tax exempt. The amount was later increased to P82,000 in R.A. No. 10653 in 2015 and currently to P90,000 by R.A. No. 10963.

1. Payment of 13th month pay is mandatory under the law

Presidential Decree (P.D.) No. 851, as amended by Memorandum Order No. 28, provides that all employers are required to pay their rank-and-file employees, thirteenth (13th) month pay regardless of the nature of their employment and irrespective of the methods by which their wages are paid, provided they worked for at least one (1) month during a calendar year and the same shall be paid not later than December 24 of each year. As this 13th month pay in Philippines is a mandatory imposition by law, failure of the employer to pay its employees is sanctioned by the Department of Labor and Employment (DOLE) in Philippines.

Notably, not every employee classification is entitled to 13th-month pay as managerial employees as defined by labor rules are excluded by law. Further, it is the actual work performed, and not the job title, that is controlling to determine whether the employee is holding a managerial position.

2. Coverage of tax-exempt 13th-month pay and other benefits

Under the rules, 13th-month pay is defined as equivalent to the mandatory one (1) month basic salary of officials and employees of the government (whether national or local), including government-owned or controlled corporations, and/or private offices received after the twelfth-month pay.”

“Basic salary” of an employee shall include all remunerations or earning paid by this employer for services rendered. Salary-related benefits should be included as part of the basis salary in the computation of the 13th month pay if by individual or collective agreement, company practice or policy, the same are treated as part of the basic salary of the employee. However, it does not include allowances and monetary benefits which are not considered or integrated as part of the regular or basic salary, such as:

• cash equivalent of unused vacation and sick leave credits,
• overtime,
• premium,
• night differential,
• holiday pay, and
• cost-of-living allowances.

On the other hand, other benefits seems a catch-all term and is defined as follows: “Other benefits” – such as Christmas bonuses, productivity incentives, loyalty award, gift in cash or in kind, and other benefits of similar nature actually received by officials and employees of both government and private offices, including the Additional Compensation Allowance (ACA) granted and paid to all officials and employees of the National Government Agencies (NGAs) including State Universities and Colleges (SUCs), Government-Owned and/or Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and Local Government Units (LGUs)

In one interpretation, the BIR ruled the caption of “Other benefits such as productivity incentives and Christmas bonus. . .” is not an exclusive enumeration but only provides examples of “other benefits” an employee may receive. Accordingly, other benefits other than the 13th month pay, such as annual Christmas bonus, the 14th month pay, the mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits, and referring to those benefits received by an official or employee for one (1) calendar year, the total amount of which, including the 13th month pay, does not exceed P82,000. (now P90,000).

Bonus and 14th month pay – Management Prerogative and Discretionary. In the case of Philippine Education Co., Inc. v. CIR, G.R. No. L-5103, December 24, 1952, a bonus is an amount granted and paid to an employee for his industry and loyalty which contributed to the success of the employer’s business and made possible the realization of profits. It is an act of generosity of the employer for which the employee ought to be thankful and grateful. It is also granted by an enlightened employer to spur the employee to greater efforts for the success of the business and the realization of bigger profits. And the occasion for it grant and payment is usually during the time of the year when people are more generous and inclined to give. This is the Christmas holiday. From the legal point of view, a bonus is not a demandable and enforceable obligation. It is so when it is made a part of the wage or salary or compensation. In such a case, the latter would be fixed and the former would be a contingent one dependent upon the realization of profits.

Christmas Bonus in the CBA is not equivalent to 13th month pay. In the case of Universal Corn Products v. NLRC, G.R. No. L-60337, August 21, 1987, it was held that the provision in the Collective Bargaining Agreement (CBA) for the payment of Christmas bonuses to all regular employees in the bargaining unit with at least one (1) year of continuous services is not equivalent to 13th-month pay but is regarded as an addition to the legal requirement that accords a reward for loyalty to certain employees.

To sum up, the tax-exempt 13th-month pay and other benefits of up to PhP90,000.00 covers those 13th-month pay mandated by law and catch all other benefits to the extent of PhP90,000.00 a year. Any excess of the P90,000 will be subject to graduated income tax at a rate of 15%-35% depending on their taxable compensation income.

3. 13th month pay and other benefits exemption is separate from de minimis benefits and other exemptions

The PhP90,000 tax exempt 13th month and other benefits in the Philippines does not include de minimis benefits within the threshold. De minimis benefits are provided by generous employers for facilities or privileges that are relatively small value and are offered or furnished merely as a means of promoting the health, goodwill, contentment, or efficiency of its employees commonly known as de minimis benefits. You may check this link for the list of de minimis benefits.

In COURAGE v. CIR, G.R. Nos. 213446 & 213658, July 3, 2018, it was explained that all other benefits given by the employer which are not included in the said list, although of relatively small value, shall not be considered as de minimis benefits, hence, shall be subject to income tax as well as withholding tax on compensation income, for rank and file employees, or fringe benefits tax for managerial and supervisory employees, as the case may be.

In BIR Ruling No. 001-07 dated January 10, 2007, the BIR clarified that “other benefits” and “de minimis” are not the same. For purposes of determining the P30,000.00 (now P90,000) ceiling in “other benefits”, the two are treated in that the amount of “de minimis” benefits conforming to the limits prescribed shall not be considered in determining the P30,000.00 (now P90,000) ceiling of “other benefits” and does not provide for a ceiling with regard to “de minimis” benefits. However, it provides for a limit in the amount of each “de minimis” benefit such that if the employer gives more than the limit prescribed, the excess of the P30,000 (now P90,000) ceiling/limit shall be taxable to the employee receiving the benefits. Both “other benefits” and “de minimis” benefits do not form part of the employees’ taxable compensation income and are, therefore, not subject to withholding tax on wages.

Further, under Revenue Regulation (RR) No. 2-98, as amended by RR No. 11-2018 and as clarified in Revenue Memorandum Circular No. 50-2018, de minimis benefits in excess of the limit (e.g., rice allowance of P3,000 per month which is P1,000 is the excess over the limit of P2,000), 13th month and other benefits (e.g., Christmas Bonus, 14th month pay, performance bonus) is tax exempt up to P90,000. Any excess of the P90,000 shall form part of taxable compensation income that will be subject to income tax, and consequently, to the withholding tax on compensation.

Fringe Benefits Treatment. Fringe Benefit means good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Under the rules, fringe benefits received by managerial and supervisory employees are subject to Fringe Benefits Tax of 35% (for employee citizen/resident alien/non-resident alien engaged in trade or business in the Philippines) or 25% (for employee non-resident alien not engaged in trade or business within the Philippines) based on gross-up monetary value of fringe benefits granted or furnished by the employer unless required by the nature of or necessary to the trade, business or profession of the employer, or where such fringe benefit is for the convenience and advantage of the employer which shall not be subject to fringe benefits tax; while fringe benefits given to rank and file employees are subject to withholding tax on compensation.

In BIR Ruling No. 041-02 dated November 14, 2002, the BIR clarified that Section 2.78.1(A) of Revenue Regulation No. 2-98, as amended, includes fringe benefits as part of compensation income “except those which are subject to fringe benefit tax under Section 33 of the Code,” which means that if the recipient of the fringe benefits is a managerial or supervisory employee, then the provisions of Section 33 of the Tax Code shall apply with respect to the imposition of a final tax on fringe benefits. But if the recipient is a rank-and-file employee, the fringe benefit will still be subject to withholding tax on compensation and consequently, to income tax, but not to final tax on fringe benefits.

4. Tax compliance related to 13th month pay and Other Benefits

• Reported in Annual Alphalist of Employees

The amount of the 13th-month and other benefits of each employee is to be reported by the employer in the Annual Alphalist List (Alphalist) of Employees to be submitted through es*********@*****ov.ph on or before January 31 of the succeeding calendar year. Exempt 13th-month pay and other benefits of up to P90,000 shall be properly reported under the exemptions while the excess or the taxable amount shall be reported under taxable 13th-month pay.

• Reflected in the BIR Form No. 2316

In general, the annualized compensation income including the 13th month and other benefits are reflected in the Certificate of Compensation Payment and Tax Withheld (BIR Form No. 2316) furnished by every employer to the employee on or before January 31 of the succeeding calendar year, or if terminated, on the day on which the last payment of compensation is made. Exempt 13th-month pay and other benefits of up to P90,000 shall be properly reported under the exemptions while the excess or the taxable amount shall be reported under taxable 13th-month pay.

Employees who are disqualified for substituted filing (e.g., two or more employers during the year, tax due and tax withheld are not the same) are required to file their own separate Annual Income Tax Return (AITR) on or before April 15 of the succeeding calendar year and claim the tax withheld in the BIR Form No. 2316 as tax credit in the AITR.

Summary:

Employees should be aware of the existing tax laws, rules, and regulations to secure that their rights as a taxpayer are protected. Compensation is to be regarded as hard-earned money and fruits of labor. After all, what we want is to have a take-home pay in this coming Yuletide season while contributing to society by means of paying the correct taxes.

There are several reasons why employees choose to be separated from work, like looking for better opportunities, a better work environment, better salaries and benefits, or a role that best suits their passions. During times of separation of employees in their company, the payroll or human resources personnel are tasked with computing his or her final pay. This article tackles the things you should know and consider when verifying or making final payments to employees in the Philippines. 

1. 13th-month pay and other benefits 

One of the items to consider in the computation of final pay is the addition of pro-rated 13th-month pay and other benefits. Employers are required to pay their rank-and-file employees a 13th-month pay benefit. However, this is not required for supervisory and managerial employees and is a company discretionary benefit. 13th-month pay is part of the non-taxable or exempt compensation income, particularly in the 13th-month pay and other benefits up to the Php 90,000 annual limit only. If the 13th-month pay and other benefits exceed Php 90,000, then the excess will be considered taxable compensation. 

Formula: 13^th Month Pay = Total Net Earned During the Year / 12 months 

Sample Computation:  

13^th Month Pay = Php 360,000/12 months = Php 30,000.00 

2. Withholding tax due or refund 

To compute the separated employee’s withholding tax due or refund. The payroll or human resources personnel should consolidate/annualize the separated employee’s payroll registers during the year. Sum up the gross compensation and deduct all the non-taxable or exempt compensation to get the net taxable compensation. The net taxable compensation will then be the basis for the withholding tax on compensation for the covered period. 

Below is the revised withholding tax table, effective January 1, 2023. This table will be used for the computation of the withholding tax. 

Sample Computation: 

Consolidated Compensation Income		Php  360,000
Add: 13th Month Pay		30,000
Other Benefits		70,000
De Minimis Benefits		10,000
Gross Compensation Income		Php   470,000
Less: Total Non-Taxable Exempt Compensation Income
Minimum Wage Earner (MWE) – Basic Wage	Php              0
MWE – Holiday, Overtime, Night Shift Differential, Hazard Pay	0
13th Month Pay and Other Benefits (maximum Php 90,000)	90,000
De Minimis Benefits	10,000
SSS, GSIS, PHIC & PAG-IBIG Contributions and Union Dues (Employee share only)	3,000
Salaries and Other Forms of Compensation	0	103,000
Taxable Compensation Income		Php    367,000
Withholding Tax Due (Php 367,000-250,000) *15%)		Php      17,550

The tax due will be compared to the remitted taxes for the year. For example, there is a tax remitted to the BIR (Bureau of Internal Revenue) or the BIR Form No. 1601C from previous months of Php 20,000. Since the correct tax due after consolidation is only Php 17,550, there is a tax refund of Php 2,450. This tax refund will be included in his or her final pay. 

3. Structure of final pay 

Once the 13th-month pay and tax due or refund have been computed, this is to be added or deducted from the gross compensation income of the separated employee. Gross compensation comprises the following but is not limited to: 

1. Net basic salary (Monthly basic pay less late or tardiness, undertime, and absences) 

2. Overtime and night shift differential 

3. Holiday and premium pay 

4. 13^thmonth pay 

5. Other benefits and allowances 

Include an additional tax refund portion if there is an excess of the withheld tax from the annualized withholding tax due. 

Total deductions include the employee’s government contributions to Social Security Services (SSS), Philippine Health Insurance Corporation (PHIC), and Home Development Mutual Fund (HDMF) and any tax due, if any. 

To compute the final pay, add the semi-monthly or monthly gross compensation, 13^th month pay, and tax refund if applicable, then deduct the total deductions like SSS, PHIC, and HDMF contributions and tax due if applicable. 

Sample Computation: 

Net Basic Pay for the month of separation		Php       30,000
Add: 13th Month Pay		30,000
Other Benefits		10,000
Gross Compensation Income		Php       70,000
Add: Tax Refund, if applicable		2,450
Less: SSS, PHIC & PAG-IBIG Contributions (Employee share)	Php       3,000
Tax Due, if applicable	0	3,000
Total Final Pay		Php       69,450

There are many factors that compose a final pay, and this article shows some of the common features of a final pay, its computation, and how it is done. 

The Certificate of Compensation Payment/Tax Withheld (CCPTW), also known as BIR Form 2316, is an essential part of the Philippine tax system. BIR Form No. 2316 summarizes all the employees’ earnings, deductions, and taxes withheld, if there are any. In this article, we will delve into the details of BIR Form No. 2316, its purpose, and its importance for both employers and employees. 

1. Goal and Relevance of BIR Form No. 2316

BIR Form No. 2316 serves as a summary of an employee’s compensation income, tax withheld, and other relevant information for a particular calendar year. It assists both the company and the employee by ensuring transparency and compliance with tax laws. BIR Form No. 2316’s main goals and significance include the following: 

• Proof of Income: It serves as a record of the wages an employee received from a certain employer during the year. 
• Tax compliance: By displaying the right amount of taxes withheld by the employer, BIR Form No. 2316 makes it easier to calculate the employee’s yearly income tax liability. 

2. Components of BIR Form No. 2316 

• Information on the Employee and the Employer: This section contains the name, address, and taxpayer identification number (TIN) of the Employee and the Employer. 
• Compensation Income: This section of the form comprises the employee’s annual compensation income, which includes their basic salary as well as any additional taxable benefits such as allowances, bonuses, commissions, and other related compensation income. 
• Non-taxable/Exempt Compensation Income: BIR Form No. 2316 accounts for the tax-exempt or non-taxable compensation that lowers taxable income, such as the minimum wage earner’s basic pay, holiday pay, overtime pay, and night shift differential; de minimis benefits; 13^th month pay and other benefits (maximum of Php 90,000.00); and other non-taxable compensation. 
• Taxes Withheld: The entire amount of taxes that the employer withheld from the employee’s compensation income is stated in this section. 
• Other required fields:  
  The signature portion of the employer and employee, in which the certificate has been made in good faith, verified, and, to the best of their knowledge, true and correct, gives consent to the processing of information as contemplated under the Data Privacy Act of 2012 (Republic Act No. 10173) for legitimate and lawful purposes.  
  The signature portion of the employer and employee to be accomplished under substituted filing. An employee is qualified under substituted filing of the Income Tax Return (BIR Form No. 1700) if he or she received purely compensation income from only one employer in the Philippines for the calendar year and if his or her taxes have been correctly withheld by the employer (tax due equals tax withheld). 

3. Employer’s Responsibilities 

• Accuracy and Completeness: Employers are responsible for making sure the data on the form reflects the employee’s pay, taxes withheld, and other pertinent information. 
• Release: Employers must deliver a copy of BIR Form No. 2316 to each employee by January 31st of the following year, except if the employee is separated before the calendar year ends. The employee will receive a copy of BIR Form No. 2316 upon release of the final payment. 
• Submission: Employers must provide BIR Form No. 2316 and the alphalist to the Bureau of Internal Revenue (BIR) no later than February 28th of the following year. 

4. Employee’s Responsibilities 

• Verification: Employees should thoroughly go over the form to make sure that all the information—including compensation income, taxes deducted, and exemptions—is accurate. 
• Record-keeping: For future reference, potential BIR audits, and supporting documents with their personal application in banks or other agencies, employees should keep a copy of their BIR Form No. 2316 and other pertinent tax papers. 

Therefore, BIR Form No. 2316 is an essential form that permits correct income tax calculation and compliance for both the employer and employees. Employers must provide this form to their employers as proof of their income for the year. Understanding the purpose, contents, and responsibilities associated with BIR Form No. 2316 ensures transparency, smooth tax operations, and adherence to tax laws.

The annualization of compensation is a crucial procedure used by employers in the Philippines to calculate the correct tax due or refund of employees at year-end or during the separation of employees from the company. This procedure is used to ensure fair taxation and an accurate calculation of the withholding tax on compensation. It reduces income fluctuations, minimizes tax fraud, and fosters fair tax obligations by distributing income and deductions over the entire course of the year, regardless of the actual pay period, to accurately estimate taxpayers’ tax obligations.  

In this article, we will delve into why annualizing payroll is important in the Philippines. 

1. Managing income fluctuations 

In the Philippines, a lot of workers have irregular revenue patterns where they get bonuses, commissions, or overtime compensation at various times of the year. By averaging out the earnings over the entire course of the year, annualizing payroll provides a solution to these revenue swings. It gives a more realistic picture of a person’s yearly income, enabling the proper estimation of tax liabilities. 

2. Ensuring fair taxation 

By preventing people from abusing their tax obligations, annualizing payroll provides fair taxes. Without annualization, taxpayers might be able to earn a lot of money in a brief period and then do nothing for the rest of the year to avoid paying higher tax rates. Annualization makes the tax burden more evenly distributed and ensures fair taxation by considering all revenue for the year. 

3. Calculating the correct tax withholdings and refunds if any 

By appropriately deducting taxes from employees’ salaries, employers play a critical role in annualizing payroll. Employers can calculate the right amount of tax to withhold from each pay period by annualizing it, considering the employee’s projected yearly income. By reducing the possibility of underpaying or overpaying taxes, this strategy ensures compliance with tax laws and calculates the proper withholding tax or refund of employees. 

4. Making tax law compliance easier 

Payroll annualization makes it easier for both employers and employees to remain compliant with Philippine tax laws and regulations. Employers can correctly record and submit the right amount of taxes to the Bureau of Internal Revenue (BIR), avoiding fines or legal concerns. Employees who have their salary annualized are better able to comprehend their tax liabilities.  

Therefore, annualizing payroll is an essential procedure that properly equates withholding taxes and adheres to the tax rules. Annualization reduces income swings and prevents tax fraud by dividing income and deductions over a full year. It allows for precise tax deductions from employee pay and makes it easier to comply with tax laws. Payroll must be annualized, and both employers and employees must be aware of this fact to maintain the Philippines’ tax system’s fairness, transparency, and compliance.

To align with the Philippines’ Bureau of Internal Revenue’s digital transformation roadmap, there is a need to replace the outmoded and obsolete processing of payroll with a more contemporary and progressive payroll system. The Revenue Memorandum Order (RMO) no. 25-2023 issued on July 4, 2023, prescribes the policies, guidelines, and procedures for the preparation and processing of payroll in the National Office and Regional Offices using the new Nationwide BIR Payroll System (NBPS). 

The new NBPS has a full integration module that can accurately capture personnel information necessary for the processing of payroll and the generation of reports. It can generate the weekly or semi-monthly General Office Payroll (GOP) for the salaries, Personnel Economic Relief Allowance (PERA), Representation Allowance and Transportation Allowance (RATA), including other monetary bonuses and incentives. NBPS has the following modules: 

Encoding and updating of personnel information, which includes adding, editing, and viewing it in the Personnel Module in the NBPS, shall be the responsibility of the concerned sections of the Personnel Division (PD) for the National Office and the Administrative Human Resource Management Division (AHRMD) for the Regional Offices. The updates shall be based on the documentary requirements received by PD/AHRMD on or before the 12th day of the month. As soon as the concerned Section Chiefs recommend it for approval by the Division Chief or Assistant Division Chief of PD/AHRMD, it shall be immediately encoded in the NBPS. Documents received after the cut-off date shall be included in the succeeding GOP. If the 12th day of the month falls on a weekend or holiday, the new cut-off date is the next working day. 

Updates on mandatory government deductions and other loans that are authorized to be deducted by the BIR shall be the responsibility of the concerned section of the Accounting Division or Finance Division (AD/FD). The updates shall be done prior to the processing of the monthly GOP and must be supported with the following documents:  

a. Letter requests from employees 

b. Billing from GSIS/PAG-IBIG  

c. Other billing deductions/loans 

All documentary requirements received by the AD/FD on or before the 18th day of the month shall be encoded or uploaded in the NBPS for approval of the Division Chief or Assistant Division Chief as recommended by the concerned Section Chief of the AD/FD in the NBPS. Documents received after the cut-off date shall be included in the succeeding GOP. If the 18th day of the month falls on a Weekend or Holiday, the new cut-off date is the next working day. Other details are specified in the Order. 

The Order defines the roles and responsibilities of the following: 

1. Employee concern 

2. Head of Office 

3. The sections under the Personnel Divisions which are the following: 

1. Manpower and Management Section (MMS) 

2. Information and Records Section (IRS) 

3. Compensation and Benefits Section (CBS) 

4. Performance Evaluation and Management Section (PEMS) 

5. Payroll Section (PS) 

4. The PS-PD/HRMS/AHRMD 

5. BD/FD-Budget Section (FD-BS) 

6. Accounting Division or Finance Division (AD/FD) 

7. FS/Office of the Assistant Regional Director (OARD) 

8. GSD/General Services Section (GSS)-AHRMD 

9. Administrative Services 

10. Human Resource Development Service/Office of the Assistant Regional Director 

The Order defines documentary requirements for new employees, transferred employees from other Government offices, promotions, transfers of employees in compliance with the Revenue Travel Assignment Order (RTAO), employee information changes or updates, salary increments, separated employees, suspension/resumption of salaries of employees, and supplemental payroll. 

The Order shall take effect immediately. The full implementation of the New BIR Payroll System shall be operational for the National and Regional Offices from 2023 onwards.

The Regional Tripartite Wages and Productivity Board (RTWPB) in the National Capital Region (NCR) received several petitions filed by various labor groups seeking a minimum wage increase for all workers in the private sector. After due notice to all concerned stakeholders, the Board conducted consultations and a public hearing. 

In settling the minimum wage, the Board considers the various criteria under Republic Act 6727, otherwise known as “The Wage Rationalization Act”, to periodically assess wage rates and conduct continuing studies in the determination of the minimum wage applicable to the region or industry. Compliance with the procedures laid down in the Omnibus Rules on Minimum Wage Determination to protect vulnerable workers from undue low wages was also considered. After a thorough review and evaluation of the existing socio-economic conditions in the region as well as the positions of the labor management, the following findings were established: 

1. The Consumer Price Index (CPI) in the region was at 112.2 in June 2022 and at 118.1 in May 2023; 

2. Based on the abovementioned CPI figures in the region, the average inflation rate from the effectivity of the last wage increase to the present is 7.03%; 

3. The poverty threshold based on the preliminary data for 2021 provided by the Philippine Statistics Authority is PHP 452.00; and 

4. Other relevant findings of the Board. 

Based on the findings enumerated, the Regional Tripartite Wages and Productivity Board (RTWPB) in the National Capital Region (NCR) issued Wage Order No. NCR-24 on June 26, 2023. 

Effective July 16, 2023, the minimum wage earners in the private sector in the Philippines’ National Capital Region shall receive a forty peso (PHP 40.00) increase in the basic wage per day. 

Sectors/Industry	Current Minimum Wage Rates	New Wage Increase	New Minimum Wage Rates
Non-Agriculture	PHP 570.00	PHP 40.00	PHP 610.00
Agriculture  (Plantation and Non-Plantation)	PHP 533.00	PHP 40.00	PHP 573.00
Service/Retail Establishments employing 15 workers or less
Manufacturing regularly employs less than 10 workers

The National Capital Region (NCR) covers the cities of Caloocan, Las Pinas, Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Paranaque, Pasay, Pasig, Quezon, San Juan, Taguig, and Valenzuela, as well as the Municipalities of Navotas and Pateros. The minimum wage rates prescribed under this Order shall be for normal working hours, which shall not exceed eight (8) hours of work a day. The wage increase prescribed herein shall apply to all minimum wage earners in the private sector within the region, regardless of their position, designation, or status, and irrespective of the method by which their wages are paid. Any person, corporation, trust, firm, partnership, association, or entity who refuses or fails to pay the prescribed increase shall be dealt with pursuant to the provisions of Section 12 of the Republic Act (RA) No. 6727, as amended by RA No. 8188. 

Under the Social Security Act of 1997, Republic Act No. 8282, it is the policy of the State to establish, develop, promote, and perfect a sound and viable tax-exempt social security system suitable to the needs of the people throughout the Philippines, which shall promote social justice and provide meaningful protection to members and their beneficiaries against the hazards of disability, sickness, maternity, old age, death, and other contingencies resulting in loss of income or financial burden. 

To carry out the purposes of this Act, the Social Security System (SSS) was born. The Social Security System is a social insurance program in the Philippines for compulsory and voluntary members. Compulsory members are those that are employed, self-employed, household helpers, and Overseas Filipino Workers (OFW), while voluntary members are the separated employees and the non-working spouse. SSS gives its members protection against the economic and social distress caused by contingencies such as sickness, maternity, disability, retirement, death, funerals, and unemployment. 

The employer is mandated to remit contributions to SSS from both employer and employee every month from the start of operation with at least one employee. The employees’ membership will be effective on the first day of employment. 

The table below shows the regular contributions for the SS, the Employees’ Compensation (EC) that is paid only by the employer, and the Workers’ Investment and Savings Program (WISP) that are administered by the SSS. The 2023 SSS contribution rate is 14%. The 14% is composed of a 9.5% Employer share and a 4.5% Employee share, while the minimum Monthly Salary Credit (MSC) increased from P3,000 to P4,000 and the maximum MSC from P25,000 to P30,000. The WISP contribution is only required for employees who have a monthly salary credit of PHP 20,500 and above.

Reference for the image: SSS

The basis for the computation of the SSS contribution is gross compensation. Compensation is defined as all actual remuneration for employment, except the part of the remuneration received during the month that is more than the maximum MSC as provided under the Social Security Act of 2018 and this IRR [Sec. 8, (f)], including but not limited to the following: 

To give a better understanding of how SSS contributions are identified and computed, let us have an example: 
A, an employee of XYZ Company, has a monthly basic salary of P30,000, transportation, communication, and meal allowances of P5,000, and a performance incentive of P5,000. The total gross compensation is P40,000. This will be used to identify the contributions of the employer and employee by selecting the appropriate range of compensation. For the 40,000, the range will be P29,750 and above, which would result in an SSS ER Contribution of P2,880, which is composed of Regular SS of P1,900, EC of P30, and WISP of 950, while for the EE’s SSS Contribution, it is P1,350, which is composed of Regular SS of P900 and WISP of P450. 

The deadline for the regular employer to remit and pay the contributions is on the last day of the month following the applicable month. The employer is liable to his or her employees and must pay their benefits on the employee’s behalf. If there are unpaid contributions, employers are bound to pay for all unpaid contributions and penalties and be held liable for a criminal offense punishable by a fine or imprisonment.