How to determine tax exempt minimum wage Philippines?

By: Garry S. Pagaspas, CPA

Under Republic Act No. 9504 implemented by Revenue Regulations No. 10-2008, statutory minimum wage earners are exempted from income tax, and consequently from withholding tax on compensation. While this is a much welcomed legislation for the labor sector, some employees and employers in the Philippines are not aware on how to determine whether or not the salary or compensation in the Philippines is within the statutory minimum wage. For this purpose, this articles attempts to share simple rules on how to determine tax exempt statutory minimum wage in the Philippines.

How to determine minimum wage for daily paid employee Philippines?

For a daily paid employee, simply compare the employee rate per day with the minimum wage of NCR (e.g. 481 a day inclusive of ECOLA). If rate is equal to minimum wage, then, the same is exempted from withholding tax on compensation – basic minimum wage and the corresponding holiday, hazard, overtime, and night shift differential of such employee. If daily rate is more than the minimum wage, then, taxable.

How to determine minimum wage for a monthly salaried employees Philippines?

For a monthly paid employee, you need to determine if the amount of monthly salary is equivalent to the daily rate for statutory minimum wage in the Philippines. You can do it in either of the two (2) ways:

1. Multiply the statutory minimum wage by the denominator depending on the coverage of the employee’s monthly rate and compare with the actual monthly rate of the employee; or,
2. Convert the employee’s monthly rate to daily rate and compare the daily rate with minimum wage

In converting the monthly rate to daily rate, you need to choose the denominator depending on the coverage of such monthly rate as to number of working days in a year as follows:

• 261 days – for those who do not work and are not considered paid on Saturdays, Sundays or Rest Days;
• 313 days – for those who do not work and are not considered paid on Sundays or Rest Days;
• 365 days – for those who do not work but are considered paid on rest days, special days, and regular holidays;
• 392.5 days – for those required to work everyday including Sundays, and Rest Days;

Please refer to the Annex “B” of Revenue Regulations No. 10-2008 for further details of such denominator.

Example: Is 12,546.08 monthly basic salary covering Monday to Saturday work with regular and special holidays considered paid taxable? For this purpose, let us use P481.00 a day statutory minimum wage in Metro Manila, Philippines effective April. 4, 2015.

First step – Determine the applicable denominator.

In this case, let us assume its 313 – for those who do not work and are not considered paid on Sundays or Rest Days using Annex “B” of Revenue Regulations No. 10-2008.

Second step – determine equivalent monthly rate (EMR) of the statutory minimum wage

To determine the equivalent monthly rate (EMR) simply multiply the statutory daily minimum wage by the denominator in Step 1. – P481.00 a day multiplied by 313 days divided by 12 months equals P12,546.08.

Alternatively, you can convert the employee’s actual monthly rate to daily rate to check whether or not such daily rate is equivalent to the minimum wage. To do so, multiply the employees actual monthly rate by 12 months divided by denominator in Step 1 (12,546.08 x 12)/313 or P480.999 a day or simply P481 a day.

Third step – compare converted employee actual ate with minimum wage rate

Based on the computation P481.00 actual daily rate or P12,546.08 actual monthly rate of such emloyee is statutory minimum wage.

Conclusion:

Employee with a monthly basic salary of P12,546.08 under 313 denominator is statutory minimum wage. As such, the employee is exempted from income tax and consequently, exempted from withholding tax on compensation with respect to the following, B-HON:

• Basic salary;
• Holiday pay;
• Hazard pay;
• Overtime pay; and,
• Night shift differential

Finally, it is strongly suggested that you adopt in strict terms the rules for statutory minimum wage so as to avoid the implications of misapplications. Should you fail to withhold the withholding tax on compensation, then, the tax authority or BIR will assess deficiency tax based on the amount of withholding tax that you should have withheld as employer plus penalties. The corresponding salaries expense will likewise be disallowed for failure to withhold under Section 34(k) of the Tax Code of the Philippines, as amended.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.