Module No.
9 – Compensation Income
Learning Outcome/s:
To be able to master the special rules on compensation income
Core Values/Biblical Principles:
Even though I walk through the valley of the shadow of death, I will fear no evil, for you are with me;
your rod and your staff, they comfort me. – Psalm 23:4 (ESV)
Introduction:
The employee benefits considered as compensation income is discussed below. The types of employees,
and exempt and taxable benefits is also discussed in this module.
Body:
Employer – any person for whom an individual performs any service of whatever nature as employee of
such person. It has the control over the payment of the employee remuneration.
Employee – any individual who is a recipient of wages.
Elements of employer and employee relationship
1. Selection and engagement of employees
2. Payment of wages
3. Power of dismissal
4. Power of control
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, layoff, 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 judgement.
3. Rank and file employees – those who hold neither managerial nor supervisory functions.
Types of employees as to taxability
1. Minimum wage earners – employees who are recipients of minimum wage. They are exempt
from income tax on their compensation.
2. Regular employees – employees who are subject to regular progressive income tax.
Tax model on compensation income
Gross compensation income Php xxx
Less: Non-taxable compensation xxx
Taxable compensation income Php xxx
Gross compensation income generally includes all remunerations received under an employer-employee
relationship.
Non-taxable compensation
a. Mandatory deductions – include employee’s mandatory contributions to GSIS, SSS, PhilHealth,
Pag-Ibig, and union dues.
b. Exempt benefits -include benefits excluded and/or exempted under the NIRC and special laws;
benefits exempt under treaty or international agreements; benefits necessary to the trade,
business, or conduct of profession of the employer; and benefits for the convenience or
advantage of the employer.
Exempt benefits under the NIRC and special laws
1. Remunerations received as incidents of employment
a. Exempt retirement benefits under R.A. 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 and/or GSIS
2. De minimis benefits – 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.
The BIR and DOF restricted the term “de minimis benefits” to the following:
a. Monetized unused vacation leave credits of private employees not exceeding 10 days during
the year;
b. Monetized unused vacation and sick leave credits paid to government officials and
employees;
c. Medical cash allowance to dependents of employees not exceeding Php 1,500 per employee
per semester or Php 250 per month;
d. Rice subsidy of Php 2,000 or one sack of 50kg. rice per month amounting to not more than
Php 2,000;
e. Uniform and clothing allowance not exceeding Php 6,000 per annum;
f. 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 Php 10,000 per annum;
g. Laundry allowance not exceeding Php 300 per month;
h. Employee achievement awards, e.g. for length of service or safety achievement, which must
be in the form of tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding Php 10,000 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees;
i. Gifts made during Christmas and major anniversary celebrations not exceeding Php 5,000
per employee per annum;
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a per region basis;
k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total monetary value incentive schemes
combined do not exceed Php 10,000 per employee per taxable year.
Taxable de minimis benefits:
a. Excess de minimis over their regulatory limits
b. Other benefits or relatively small value that are not included in the list above
Treatment of taxable de minimis benefits:
a. For rank-and-file employees – 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.
3. 13th month pay and other benefits not exceeding Php 90,000
4. Certain benefits of minimum wage earners
a. Basic minimum wage
b. Other benefits – holiday pay, hazard pay, overtime pay, night shift differential pay
Illustration
A, a private employee who is paid a Php 600 daily rate, receives the following benefits during the year
2019:
Monetized unused vacation leave credits 9 days
Monetized unused sick leave credits 9 days
Medical assistance Php 7,000
Rice subsidy (Php 2,500 per month) 30,000
Clothing allowance 9,000
Laundry allowance 6,000
Determine the taxable amount of de minimis benefits.
Actual Limit Excess
Monetized unused VL Php 5,400 Php 6,000 Php 0
Monetized unused SL 5,400 0 5,400
Medical assistance 7,000 10,000 0
Rice subsidy 30,000 24,000 6,000
Clothing allowance 9,000 6,000 3,000
Laundry allowance 6,000 3,600 2,400
Taxable de minimis as “other benefits” Php 16,800
Illustration
A government rank and file employee received the following benefits:
Monetized unused VL credits (10 days) Php 6,000
Monetized unused SL credits (15 days) 9,000
Uniform allowance 5,000
Laundry allowance 4,800
Determine the amount to be included in other benefits.
Actual Limit Excess
Monetized unused VL Php 6,000 Exempt Php 0
Monetized unused SL 9,000 Exempt 0
Uniform allowance 5,000 6,000 0
Laundry allowance 4,800 3,600 1,200
Taxable de minimis as “other benefits” Php 1,200
Benefits required by the nature of, or necessary to, the trade, business or conduct of profession of the
employer
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)
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.
Benefits for the convenience or advantage of the employer
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.
2. 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.
3. Car incentives to employed on-call medical doctors.
4. Scholarship grants to employees under contract to remain in service for a specified period upon
completion of the study.
Illustration
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:
a. As a compensation income as part of “other benefits” under 13 th month pay and other benefits
if the employee is a rank-and-file employee.
b. As a fringe benefit subject to fringe benefit tax if the employee is a managerial or supervisory
employee.
c. As an exempt fringe benefit, regardless of the type 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.
Composition of taxable compensation income
1. Regular compensation – fixed remunerations received by the employee every payroll period.
2. Supplemental compensation – other performance-based pays to employees with or without
regard to the payroll period.
13th month pay and other benefits – incentive pays and all other taxable employee benefits
not classifiable as regular or supplemental compensation.
Illustration
An employee received Php 400,000 regular compensation, Php 120,000 supplemental compensation
and Php 100,000 13th month pay and other benefits.
Regular compensation Php 400,000
Supplemental compensation [120k + (100k – 90k)] 130,000
Taxable compensation income Php 530,000
Illustration
The following pertains to an employee in 2019:
Gross salaries Php 400,000
Cost-of-living allowance 36,000
Fixed monthly transportation allowance 24,000
Deduction for withholding tax on compensation 10,000
Deduction for employee share in SSS, PHIC, and HDMF 32,000
Gross salaries Php 40,000
Cost-of-living allowance 36,000
Fixed monthly transportation allowance 24,000
Regular compensation income Php 460,000
Less: Non-taxable compensation (Mandatory deductions) 32,000
Taxable compensation income Php 428,000
Illustration
An employee who was terminated in 2019 due to business closure of the employer receive the
following:
Unpaid 2019 salaries Php 200,000
Unpaid 2018 salaries 20,000
Reimbursement for transportation expenses 10,000
Termination pay 100,000
Gross compensation income Php 320,000
Less: Non-taxable compensation 100,000
Taxable compensation income Php 220,000
Illustration
A private rank-and-file employee working in a remote tower station received the following benefit
during 2019:
13th month pay Php 72,000
Performance bonus 15,000
Christmas gift 30,000
Danger exposure allowance (Hazard pay) 6,000
Housing privilege* 38,000
Uniform and clothing allowance 8,000
Laundry allowance 6,000
*The housing privilege pertains to the annual value of the employee’s living quarters furnished by the
employer to employees for staying on-site.
Compute the taxable 13th month pay and other benefits.
De minimis Limit Other benefits
Christmas gift Php 30,000 Php 5,000 Php 25,000
Uniform and clothing allowance 8,000 6,000 2,000
Laundry allowance 6,000 3,600 2,400
Excess de minimis benefits Php 29,400
13th month pay 72,000
13th month pay and other benefits Php 101,400
Less: Exclusion threshold 90,000
Taxable 13th month pay and other benefits Php 11,400
Illustration
A managerial employee received the following benefits in 2019:
13th month pay Php 95,000
Rental expense on condominium unit 18,000
Salary of personal bodyguard 12,000
Profit sharing 12,000
Rice allowance 32,400
Clothing allowance 7,000
Night shift differential pay 11,000
Determine the taxable 13 th month pay and other benefits; additional compensation; and the fringe
benefit subject to fringe benefit tax.
De minimis Limit Other benefits
Rice allowance Php 32,400 Php 24,000 Php 8,400
Clothing allowance 7,000 6,000 1,000
Excess de minimis benefits Php 9,400
Other fringe benefits:
- Rental expense 18,000
- Salary of personal bodyguard 12,000
Total fringe benefits subject to FBT Php 39,400
Profit sharing Php 12,000
Night shift differential pay 11,000
Total supplemental compensation Php 23,000
13th month pay and other benefits Php 95,000
Less: Exclusion threshold 90,000
Taxable 13th month pay and other benefits Php 5,000
Illustration
A private employee derived the following remunerations and benefits in 2019:
Basic compensation, net of Php 32,000 SSS, PHIC, HDMF, union dues and Php 533,000
Php 35,000 withholding tax
Overtime pay 21,000
Vacation expenses of the employee paid by the employer 24,000
Cost-of-living allowance (COLA) 12,000
Pre-computed daily transportation allowance 16,000
Rice subsidy (12 cavans worth Php 2,600 each) 31,200
13th month pay 50,000
Monetized unused leave credit (10 VL and 8 SL) 18,000
Uniform allowance 9,000
Total compensation income Php 714,200
Determine the non-taxable compensation income and the taxable compensation income if the
employee is:
a. A rank-and-file employee
De minimis Non-taxable Other Taxable
benefits benefits
Regular and supplementary compensation:
Mandatory deductions Php 32,000
Regular compensation Php 568,000
Supplementary compensation
- Overtime pay 21,000
- COLA 12,000
- Daily transportation allowance 16,000
Total Php 601,000
th
13 month pay and other benefits:
13th month pay Php 50,000
Other benefits:
- Vacation expense 24,000
- Excess de minimis benefits
a. Rice subsidy Php 31,200 24,000 7,200
b. Monetized VL 10,000 10,000 0
c. Monetized SL 8,000 0 8,000
d. Uniform allowance 9,000 6,000 3,000
Total Php 58,200 Php 56,000 Php 92,200 Php 601,000
Exclusion threshold 90,000 90,000
Total Php 146,000 Php 2,200
Total non-taxable compensation Php 178,000
Taxable 13th month pay and other benefits 2,200 2,200
Taxable compensation income Php 603,200
The income tax due of the employee is computed as follows:
Tax
Taxable income Php 603,200
Less: Lower limit of applicable bracket 400,000 Php 30,000
Excess Php 203,200
Incremental tax rate 25% 50,800
Income tax due Php 80,800
b. A managerial or supervisory employee
De minimis Non-taxable Other Taxable
benefits benefits
Regular and supplementary compensation:
Mandatory deductions Php 32,000
Regular compensation Php 568,000
Supplementary compensation
- Overtime pay 21,000
- COLA 12,000
- Daily transportation allowance 16,000
Total Php 601,000
13th month pay and other benefits:
13th month pay Php 50,000
Exclusion threshold 50,000 50,000
Total Php 66,000 Php 0
Taxable 13th month pay and other benefits 0 0
Taxable compensation income Php 601,000
Other benefits:
- Vacation expense 24,000
- Excess de minimis benefits
e. Rice subsidy Php 31,200 24,000 7,200
f. Monetized VL 10,000 10,000 0
g. Monetized SL 8,000 0 8,000
h. Uniform allowance 9,000 6,000 3,000
Total Php 58,200 Php 106,000 Php 18,200
Total non-taxable compensation Php 138,000
Excess de minimis benefits 18,200 18,200
Total fringe benefits subject to FBT Php 42,200
The income tax due of the employee is computed as follows:
Tax
Taxable income Php 601,000
Less: Lower limit of applicable bracket 400,000 Php 30,000
Excess Php 201,000
Incremental tax rate 25% 50,250
Income tax due Php 80,250
Withholding tax on compensation – method of collecting the income tax at source upon receipt of the
income. It applies to all employed individuals whether citizens or aliens. The employer is constituted as
the withholding agent.
It must be noted that the total amount withheld on every payroll date may not exactly match the annual
tax due. Hence, 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.
BIR Form No. 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 and paid on or before January 15 of the succeeding year.
BIR Form No. 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.
BIR Form No. 2316 (Certificate of Compensation Payment or Income Tax Withheld) – on or before
January 31 of the succeeding year.
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.
Summary:
Compensation income includes the remunerations under an employer-employee relationship. Proper
classification of the employee and the items of income shall be made to be able to compute the correct
income tax due.
References:
Income Taxation, Rex Banggawan 2019 Edition
