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TOPIC 8: COMPENSATION INCOME

TAXATION (INCOME TAXATION) – 2-BSBA FM–A & 2-BSBA OM-B

EMPLOYER-EMPLOYEE RELATIONSHIP

 Employer – refers to any person for whom an individual performs any service of whatever nature as
employee of such person. He/she 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.

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 other 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.

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

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

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.

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 the regular progressive income tax.

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.

THE TAX MODEL ON COMPENSATION INCOME

Gross compensation income P xxx,xxx

Less: Non-taxable compensation xxx,xxx
Taxable compensation income P xxx,xxx
GROSS COMPENSATION INCOME
Gross compensation income generally includes all remunerations received under employer-employee
relationship.

NON-TAXABLE COMPENSATION

A. Mandatory deductions
These include 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

Exempt benefits 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 RA 11494 (BAYANIHAN 2)
 Special Risk Allowance
 Actual Hazard Duty Pay
 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

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 benefits even if
not part of the de minimis list are normally treated as de minimis and are also exempt from income tax.

However, the term “de minimis benefits” was restricted under RR 5-2011 and RR 11-2018 to mean only the
following:

1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the
years.
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.
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.
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 P10,000 or less is de
minimis, meanwhile if the amount exceeds P10,000, the entire amount is a taxable “other benefits”.

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

TREATMENT OF TAXABLE DE MINIMIS BENEFITS

 For rank and file employees – taxable de minimis is treated as other compensation income under the
category “13th month pay and other benefits”.
 For managerial and supervisory employees – the taxable de minimis is treated as fringe benefits
subject to final fringe benefit tax of 35%.

DETERMINATION OF EXCESS DE MINIMIS BENEFITS

Illustration 1: De minimis limits

Miss Lena Macatee, a private employee, who is paid a P600 daily rate, receives the following benefits during
the year 2024:

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days
Medical assistance P 7,000
Rice subsidy (P2,500 per month) 30,000
Clothing allowance 9,000
Laundry allowance 6,000

Determine the taxable amount of de-minimis benefits.

Solution:
ACTUAL LIMIT EXCESS
Monetized unused vacation leave ( 9 x P600) P5,400 P6,000 P -
Monetized unused sick leave ( 9 x P600) 5,400 - 5,400
Medical assistance 7,000 10,000 -
Rice subsidy (P2,500 x 12 mos.) 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” P16,800

Note: Private employees

 The actual value of the monetized unused vacation leave was computed as P600 x 9 days while the
limit was P600 x 10 days.
 The 10-day rule applies only to vacation leaves. Monetization of sick leaves of private employees is
taxable.
 The rice subsidy and laundry allowance were likewise annualized by multiplying their monthly limit by
12. The de minimis benefits within the limits are exempt from income tax.

Illustration 2: Government employee

Miss Arlene Kasalo, a government rank and file employee, received the following benefits:

Monetized unused vacation leave credits (10 days) P 6,000

Monetized unused sick leave credits (15 days) 9,000
Uniform allowance 5,000
Laundry allowance 4,800

Solution:
ACTUAL LIMIT EXCESS
Monetized unused vacation leave P6,000 Exempt -
Monetized unused sick leave 9,000 Exempt -
Uniform allowance 5,000 P6,000 -
Laundry allowance 4,800 3,600 P 1,200
TAXABLE DE MINIMIS AS “OTHER BENEFITS” P 1,200
Illustration 3:

Princess Pantalan was one of the Hall of Fame awardees of YouTube University. She was granted P25,000
cash as loyalty award for her 30 years of service. She 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.

Required: Compute the total taxable de minimis benefits as other benefits.

Solution:
ACTUAL LIMIT EXCESS
Loyalty or service award P25,000 P0 P25,000
Christmas and anniversary gift 20,000 5,000 15,000
Meals 15,000 0 15,000
TAXABLE DE MINIMIS AS “OTHER BENEFITS” P55,000

Note:
 The limit on loyalty or service awards applies only if it is given in kind.
 Only meals for overtime or graveyard shifts are considered de minimis. Other meal benefits are no
longer considered de minimis.

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 taxation.

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.
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)
7. International Organization for Migration (IOM)
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.

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.

Employees of Philippine embassies or consulate offices:

Employees working in Philippine embassies or Philippine consulate offices are not considered non-resident
citizens and are therefore subject to Philippine income tax.
Summary:
Foreign embassy, missions or Philippine embassy or consulate
organization 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.

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”.

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
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.

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.

BENEFITS FOR THE CONVENIENCE OR 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.”

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.
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.
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.
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.

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 expenses are regarded as “hybrid expenses” because they are partially business expense and partially
employee benefits.

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

An adjunct category to the supplemental compensation, 13th month pay and other benefit, 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 exclusion from gross income.
The excess above P90,000 is added to supplemental compensation.

ILLUSTRATION

Maricar D. Great 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 P 400,000

Supplemental compensation (P120,000 + [P100,000- 90,000]) 130,000
Taxable compensation income P 530,000

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 allowances, fixed housing allowance, representation,
transportation, and other allowances paid to an employee every payroll period.

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’s 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, the 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 leave credits which are normally
received as part of the regular salary is part of the regular compensation.

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 of the recipient.
2. Commissions to non-employees such as independent sales agents are business income to the sales
agent.
3. 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.

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 named Regina Vanguardia in 2024:

Gross salaries P 400,000

Cost-of-living allowance 36,000
Fixed monthly transportation allowance (P2,000 x 12) 24,000
Deduction for withholding tax on compensation 10,000
Deduction for employee share in SSS, PHIC and HDMF 32,000

Compute the taxable compensation income:

Gross salaries P 400,000
Cost-of-living allowance 36,000
Fixed monthly transportation allowance 24,000
Regular compensation income P 460,000
Less: Non-taxable compensation
Mandatory deduction 32,000
TAXABLE COMPENSATION INCOME P 428,000

ILLUSTRATION 2
An employee named Narda Custodio who was terminated in 2024 due to business closure of the employee
received the following:
Unpaid 2024 salaries P 200,000
Unpaid 2023 salaries 20,000
Reimbursement for transportation expense 10,000
Termination pay 100,000

Compute for taxable compensation income.

Gross compensation income (P200,000 + 20,000 + 100,000) P 320,000

Less: Non-taxable compensation 100,000
Taxable Compensation Income P 220,000

Note:
 Reimbursement for transportation expense is not an income to the employee.
 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’s control.

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

Overtime, holiday, hazard and night shift differential pay

These constitute additional compensation, except when derived by a minimum wage earner.

Commissions, emoluments and honorarium

 Commissions – incentives intended to stimulate sales; may be given as a profit sharing or performance
bonus.
 Emoluments – pertain to any pay in general.
 Honoraria – 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 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.

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 an 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

It is linked to improvements in productivity usually in terms of cost savings through waste reduction, efficient
labor utilization, or increase in volume of production. Under the revision of RA 10653, productivity incentive is
now a de minimis benefit.

Productivity incentive vs. 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.

13TH MONTH PAY AND OTHER BENEFITS

It includes:
1. 13th month pay
2. Other benefits
a. Christmas bonus of private employees
b. Cash gifts other than Christmas or anniversary gifts of private employees
c. Additional compensation allowance of government personnel
d. 14th month pay, 15th month pay, until 30th month pay
e. Other fringe benefits of rank and file employees

13th month pay

 The 13th month pay of government employees consists of a Christmas bonus equivalent to one-month
salary plus a P5,000 cash gift, as per RA 8441.
 The 13th month pay of private employees is equivalent to one-month salary.

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 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 Section 32(B)(7)(e)(i) of the NIRC. RR 5-2011 includes Christmas gift in the list of de minimis
benefits but this should be interpreted to apply only to Christmas gifts of private employees.

Government employees Private employees

Christmas bonus 13th month pay and other benefits 13th month pay and other benefits
Christmas gift 13th month pay and other benefits De minimis benefits

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

These 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. Employee personal expenses, even if
receipted in the name of the employer, 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.
2. 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

 For rank and file employees – treated as compensation income as part of “other benefits” under “13th
month pay and other benefits”.
 For managerial or supervisory employees – treated as fringe benefit subject to fringe benefits tax
TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS

RR 2-98 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.

RR 3-98, the revenue regulation implementing the fringe benefits tax, also provides that it does not cover
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.

ILLUSTRATION 1:
A government rank and file employee named Tania Mae Cruz received the following benefits aside from the
basic pay in 2024:
Christmas bonus P 70,000
Christmas gift 5,000
Additional compensation allowance 36,000
Personnel Economic Relief Allowance (P2,000/month) 24,000
Monetized value of vacation leave and sick leave (18 days) 9,000
Uniform and clothing allowance 7,000

Required: Determine the taxable “13th month pay and other benefits.”

SOLUTION:
Christmas bonus (13th mo. pay of gov’t employees) P 70,000
Cash gift 5,000
Additional compensation allowance 36,000
Excess uniform and clothing allowance (P7,000 – 6,000) 1,000
Total 13th month pay and other benefits P 112,000
Less: Exclusion threshold 90,000
Taxable 13th month pay and other benefits P 22,000

Note:
 PERA is not subject to income tax and withholding tax.
 The P5,000 Christmas gift of government employees is designated by the NIRC to be part of the “13th month pay
and other benefits”; hence, it is not a de minimis benefit.
 Under RR 5-2011, the monetization of vacation leave and sick leave credits of government officials is an exempt
de minimis benefit without regard to the number of days.

ILLUSTRATION 2:
A private rank and file employee working in a remote tower station of Acosta Internet Company received the
following benefit during 2024:
13th month pay P 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 employees’ living quarters furnished by the employer
to employees for staying on-site.

Required:
1. How much is the excess de minimis benefits (other fringe benefits)? P29,400
2. How much is the total 13th month pay and other benefits? P101,400
3. How much is the taxable 13th month pay and other benefits? P11,400

SOLUTION:
ACTUAL LIMIT OTHER BENEFITS
Christmas gift P 30,000 P 5,000 P 25,000
Uniform & clothing 8,000 6,000 2,000
Laundry allowance 6,000 3,600 2,400
Excess de minimis benefits (other fringe benefits) P 29,400
13th month pay 72,000
Total 13th month pay and other benefits P 101,400
Less: Exclusion threshold 90,000
Taxable 13th month pay and other benefits P 11,400
Note:
 Performance bonus is a supplemental or additional compensation.
 The laundry allowance limit is computed as P300 x 12 = P3,600.
 Christmas gift is a de minimis benefit for private employees under RR 5-2011.
 The housing privilege is exempt under the convenience of the employer rule.
 The “13th month pay and other benefits” of rank and file employees includes “other fringe benefits.”

INTEGRATIVE ILLUSTRATION 1:
A government rank and file employee named Victoria Soler had the following summary of his compensation
and benefits in 2024:

Gross compensation income P1,044,000

Less: Employee payroll deductions
Employee contribution to GSIS, PHIC, HDMF P 80,000
Employee deduction for withholding tax 64,000 144,000
Net regular payroll P 900,000
Representation and Transportation Allowance 18,000
Personnel Economic Relief Allowance 24,000
Christmas bonus 87,000
Uniform allowance 12,000
Christmas gift 5,000
Honoraria 15,000
Total compensation P1,061,000

Required:
1. How much is the gross compensation income to be reported in the income tax return of Victoria?
2. How much is the non-taxable compensation income to be reported in the income tax return of Victoria?
3. How much is the taxable compensation income to be reported in the income tax return of Victoria?
4. How much is the income tax due of Victoria Soler for the year 2024?
5. How much is the income tax still due (payable) of Victoria Soler for the year 2024?
6. How much is the total taxable regular and supplementary compensation?
7. How much is the total 13th month pay and other benefits?
8. How much is the taxable 13th month pay and other benefits?
ANSWERS:
1. P1,205,000
2. P218,000
3. P987,000
4. P149,250
5. P85,250
6. P979,000
7. P98,000
8. P8,000

INTEGRATIVE ILLUSTRATION 2:
A private rank and file employee named Roxy Cristobal derived the following remunerations and benefits in
2024:

Basic compensation, net of P32,000 SSS, PHIC, PhilHealth,

HDMF, union dues, and P35,000 withholding tax P 533,000
Overtime pay 21,000
Vacation expenses of the employee paid by employer 24,000
Cost-of-living allowance (COLA) 12,000
Pre-computed daily transportation allowance 16,000
Rice subsidy (12 cavans worth P2,600 each) 31,200
13th month pay 50,000
Monetized unused leave credit (10 vacation leave and 8 sick leave) 18,000
Uniform allowance 9,000
Total compensation allowance P 714,200

Required:
1. How much is the gross compensation income in the income tax return of Roxy Cristobal?
2. How much is the non-taxable compensation income in the income tax return of Roxy Cristobal?
3. How much is the taxable compensation income in the income tax return of Roxy Cristobal?
4. How much is Roxy’s tax due for the year 2024?
5. How much is the income tax still due (payable) of Roxy Cristobal for the year 2024?
6. How much is the total taxable regular and supplementary compensation?
7. How much is the total 13th month pay and other benefits?
8. How much is the taxable 13th month pay and other benefits?
ANSWERS:
1. P781,200
2. P178,000
3. P603,200
4. P63,140
5. P28,140
6. P601,000
7. P92,200
8. P2,200

TAXABILITY OF MINIMUM WAGE EARNERS

Minimum wage earners are exempt from income tax on the following:
1. Basic minimum wage
2. Other benefits (HHON)
a. Holiday pay
b. Hazard pay
c. Overtime pay
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.

INTEGRATIVE ILLUSTRATION 3:
Archie Aguerro, a minimum wage earner employed by ABS Company, derived the following benefits during
the year:
Basic minimum wage P124,000
13th month pay 11,000
Overtime pay 80,000
Night shift differential pay 30,000
Hazard pay 15,000
Holiday pay 15,000
Total P275,000
Less: SSS, PhilHealth, HDMF cont. 5,000
Net total P270,000

Required:
1. How much is the gross compensation income in the income tax return of Archie Aguerro?
2. How much is the non-taxable compensation income in the income tax return of Archie Aguerro?
3. How much is the taxable compensation income in the income tax return of Archie Aguerro?
4. How much is Archie Aguerro’s tax due for the year 2024?

SOLUTION:

Gross compensation income (P270,000 + 5,000) P275,000

Less: Non-taxable compensation
Mandatory deductions P 5,000
Exempt benefits 270,000 275,000
Taxable compensation income P 0

Tax Due P 0

ANSWERS:
1. P275,000
2. P275,000
3. P0
4. P0

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. Hence,
additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowance
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.
INTEGRATIVE ILLUSTRATION 3:
Gino Acosta, a minimum wage employee, was able to close a sales deal for his employer in 2024. He
received the following compensation during the year:

Basic minimum wage , net of P8,000 mandatory deductions P160,800

13th month pay 14,000
Holiday pay 4,000
Overtime pay 70,000
Night shift differential pay 15,000
Hazard pay 10,000
Profit-sharing bonus 12,000
Commission income 370,000
Total P655,800

Required:
1. How much is the gross compensation income in the income tax return of Gino Acosta?
2. How much is the non-taxable compensation income in the income tax return of Gino Acosta?
3. How much is the taxable compensation income in the income tax return of Gino Acosta?
4. How much is Gino Acosta’s tax due for the year 2024?

SOLUTION:

Gross compensation income (P655,800 + 8,000) P663,800

Less: Non-taxable compensation
Mandatory deductions P 8,000
Exempt benefits 273,800 281,800
Taxable compensation income P382,000

Exempt benefits:
Basic minimum wage P 160,800
13th month pay 14,000
Holiday pay 4,000
Overtime pay 70,000
Night shift differential pay 15,000
Hazard pay 10,000
Total exempt benefits P 273,800

Income Tax Due/Payable:

Taxable Income 382,000

Less: Lower limit of applicable bracket (250,000) 0

Excess 132,000

Multiply by: Incremental tax rate 15% 19,800

Income Tax Due 19,800

ANSWERS:
1. P663,800
2. P281,800
3. P382,000
4. P19,800

END OF TOPIC 8

Prepared by: Sir Arvs 