Compensation Income

Laws, Principles & Applications

KART VICTOR LAGUSTAN, CPA
November 28, 2023
BAM031 Income Taxation 2025 Class Calendar
Date Activity/Topic/Chapter Mode
January 11, 2025, Saturday Virtual Class
Chapters 3 - 9
January 16, 2025, Thursday Classroom Discussion (attendance not
required)
January 18, 2025, Saturday NO CLASS – Sinulog Pocession
January 25, 2025, Saturday (Whole Day) Quiz & Classroom Discussion
Jan 30 – Feb 1 Long Test 2 c/o Department
Feb 3-5 Period 2 Exam c/o Department
February 8, 2025 Classroom Discussion
February 15, 2025 – Feb 13, 2025 Classroom Discussion
February 22, 2025 – Feb 20, 2025 NO CLASS
Chapters 10- 15B
March 1, 2025 *SINGLAKAS*
March 8, 2025 Classroom Discussion
March 15, 2025 Classroom Discussion
March 20-22 Long Test 3 c/o Department
March 24-29 Common Final Exam c/o Department
2
The Concept Map of Income Taxation
Introductory Concepts
(Chapters 1-2)

Gross Income
(Chapter 3)

Final Income Taxation Capital Gains Taxation Regular Income Taxation

(Chapter 5) (Chapter 6) (Chapter 6-15B)

Fringe Benefits Gains on dealings in properties

(Chapter 13-13C)
Gross Income P XXX
(Chapter 11) (Chapter 12) Less:
Deductions XXX
Exemptions XXX
Taxable Income XXX

Individual Taxpayers Corporate Income Taxpayers

(Chapter 14) (Chapters 15A-15B)

Special Individual Tax Rules Special Corporate Tax Rules

(Taxable Estates & Trusts) (MCIT, iaet, Branch profit
remittance Tax) 3
Compensation Income
Laws, Principles & Applications
KART VICTOR LAGUSTAN, CPA
November 28, 2023
Employer-Employee Relationship

Employer - refers to any person for whom an individual performs

any service of whatever nature as employee of such person. An
employer is the person who has control over the payment of the
employee remuneration. However, if such person is a non-resident
not engaged in trade or business in the Philippines, the employer is
deemed the person paying remuneration in their behalf.

Employee - refers to any individual who is a recipient of wages and

includes officer, employee or elected official of the Government of
the Philippines or any political subdivisions, agency or instrumentality
thereof. The term also includes an officer of a corporation.
5
Elements of employer and employee relationship under case law:

1. Selection and engagement of employees - There is a screening process for

employees to hire.
2. Payment of wages - The employer usually fixes and controls the payment of
wages.
3. Power of dismissal - Employer has power to retrench or terminate employees
when incurring heavy losses or another reasonable basis.
4. Power of control - The employer has power to control the employee on the
means and methods by which the work is accomplished.

6
Elements of employer and employee relationship under case law:

An arrangement which do not manifest all the elements is not an employer-

employee relationship but an independent contract for the provision of services.
The following are not considered employees:
1. Consultants
2. Directors without management function
3. Talents and artists on TV shows or radio broadcasts (Soriza vs. ABS-CBN
Broadcasting Corporation, G.R. No. 138051)

The income or fees of these individuals are not compensation income but are
business or professional income.

7
Types of Employees as to Function

1. Managerial employees - Those who are given powers or prerogatives to lay

down and execute managerial policies and/or to hire, transfer, suspend, lay off,
recall, discharge, assign or discipline employees.

2. Supervisory employees - Those 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 judgment.

3. Rank and file employees - Those who hold neither managerial nor supervisory
functions.

8
Minimum Wage Earner

A minimum wage earner refers to a worker in the private sector who is paid the
minimum wage or to an employee in the public sector with compensation income of
not more than the statutory minimum wage [i.e., those with salary grade 1 to 3) in
the non-agricultural sector where he or she is assigned.

The statutory minimum wage refers to rate fixed by the Regional Tripartite Wage
and Productivity Board of the Department of Labor and Employment or
P5,000/month or P60,000/year, whichever is higher.

9
The Tax Model on Compensation Income

Gross compensation income P xxx,xxx

Less: Non-taxable compensation xxx,xxx
Taxable compensation income P xxx,xxx

10
Gross Compensation Income

Gross compensation income generally includes all remunerations received under an

employer-employee relationship.

11
Non-taxable Compensation

A. Mandatory deductions
These includes employees' mandatory contribution to GSIS, SSS, PhilHealth,
HDMF, and union dues

B. Exempt benefits
1. Benefits excluded and/or exempted under the NIRC and special laws.
2. Benefits exempt under treaty or international agreements
3. Benefits necessary to the trade, business, or conduct of profession of the
employer
4. Benefits for the convenience or advantage of the employer

12
Benefit under the NIRC, as amended, and Special Laws
1. Remunerations received as incidents of employment
a. Exempt retirement benefits under RA 7641 including exempt retirement gratuities to government
officials and employees
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 the SSS Act of 1954, as amended
f. Benefits from GSIS, under the GSIS Act of 1937, as amended
g. COVID-19 benefits to health workers under ^^37, RA as 11494 amended [BAYANIHAN 2)
a. Special Risk Allowance
b. Actual Hazard Duty Pay
c. Compensation paid to private and public health workers who have contracted COVID-19 in
the line of duty
2. De minimis benefits
3. 13th month pay and other benefits not exceeding P90,000
4. Certain benefits of minimum wage earners 13
De minimis benefits

De minimis benefits are facilities or privileges such as entertainment,

medical services, or courtesy discounts on purchases that are of 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.

As originally conceived, other petty fringe benefits which fall within the
purview of de minimis even if not part of the de minimis list are normally
treated as de minimis and are also exempt from income tax.

14
De minimis benefits
However, the BIR and the Department of Finance changed the rule under RR5-
2011, as last amended by RR11-2018 wherein the term "de minimis benefits" was
restricted to mean only the following:

1. Monetized unused vacation leave credits of private employees not exceeding

10 days during the year
2. Monetized unused vacation and sick leave credits paid to government officials
and employees
3. Medical cash allowance to dependents of employees not exceeding P1,500 per
employee per semester, or P250 per month
4. Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per month amounting
to not more than P2,000
5. Uniform and clothing allowance not exceeding P6,000 per annum [RRl11-2018)

15
De minimis benefits
6. Actual Medical Assistance, e.g., medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations not exceeding P10,000
per annum
7. Laundry allowance not exceeding P300 per month
8. 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.
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum (i.e., Christmas gift and anniversary gifts)
10. Daily meal allowance for overtime work and night or graveyard shift not exceeding 25% of the
basic minimum wage on a per region basis [i.e., overtime meal)
11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from both CBA
and productivity incentive schemes combined do not exceed P10,000 per employee per taxable year.

 Note that only CBA benefits and productivity incentives amounting to PI0,000 or less is de minimis.
If the amount exceeds P10,000, the entire amount is a taxable "other benefits. 16
De minimis benefits
The Department of Finance issued Revenue Regulations (RR) No. 04-2025, dated 30 January
2025, to further amend the “De Minimis” benefits provisions of RR No. 2-98, as amended.

RR No. 4-2025 introduces key amendments to RR No. 2-98, specifically to Section 2.78.1, as
follows:

1. Uniform and Clothing Allowance – The amendment provides that the annual uniform and
clothing allowance, which shall not be subject to withholding tax, has been increased
to Php7,000.00 per annum.

2. Employee Achievement Awards – The amendment recognizes that achievement awards

may be in any form, whether in cash, gift certificate or any tangible personal property. However,
the amount of achievement awards not subject to withholding tax should still not exceed an
annual monetary value of Php10,000.00.

17
Taxable de minimis benefits

1. Excess de minimis over their regulatory limits

2. Other benefits of relatively small value that are not included in the list
of de minimis benefits

18
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 - the taxable de
minimis is treated as fringe benefit subject to final fringe benefit tax

19
DETERMINATION OF EXCESS DE MINIMIS BENEFITS

20
DETERMINATION OF EXCESS DE MINIMIS BENEFITS

21
DETERMINATION OF EXCESS DE MINIMIS BENEFITS

22
DETERMINATION OF EXCESS DE MINIMIS BENEFITS

23
DETERMINATION OF EXCESS DE MINIMIS BENEFITS

24
Commutation of accumulated leave credits

The terminal leave pay or the commutation of unused leave credits

due to involuntary separation from emplo5nnent 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.

25
13th month pay and other benefits not in excess of P 90,000

The composition of the "13th month pay and other benefits" will be
discussed later under taxable benefits.

26
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.

27
Exemption from withholding tax does not mean income tax exemption

Foreign government embassies, diplomatic missions and international

organizations are immune from income tax including the obligation to withhold
income tax by virtue of international comity as embodied in several international
agreements to which the Philippines is a signatory.

However, this exemption from the obligation to withhold tax does not mean income
tax exemption of their Filipino employees. In fact, most of the international
agreements to which the Philippines is a signatory limit exemption only to non-
Filipino nationals and/or non-residents of the Philippines.

Filipino employees of foreign governments, international missions, and

organizations are taxable as a rule except only to employees of the following
organizations:

28
Exemption from withholding tax does not mean income tax exemption

1. United Nations (UN)

2. Specialized Agencies of the United Nations
3. Australian Agency for International Development (AUSAID)
4. Food and Agriculture Organization (FAQ)
5. World Health Organization (WHO)
6. United Nations Development Programme (UNDP)
7. International Organization for Migration (lOM)
8. International Seabed Authority (ISA)

These organizations have exemption provisions that extend even to their Filipino
employees. Other aid agencies or international organizations may have tax free
provisions in their articles of agreement for Filipino employees.

29
Confirmation of Tax Exemptions

The exemption of Filipino employees is not automatic. Filipinos

claiming exemptions under the terms of international agreements or
under provisions of special laws granting privileges to international
organizations shall file an application for confirmation of tax
exemption with the BIR's International Tax Affairs Division (ITAD).
The confirmation shall serve as proof of exemption. Without the
confirmation certificate, the employee is taxable.

30
Employees of Philippine embassies or consulate offices

It should be recalled that employees working in Philippine

embassies or Philippine consulate offices are not considered non-
resident citizens and are therefore subject to Philippine income
tax.

31
Summary of rules

32
Benefits Required by the Nature of, or Necessary to, the trade,
Business or Conduct of Profession of the Employer

Benefits or allowances furnished by the employer to the employees to

enable them to appropriately and effectively execute their duties as required
by their employment are exempt from income tax. This is referred to as
"necessity of the employer rule."

33
Examples:
1. Necessary traveling, transportation, representation, or entertainment expenses that are
subject to an accounting or liquidation in accordance with specific requirements of
substantiation of expense.
2. Allowances which essentially constitute reimbursement to government personnel for
expenses they incurred in the performance of their official duties, such as:
a. Representation and Transportation Allowance (RATA) of public officers and employees under
the General Appropriation Act
b. Personnel Economic Relief Allowance (PERA) (RRlO-2008)
3. Reasonable amounts of reimbursements or advances to employees for travelling and
representation which are pre-computed on a daily basis and which are paid to any employee
while on assignment or duty. These amounts given to the employee are not income but are
expenses of the trade, business or profession of the employer that are incurred or paid through
the employee.

These are not employee benefits since they are mere advances or replenishments of what are
supposed to be direct cash outflows from the employer; hence, these are not considered as
compensation income.
34
Benefits for the Convenience of Advantage of the Employer

Benefits or allowances which are intended for the furtherance of

the interest of the employer's business or to ensure its smooth
operations are likewise exempt from income tax. This is referred to
as the "convenience of the employer rule."

35
Examples:
1. Work-related mobile phone allowance and transportation allowance particularly to
employees of call centers which are operated on a 24-hour basis where employees are
required to be available always for assignment and consultation (BIR Ruling DA-233-07)
2. Outstation allowance for employees who will be out from office site at least 8 hours to visit
lotto franchise holders for repairs and/or inspection of equipment leased by the employer (SIR
Ruling No. 013-02)
3. Grant of housing privilege to employees working at distant or remote facilities even if the
dwelling is distanced from the facility in compliance to labor safety standards (SIR Ruling No.
055-99)
4. Car incentives to employed on-call medical doctors
5. Scholarship grants to employees under contract to remain in service for a specified period
upon completion of the study
6. Housing privilege of military officials of the AFP located inside or near the military camps

36
These types of employer spending are regarded as business expenses and
are not considered as employee reward because they are not intended for the
free personal consumption or disposal of the employees but as implements of
the employer's business to ensure the employer's convenience.

However, if the expense is unreasonably excessive making it depart from the

nature of a reasonable business expense such as when it is deliberately
granted to include a benefit for the employee, the portion of the expense
representing provision or privilege to the employee is considered a taxable
fringe benefit. These types of expense are regarded as "hybrid expenses"
because they are partially business expense and partially employee benefits.

37
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.

An adjunct category to the supplemental compensation, 13th month pay and

other benefit, it is necessary to contain incentive pays and all other taxable
employee benefits not classifiable as regular or supplemental compensation.
13th month pay and other benefits not exceeding P90,000 is an inclusion from
gross income. The excess above P90,000 is added to supplemental
compensation. 38
COMPOSITION OF TAXABLE COMPENSATION INCOME

Illustration
An employee received P400,000 regular compensation, P120,000
supplemental compensation, and P100,000 13th month regular pay
compensation, and other benefits.

The taxable compensation income shall be computed as follows:

Regular compensation P 400,000
Supplemental compensation [P120,000 + (P100,000 - P90,00)] 130,000
Taxable compensation income P 530,000

39
REGULAR COMPENSATION INCOME

The regular compensation includes fixed remunerations due to be received by

an employee every period such as:
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

40
REGULAR COMPENSATION INCOME
Fixed allowances
Allowances which are fixed in amounts and regularly received as part of the basic monthly, bi-
weekly, weekly or daily salaries or wages are part of regular compensation. This applies even
if a portion of the allowances are actually used in the employer's business.
Exception rule on the taxability of allowances:
a. Ordinary and necessary allowances for travelling, representation or entertainment expense
of employees incurred in the pursuit 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.

Hence, variable and liquidated allowances are not subject to tax. However, amounts of
allowances that are retained by the employee for himself shall be considered compensation.

Paid vacation and sick leave allowances

The paid absences of an employee applied against his vacation or sick credits which are
normally received as part of the regular salary is part of the regular compensation.

41
Non-compensation items
1. Fees
Retainer fees of consultants, talents, and directors who have no management function in the
business are professional income, not compensation income o the recipient.

2. Commissions to non-employees such as independent sales agents are business income

to the sales agent.

3. Tips and gratuities

Tips and gratuities paid directly to an employee by customers of the employer which are not
accounted for by the employee to the employer are not considered as compensation income,
but are to be reported as "other income" in the income tax return of the employee.

42
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.

43
44
Note:
1. Reimbursement for transportation expense is not an income to the employee.
2. The termination pay is included in gross compensation income, but is also deducted as non-
taxable compensation because the reason of termination is beyond the employee'
45
SUPPLEMENTARY COMPENSATION

Supplementary or additional compensation includes performance-based remunerations

to an employee in addition to the regular compensation with or without regard to the
payroll period.
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 on exercise of stock options
11. Profit sharing and taxable bonuses

46
Overtime, holiday, hazard, and night differential pay
These constitute additional compensation, except when derived by a minimum
wage earner.

Commissions, emoluments and honoraria

Commissions are incentives intended to stimulate sales. These may be given as a
profit sharing or performance bonus. Emoluments pertain to any pay in general
while honoraria are additional payments for attending to special tasks or
assignments.
Living quarters or meals
If an employee receives free living quarters or meals in addition to salary for
services rendered, the value to the employee of such living quarters or meals is
included in compensation income. However, when the same was 47 furnished to an
employee for the convenience of the employer or out of necessity of the
employer's business, the value thereof is not compensation income, but a business
expense.
 Stock option plans
To motivate employees, employers give stock options to employees allowing them to
earn additional rewards on the appreciation of the stock price of the company. The
option will have value when the value of the stock of the employer exceeds the exercise
price fixed at the grant date.

Types of options
1. Equity-settled options - entitles employees to purchase shares of stocks of the
employer at a pre-determined exercise price fixed on the grant date
2. Cash-settled options - entitles the employee to receive in cash the excess of the fair
value of stocks over the exercise price without actually delivering stocks

Upon the exercise of the option, the excess of the book value or fair value of the stocks,
whichever is higher, less the exercise price set at grant date is treated as follows:
a. Additional compensation income - if the employee is a rank and file 48
b. Fringe benefits - if the employee is a managerial or a supervisory employee

This rule is applied regardless of the type of the option. [RMC 79-2014)
49
 Treatment of the subsequent sale of the shares
If the employer corporation is a:
1. Domestic corporation, and the sale of the stocks is made:
a. through the PSE, the sale is subject to the stock transaction tax of 60% of 1% of the gross
selling price. The tax would be computed as:

Selling price (P180,000x 10,000) P 1,800,000

Multiply by: stock transaction tax rate 60% x 1%
Stock transaction tax P 10,800

The tax will be withheld by the broker who effected the sale. The gain from the sale of the stocks
would not be subject to income tax

b. directly to buyer, the net gain on the sale is subject to the 15% capital gains tax. The tax shall
be computed as follows:
Selling price (P180 x 10,000) P 1,800,000 50
Less: Tax basis of shares sold 1,500,000
Capital gains P 300,000
Multiply by: CGT tax rate 15%
Capital gains tax P 45,000
2. Foreign corporation, the net gain on the sale is a capital gain subject to the rules of
regular income tax. The gain subject to regular tax shall be computed as follows:

Selling price (P180 x 10,000) P 1,800,000

Less: Tax basis of shares sold 1,500.000
Capital gains 300,000
Multiply by: Holding period rate (>1 year) 50%
Capital gain subject to regular tax P 150.000

The rules on dealings in other capital assets will be discussed in Chapter 12.

51
52
53
 Profit sharing or taxable bonus
Profit sharing is a reward for churning the business to post a profit. It is a compensation for
controlling all the factors that influence profit such as marketing and sales, productivity, and
administrative factors. It is a reward which can be enjoyed by individual employees such as
salesmen, division heads, key officers, or by all employees collectively.

Bonuses are supplemental or additional compensation. However, if they are linked solely to
productivity under the productivity incentive plan of the employer pursuant to RA 6971, they
should be considered as de minimis benefits.

Productivity incentive bonus

The Productivity Incentive Act of 1990 (RA 6971) encourages private employers to set-up
productivity incentive programs.

A productivity incentive is linked to improvements in productivity usually in terms of cost

savings through waste reduction, efficient labor utilization, or increase in54volume of production.
Under the NIRC, productivity incentive bonus is considered as part of "other benefits" under
"13th month pay and other benefits". Under the revision of RA 10653, productivity incentive is
now a de minimis benefit
 Productivity incentive distinguished from profit
sharing bonus
Productivity incentive is anchored on improvements in the factors of production
and is usually enjoyed collectively by employees due to the inherent difficulty of
tracing productivity to individual performance. It is based upon cost savings;
hence, it is payable even if the business poses a loss. Profit sharing is payable only
when the business post a profit

55
 "13th Month Pay and Other Benefits" includes:
1. 13th month pay
2. Other benefits
a. Christmas bonus of private employees
13TH MONTH PAY
b. Cash gifts other than Christmas or anniversary gifts of
AND OTHER private employees (RR2-98, as amended by RRS-2011)
BENEFITS c. Additional compensation allowance (ACA) of government
personnel (RR8-2000)
d. 14th month pay, 15th month pay, etc.
e. Other fringe benefits of rank and file employees

56
 13th month pay
a. The 13th month pay of government employees consists of a Christmas bonus
equivalent to one-month salary plus a P5,000 cash gift. (RA6686 as amended by
RA 8441)
b. The 13th month pay of private employees is equivalent to one-month salary. (PD
85l)
Christmas bonus and Christmas gift
The Christmas bonus of government employees is their 13th month pay. In private
companies, the term "Christmas bonus" may pertain to the 13th month pay, a
separate incentive pay, or to a profit sharing.

Christmas bonus of private employees which is a non-performance-based

incentive pay is part of other benefits. Christmas bonus in the
57
nature of profit
sharing should be treated as additional compensation income, not as "other
benefits." The nature of the Christmas bonus of private employees shall determine
its tax classification.
The Christmas gift of government employees is specifically designated as part of
“13th month pay and other benefit” under Sec. 32CB)(7)(e)(i) of the NIRC. RRS 2011
includes Christmas gift in the list of de minimis benefits. But since revenue
regulations cannot amend the law they implement, RRS-2011 should be interpreted
to apply only to Christmas gifts of private employees.
Hence,

Government Private
employees employees
Christmas bonus 13th month pay 13th month pay
and other benefits and other benefits
Christmas gift 13th month pay De minimis
and other benefits
58

Bonus vs. Gift

Bonus is performance-based and is non-discretionary to the employer while a gift is a gratuity
and is discretionary upon the employer.
 Other fringe benefits
Other fringe benefits include all other taxable fringe benefits not specifically included in
compensation income as regular, supplementary or 13th month pay, and other benefits
under current tax rules such as:
1. Employee personal expenses shouldered by the employer
2. Taxable de minimis benefits such as:
a. Excess de minimis
b. Benefits not included in the de minimis list

Employee personal expenses

Employee personal expenses such as, but not limited to, rental of residence, grocery,
association or club membership dues, travel or vacation expense or tuition fees, when
assumed or paid by the employer, constitute fringe benefits to the employee. This fact holds
true even if the expense is receipted in the name of the employer.
59
Taxable de minimis benefits
All other benefits of relatively small value which are not included in the list of de minimis
benefits shall not be considered as de minimis but as ordinary fringe benefits. Corollary to
this rule, excess de minimis benefits should be considered as taxable ordinary fringe
benefits.
 Tax Treatment of Other Fringe Benefits
a. For rank and file employees - treated as compensation income as part of "other benefits"
under "13th month pay and other benefits"
b. For managerial or supervisory employee - treated as fringe benefit subject to fringe
benefit tax

It must be emphasized that the "other fringe benefits" of managerial or supervisory

employees are excluded from their "13th month pay and other benefits.“

Illustration 1
The employer pays for the tuition fee of the employee in addition to his regular
compensation.
The tuition fee paid is a fringe benefit which will be treated as follows:
1. As a compensation income as part of "other benefits” Under “13th month pay and other
benefits" if the employee is a rank and file employee
60
2. As a fringe benefit subject to fringe benefit tax if the employee is a managerial or
supervisory employee
3. As an exempt fringe benefit, regardless of the of employee, if the same was given by the
employer for his convenience or business necessity such as when the employee is required
to study to acquire expertise for the future use of the employer's business
Illustration 2
An employee receives a monthly rice allowance of P3,000 a month which is P1,000 in excess
of the P2,000 a month de minimis limit for rice allowance.

The P1,000 monthly excess constitutes a taxable de minimis benefit taxable as

compensation as part of "other benefits" for a rank and file employee. It is a fringe benefit
subject to final fringe benefit tax for a managerial or supervisory employee.

61
 RR2-98 provides that 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
above P90,000 is subject to the withholding tax on
compensation.
TAX TREATMENT
OF 13TH MONTH RR3-98, the revenue regulation implementing the fringe

PAY AND OTHER benefit tax, also provides that it does not cover benefits

BENEFITS forming part of compensation income subject to the

withholding tax on compensation.

Hence, the excess of "13th month pay and other benefits"

over P90,000 should be treated as compensation income
subject to regular income tax.

62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
 Minimum wage earners are exempt from income tax on the
following:
1. Basic minimum wage
2. Other benefits (HHON)
a. Holiday pay
TAXABILITY OF b. Hazard pay
MINIMUM WAGE c. Overtime pay

EARNERS (MWE) d. Night shift differential pay

These shall be presented as exempt benefits under non-

taxable compensation income. Since exempt from income
tax, the exempt benefits of MWEs shall not be subject to
withholding tax.

81
82
83
 Receipt of other taxable income by MWEs
MWEs are still exempt from income tax on the foregoing exempt benefits even if they are
earning other taxable items of compensation or other income from concurrent employers,
trade, business or practice of a profession.

MWEs are subject to tax only to the extent of income other than the aforementioned
exempt benefits. (RR11-2018) Hence, additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable amount of P90,000, taxable
allowances and other taxable income given by the same employers to MWEs are subject to
withholding tax. Despite this, it must be noted that MWEs will actually pay income tax only
if their total taxable income exceeds P250,000 for the year.

84
85
86
87
 Rules of change in status as a Minimum Wage
Earner during a year
1. When an employee becomes a minimum wage earner during the year, he shall be subject to income tax
only on compensation earned before becoming a minimum wage earner.

Illustration 1
Anthony had a basic pay of P400/day when the minimum wage was P382/day. He is also receiving overtime
pay and the year-end 13th month pay. On July 1, 2021, the Regional Wages and Productivity Board increased
the minimum wage by P22/day to P404/day. Anthony's employer increased his salary to the minimum
P404/day.

Anthony shall be taxed on his income from January 1 to June 30 because he is not yet a minimum wage
earner. The employer shall regularly deduct the withholding tax on compensation from his salary but shall
stop withholding by June 30. Anthony's compensation starting July 1 including overtime pay and year-end 13th
month pay shall be tax exempt.

If the exact amount of income taxes had been withheld by the employer for the January 1 to June 30
compensation, Anthony need not file an income tax return. Otherwise, Anthony shall88file an adjustment return
reflecting his compensation from January 1 to June 30 and shall pay the tax still due or claim for refund in
case of excess withholding.
This rule may also apply in cases of:
a. Transfer to an employer paying salary at the minimum wage
b. Transfer of employment to a region with higher minimum wage
2. When an employee ceases to be a minimum wage earner during the year due to increase in salary,
only the income for the rest of the year is taxable

Illustration 2
Andrea is a minimum wage earner. She was promoted and was given a salary raise above the minimum
wage starting August 1,2021.

Andrea shall be exempt from income tax from January 1 to July 31 because she is a minimum wage
earner. Effective August 1, 2021, Andrea shall be subject to tax. The employer shall start deducting the
withholding tax on compensation from Andrea's salaries effective the same date.

If the employer properly withheld the income tax for the period August 1 to December 31, Andrea need
not file an income tax return. Otherwise, she shall file an adjustment return reflecting her compensation
for the same period and shall pay the tax still due or claim for refund in case of excess withholding.
This rule applies in cases of:
a. Transfer to an employer paying salary above the minimum wage
b. Transfer of employment to a region with lower statutory minimum wage

3. When an employee ceases to be a minimum wage earner during the year89by 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
due for the period under the tax table.
 Treatment of Cost-of-living Allowance of MWEs
Under RMC23-2011, COLA which forms part of the new wage rates prescribed to be the
statutory minimum wage should be treated as part of the minimum wage and shall not be
treated as a separate or other benefit.

90
 The withholding tax on compensation is a method of
collecting the income tax at source upon receipt of the
income. It applies to all employed individuals whether
THE WITHHOLDING
citizens or aliens. The employer is constituted as the
TAX ON withholding agent.
COMPENSATION
Reproduced herein is the withholding tax table for semi-
monthly compensation:

91
92
93
 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.
4. Total the basic tax and the incremental basic tax.

94
95
96
97
98
 Year-end Tax 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 0 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.

99
 1. 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

BENEFITS NOT 3. Remuneration for domestic services

4. Remuneration for casual labor not in the course of an
SUBJECT TO
employer's trade or business - treated as other income
WITHHOLDING
5. Compensation for services by a citizen or resident of the
TAX ON Philippines for a foreign government or an international
COMPENSATION organization
UNDER RR2-98, 6. Damages paid by the employer to employees
AS AMENDED: 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
100
 11. 13th month pay and other benefits not exceeding a total
of P82,000
12. GSIS, SSS, PhilHealth, and other contributions
BENEFITS NOT 13. Compensation income including overtime pay, holiday
SUBJECT TO pay, night shift differential pay, and hazard pay of MWE
WITHHOLDING 14. Compensation income of employees in the public sector
TAX ON if the same does not exceed those of minimum wage

COMPENSATION earners in the non-agricultural sector.

UNDER RR2-98,
These listed benefits are not considered compensation
AS AMENDED:
income; hence, they are exempt from the withholding tax
on compensation.

101
 Employers shall file the BIR Form 1601-C (Monthly
Remittance Return of Income Taxes Withheld on
Compensation) on or before 10th day of the following month
the withholding was made except for taxes withheld for
DEADLINE OF December which shall be filed/paid on or before January 15
of the succeeding year.
FILING AND
Employers are also required to file BIR Form 1604-CF
REMITTANCE OF (Annual Information Return of Income Taxes Withheld on
THE Compensation and Final Withholding Taxes) on or before
January 31 of the following calendar year in which the
WITHHOLDING compensation income payments and passive income
payments were made.
TAX ON
COMPENSATION Employers shall furnish each employee-taxpayer a copy of
BIR Form 2316 (Certificate of Compensation Payment or
Income Tax Withheld) on or before January 31 of the
succeeding year.

102
 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 or
casual income, he must file a consolidated income tax return to include such items
of 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

103
Under the substituted filing system, the employer files the income tax return of the
employee. If the amount of tax is correctly withheld by the employer, the
employee no longer needs to file an annual income tax return.