Understanding The Non-Taxable Compensation In The Philippines

Every payday, employees are elated to receive their monthly compensation. Once employees check their payslips, some wonder if their deductions are correctly calculated and properly deducted from their salary. To help employees and companies be informed of the associated rules and regulations, non-taxable compensation in the Philippines is briefly discussed in this article.

As a general rule, all forms of compensation are taxable, except for those specifically provided under the laws, rules, and regulations in the Philippines. The following are the non-taxable compensations:

• MINIMUM WAGE EARNERS

No withholding tax shall be required for those employees who are identified as minimum wage earners in the private or public sectors as defined in RR 2-98, as amended by RR 11-2018. There’s no effect on the net taxable compensation unless it exceeds the PHP 90, 000 annual limit of the 13th-month pay and other benefits and unless the annual net taxable income exceeds PHP 250, 000.00 during the year. Statutory minimum wages that are non-taxable are the following:

1. Basic Minimum Wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

• 13th MONTH PAY AND OTHER BENEFITS (MAXIMUM OF P90,000)

13th-month pay is required by law to provide additional compensation to low-income earners to protect the level of real wages from the ravages of global inflation. This is to show concern for the masses so that they can properly celebrate Christmas and the New Year. Employers are required to pay their rank-and-file employees their 13th month’s pay, regardless of the nature of their employment and irrespective of the methods by which their wages are paid. An employee at the management level is not entitled to the 13th month’s pay unless it is provided and granted by the company. The employee should work for at least one month during a calendar year to be entitled to a 13th-month pay benefit, and the computation will be further discussed in another article.

13th-month pay and other benefits will be treated as non-taxable as long as they do not exceed the PHP 90,000 annual limit. Other benefits may include those that are not expressly stated in the non-taxable deduction in BIR Form 2316. Examples of other benefits include communication allowance, transportation allowance, birthday bonus, performance incentive, loyalty award, referral incentive, and other related employee benefits.

• DE MINIMIS BENEFITS NOT SUBJECT TO WITHHOLDING TAX

De minimis benefits are facilities and privileges of relatively small value. This is not subject to income tax as well as withholding tax on the compensation income of both managerial and rank-and-file employees. De minimis benefits up to the maximum amount do not require an official receipt or sales invoice unless expressly stated in the regulation. The enumeration of the tax-exempt de minimis benefits under Train RA 10963 will be discussed in another article.

• SSS, GSIS, PHIC, and PAG-IBIG CONTRIBUTIONS AND UNION DUES (EMPLOYEE SHARE ONLY)

One of the exclusions from gross compensation and exemption from taxation is the mandatory employee share of the SSS, GSIS, PHIC, and Pag-IBIG contributions. Non-taxable compensation is up to the prescribed maximum amount of contributions; contributions in excess of those declared to government agencies will be treated as taxable compensation. SSS provides benefits and social security in the event of unemployment, maternity, sickness, disability, retirement, funeral, and death benefits. PHIC, otherwise known as PhilHealth, provides health insurance coverage and ensures affordable, acceptable, available, and accessible healthcare services for its members. HDMF, popularly known as Pag-IBIG, offers its members a savings program, short-term loans, and access to housing programs.

• SALARIES AND OTHER FORMS OF COMPENSATION

These are other non-taxable salaries and compensation that do not fit the definition of de minimis benefits and non-taxable other benefits. Some are still questioning whether dependents are still personal and whether additional exemptions for employees are deductible in compensation. Under the TRAIN Law, the PHP25,000 exemption per dependent up to 4 dependents, or a maximum of PHP100,000 per taxpayer, was removed. However, the threshold amount for personal tax exemption was raised to PHP250,000 of annual income from PHP50,000 under the previous regulation.