COMPENSATION

INCOME
Chapter 10
By: Anna Janinah E. Ramos
 EMPLOYER-EMPLOYEE
RELATIONSHIP

EMPLOYER EMPLOYEE
■ A person who has control ■ An individual who is a
over the payment of the recipient of wages.
employee remuneration.
■ If such person is a NRA-
NETB, the employer is
deemed the person paying
remuneration in their
behalf.
Elements of Employer-Employee
Relationship under case law:
1.Selection and engagement of employees
2.Payment of wages
3.Power of dismissal
4.Power of control
Thus, the income of consultants, directors
without management function, artists are not
consider as compensation income but are
business or professional income.
 Types of Employee
As to FUNCTION:
1. Managerial Employees – given powers to lay
down and execute managerial policies,
and/or hire, transfer, suspend, layoff, recall,
discharge, assign, or discipline employee.
2. Supervisory Empoyees - who 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 judgement.
3. Rank and File Employees – who hold neither
managerial nor supervisory function;
As to TAXABILITY:
1. Minimum Wage Earners – employee in the
private sector who is paid the minimum
wage or to an employee in the puctic
sector who is paid not more than the
statutory minumum wage.
2. Regular Employees – employees subject
to regular progressive income tax.
EXEMPT BENEFITS UNDER THE
NIRC, AS AMENDED, AND
SPECIAL LAWS
1. Remuneration received as incidents of employment
2. De Minimis Benefits
3. 13th month pay and other benefits not exceeding P90,000
4. Certain benefits of minimum wage earners.
 Remuneration Received as
incidents of employment
a. Exempt retirement benefits under RA7641 including
exempt retirement gratuities to government officials
and employeer.
b. Exempt termination benefits
c. Benefits from the United States Veterans
Administration
d. Social security, retirement gratuities, pensions, and
similar benefits from foreign government agencies
and other institutions, private or public
e. Benefits from SSS, under SSS Act of 1954, as
amended
f. Benefits from GSIS under the GSIS Act of 1937, as
De minimis benefits
- Are facilities or privilages such as
entertainment, medical services, or courtesy
discounts on purchases that are relatively
small value and are furnished by the
employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of
his employees.
- De minimis benefits are 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 officials and employees.
■ Medical cash allowance to dependence of employees not
exceeding 1500 per employee per semester or 375 per
month.
■ Rice subsidy not exceeding 2000 or 1 sack of 50 kg rice per
month amounting to not more than 2,000.
■ Uniform in clothing allowance not exceeding 6000 per
annum.
■ Actual medical assistance, e.g., medical allowance to cover
medical and health care needs, annual or medical executive
check-up, maternity assistance, and routine consultations
not exceeding 10000 per annum.
 De minimis benefits
■ Laundry allowance not exceeding 300 per month
■ Employee achievement award, e.g., for length of service or
safety achievement, which must be in the form of tangible
property other than cash or gift certificates, with an annual
monetary value not exceeding P10,000 received by the
employee under an established written plan which does not
discriminate in favor of highly paid employees.
■ Gifts given during Christmas and major anniverssary
celebrations not exceeding P5,000 per employee per annum
(i.e., Christmas gift and anniversary gifts)
■ Daily meal allowance for overwork and night or graveyard shift
not exceeding 25% of the basic minimum wage on a per region
basis (i.e., overtime meal)
■ Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive
schemes provided that the total annual monetary value
Taxable de minimis benefits
1. Excess de minimis over their regulatory limits
2. Other benefits of realtively small value that
are not included in the list of de minimis benefits

Treatment of taxable de minimis benefits

a. For rank and file employees – taxable de
minimis is treated as other compensation
income under the category “13th month pay
and other benefits”
b. For managerial and supervisory employees –
taxable de minimis is treated as fringe benefit
subject to final fringe benefit tax
Illustration 1:
Alexander, a private employee who is paid a P600 daily rate, receives
the ff. benefits during the year 2019:

Monetized unused VL 9 days

Monetized unused SL 9 days
Medical assistance P7,000
Rice Subsidy 30,000
Clothing Allowance 9,000
Laundry Allowance 6,000
Illustration 2:
Giovanni, a government rank and file employee, received the ff.
benefits.

Monetized unused VL P6,000

Monetized unused SL 9,000
Uniform Allowance 5,000
Laundry Allowance 4,800
Illustration 3:
Professor Radvic was one of the Hall of Fame awardee of Youbee
University. He was granted P25,000 cash as loyalty award for his
30 years of service. He was also given P10,000 Christmas gift and
an additional P10,000 gift during the institution’s Founding Day
Anniversary. Besides, he was also given free lunch meals with a
total value of P15,000 during the same year.
Commutation of accumulated leave credits

The terminal leave pay or the commutation of

unused leave credits due to involuntary separation
from employment of the employee is now treated
as de minimis benefits subject to the 10-day leave
credit limit and is no longer exempt as part of
exempt termination benefits.
Benefits exempt under treaty or
International Agreements
Employee benefits of non-Filipino
nationals and/or non-permanent
residents of the Philippines from foreign
governments, embassies or diplomatic
missions, and international
organizations in the Philippines are
exempt from income tax.
Exemption from withholding tax
does not mean income tax
exemption
■ Filipino employees of foreign governments,
international missions and organizations are
taxable as a rule except only to employees of
the following organizations:
1. United Nations (UN)
2. Specialized Agencies of the United Nations
3. Australian Agency for International Development
(AUSAID)
4. Food and Agriculture Organization (FAO)
5. World Health Organization (WHO)
6. United Nations Development Programme (UNDP)
 Foreign embassy, Philippine embassy
Missions, or organization or consulate office
In the Philippines
- Filipino citizens Taxable* N/A
- Aliens Exempt N/A
Abroad
- Filipino citizens Exempt Taxable
- Aliens Exempt Exempt

* Taxpayer must prove if there is an

exemption grant under contract or
special law
“Necessity of the employer
rule”
And
“Conveniece of the employer
rule”
Composition of Taxable
Compensation Income
1. Regular compensation – This
pertains to the fixed
remunerations received by the
employee every payroll period.
2. Supplemental compensation –
This pertains to other
performance-based pays to
employees with or without regard to
the payroll period.
Illustration
An employee received P400,000 regular compensation, P120,000
supplemental compensation, and P100,000 13th month pay and other benefits.
The taxable compensation income shall be computed as follows:
REGULAR
COMPENSATION
1. Basic Salary
2. Fixed allowances such as cost-of-living
allowance, fixed housing allowance,
representation, transportation, and other
allowances paid to an employee every
payroll period.
Exemption rule on the taxability of allowances:
a. Ordinary and necessary allowances for
travelling, representaion or entertainment
expense of employees incurred in the persuit of
the employer’ trade business or profession.
b. The expense is subject to accounting or
liquidation
c. Any excess advances are returned to the
employer.
Valuation of compensation paid in kind
Compensation in kind is taxable at the fair value of the consideration received.
If received in shares, the fair value of the shares at the date services were
provided is used.
Illustration 1
The following pertains to an employee in 2019
Illustration 2
An employee who was terminated in 2019 due to business closure of the employer received the
following:
Supplementary Compensation
The following are the additional compensation under current tax
rules:
1. Overtime pay
2. Hazard pay
3. Night shift differential pay
4. Holiday pay
5. Commissions
6. Fees, including director’s fees (if director is an employee)
7. Emoluments and honoraria
8. Taxable retirement and separation pay
9. Value of living quarters or meals
10.Gains or exercise of stock options (BIR Ruling 119-2012)
Illustration
Mr. Anthony met the vesting condition of his
employer’s stock option plan where he is entitled to
buy 10,000 of his employer’s share at a strike price of
P100. In 2018. Mr. Anthony exercised the option when
the share of his employer was selling P150/share.
After 2 years, he sold the share for P180/share.

The compensation income shall be reported by

Anthony in his 2018 income tax return
Illustration
Mr. Anthony met the vesting condition of his
employer’s stock option plan where he is entitled to
buy 10,000 of his employer’s share at a strike price of
P100. In 2018. Mr. Anthony exercised the option when
the share of his employer was selling P150/share.
After 2 years, he sold the share for P180/share.

The compensation income shall be reported by

Anthony in his 2018 income tax return
Treatment of the subsequent sale of the
shares
1. If the employer is a Domestic corporation, and
sale of stock is made
a. Through PSE

b. Directly to the buyer

Treatment of the subsequent sale of the shares
2. If the employer is a Foreign corporation
“13th month pay and other benefits” includes:
1. 13th month pay
2. Other Benefits
a. Christmas bonus
b. Cash gifts
c. Additional compensation allowance
d. 14th month pay, 15th month pay, etc.
e. Other fringe benefits
 Government Private
employees Employees
Christmas Bonus 13th month pay and 13th month pay and
other benefits other benefits
Chrismas Gift 13th month pay and De minimis
other benefits
Other fringe benefits
1. Employee personnel expenses
shouldered by the employer
2. Taxable De Minimis such as:
a. Excess De minimis
b. Benefits not included in the de
minimis list
Tax treatment of 13th month pay and other
benefits

- 13th month pay and other benefits are

exempt from withholding on compensation
provided they do not exceed P90,000. It
follows, therefore, that the excess over
P90,000 is subject to the withholding tax on
compensation.
- Excess over P90,000 should be trated as
compensation income subject to regular tax.
Illustration 1
A government rank and file employee received
the following benefits aside fom the basic pay in
2019:
Illustration 1
A private rank and file employee working in a
remote tower station of Snail internet Company
received the following benefit during 2019:
Illustration 3
A managerial employee
received the following benefits
in 2019:
Integrative Illustration 1
A government rank file employee had the following summary of
his compensation and benefits in 2019:
Integrative Illustration 2
A private rank file employee derived the following remunerations
and benefits in 2019:
TAXABILITY OF MINIMUM WAGE
EARNERS (MWE)

Minimun wage earners are exempt from

income tax on the follwing:
1. Basic minimum wage
2. Other benefits (HHON)
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential pay
Receipt of other taxable income by MWEs

Previously under RR10-2008, a minimun wage

earner loses the special privilege of tax exemption if
they derive other taxable income. However, this rule
was nullified by the Supreme Court.

Consequently, the minimum wage earner is still

exempt from income tax from the foregoing benefits
even if they receive other taxable compensation.
However, they may be subjected to tax if their other
taxable income exceeds the P250,000 for the year.
Rules of change in staus as a Minimum Wage
Earner during a year
1.When an employee becomes a minimum wage
earner during the year, he shall be subjected to
income tax only on compensation earned before
becoming a minimum wage earner.

This rule may also apply in cases of:

a. Transfer
2. When anto a employer
employee paying
ceases salary
to be at thewage
minimum
minimum
earner duringwage.
the year due to increase in salary, only
b.
theTranfer
incomeoffor
employment to ayear
the rest of the region with higher
is taxable.
minimum wage.
This rule applies in case of:
a. Transfer to an employee paying salary above the
minimum wage
b. Transfer of an employment to a region with lower
statutory minimum wage
Rules of change in staus as a Minimum Wage
Earner during a year

3. When an employee ceases to be a minimum

wage earner during the year by disqualification (i.e.,
earning taxable income)

Note that if the taxable income of the employee

does not exceed P250,000 for the year, there will be
no income tax diue for the period under the tax
table.
Treatment of Cost-of-living Allowance of MWEs
Under RMO23-2011, COLA which forms part of the
new wage rate prescribed to be the statutory
minimum wage should be treated as part of the
minimum wage and shall not be treated as separate
or other benefit.

THE WITHHOLDING TAX ON COMPENSATION

The withholding tax on compensation is a method of
collecting the income tax at source upon receipt off
the income. It applies to all employed individulas
whether citizens or aliens. The employer is
constituted the withholding agent.
Procedural computation of the withholding tax
on compensation

1. Determine the total monetary and non-monetary

compensation of the employee for the payroll
period: monthly, semi-monthly, weekly or daily.
Segregate non-taxable benefits, mandatory
contributions and supplemental compensation.

2. Determine the bracket that applies to the regular

compensation of the employee for the applicable
payroll period. Determine the basic tax for the
bracket.

3. Add supplemental compensation to the excess of

the regular compensation. Subject the total to the
incremental tax rate for the bracket.
Year-end Adjustment
It must be noted that the total amount
withheld on every payroll date may not
exactly match the annual tax due.Due to this,
the income of the employee needs to be
reckoned at the end of the year and
adjustment is made as necessary. Any under-
withholding shall be deducted on the final
payroll of the employee. An over-withholding
shall be refunded to the employee.
BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON
COMPENSATION UNDER
RR2-98, AS AMENDED:

I. Remunerations received as incidents of employment

2. Remuneration paid for agricultural labor and paid entirely in
products of the
farm where the labor is performed
3.Remuneration for domestic services
Note that the minimum wage for domestic workers or ”kasambahay”
prescribed under Sec. 24,Art. IV of RA 10361 or the Domestic
Workers Act or Batas Kasambahay or 2013 ranges from P1,500 to
P2,500 a month-too low compared to the tax exempt
minimum wage for commercial, industrial, or agricultural workers.
4.Remuneration for casual labor not in the course of an employer’s
trade or
business-treated as other income.
5.Compensation for services by a citizen or resident of the
Philippines for a
foreign government or an international organization.
6.Damages paid by the employer to employees
7.Proceeds of life insurance
8.Amounts received by an insured employee as a return
of premium
9.Compensation for injuries or sickness
10.Income exempt under treaty
11.13th month pay and other benefits not exceeding a
total of P90,000
12.GSIS, SSS, PhilHealth, and other contributions
13.Compensation income including overtime pay, holiday
pay, night shift
differential pay, and hazard pay of Minimum Wage
Earners
14.Compensation income of employees in the public
sector if the same does not exceed those of minimum
wage earners in the non-agricultural sector
DEADLINE OF FILING AND REMITTANCE OF THE
WITHHOLDING TAX ON COMPENSATION

Employers shall file the 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 except for
taxes withheld for December which shall be filed/paid on
or before January 15 of the succeeding year.

Employers are also required to file 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 in which the
compensation income payments and passive income
payments were made.

Employers shall furnish each employee-taxpayer a copy

Penalties for Non-compliance
Employers are subject to the same penalties discussed
in Chapter 4 for non-compliance of withholding tax
requirements.

Treatment of the Withholding Tax on

Compensation
If the employee has other items of income that are
subject to regular income tax such as income from
business or profession, income from other employment
orcasual income, he must file a consolidated income
tax return to include such itemsof income for the entire
taxable year. The withholding tax on compensation is
credited against the total tax due in the consolidated
income tax return.

Substituted filing of tax return

Under the substituted filing system, the employer files
Thank You 