3 Things You Should Know About Final Pay in the Philippines

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: 

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: 

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. 

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.