Unit #4

A. SALARIES AND WAGES

4.1 INTRODUCTION

One of the expenses in every business is the employee’s compensation or income. Income refers to
the amount received by an individual in exchange for the service or services rendered. There
are different ways on how employees are paid. Generally, the type of payment is based on the
type of service.

Employees may be paid on a daily, weekly, semi-monthly or monthly basis. The date when
employees receive their compensation is known as the payroll date.The interval between
successive payroll dates is called payroll period.

In this chapter, we will discuss the different methods of computing compensation. Some of these
methods are hourly wage, piece-wrk wage plan, salary and commission.

Salary- refers to an agreed and fixed annual amount of money the employees receives regardless
of the hours. worked.

Wages - basic pay in an employee’s compensation package refers to the wages or salaries that
they get. Wages refer to the earnings received by a worker on a piece rate, hourly rate or
daily rate.

Piece Rate - A worker employed on a ”piece work” basis is paid in proportion to the quantity of
work he finishes. The rate used can be fixed irrespective of the quantity produced, in whcih
case it is called a fixed piece-rate plan. On the other hand, it can be graduated, increasing
as the quantity produced increases, in which case it is called differential piece-work plan.

Piece rate formula = Quantity x Rate

EXAMPLES

1. Tammy is paid on a per piece basis at the rate of P 1.20 per piece. If she finishes 360 pieces
for a week, how much is her total earnings?

2. Linda is employed to repack and seal pepper. She is paid on the following differential pay
plan schedule:
Quantity Daily rate/100 packs Quantity Daily rate/100 packs

Less than 100 P100.00 150.199 P107.50

100-149 P105.00 200 or more P110.00

For the week, Linda repacked the following quantities: Monday, 95; Tuesday,102; Wednesday,
130; Thursday, 152; and Friday, 201.

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Hourly Rate
To compute for the pay, multiply the number of hours of work by the hourly rate.

Regular Pay formula = Hours Worked x Hourly rate

For example: If an employee worked for 40 hours during the week and his rate is P10.00 per hour,
his wage is 40 hours x P10.00/hour = P400.00
Employees who work more than the required number of hours are entitled to overtime pay.

Overtime premium refers to the excess payment over the regular rate.
Computation of Overtime Pay
Assuming that the minimum daily wage is P340.00, how much is the overtime rare per hour?
ORDINARY DAY: 1. Compute the hourly rate of the employee:
Regulary hourly rate = Daily wage rate /8 hours
= P340.00/8
= P42.50 per hour

OVERTIME RATE = Regular hourly rate + 25% of Regular hourly rate

= P42.50 + (25% of P42.40)
= P53.125

The overtime premium is therefore:

Overtime premium = P42.50 x 25%=P10.625

The Overtime rate = Regular rate + Overtime premium

Overtime rate = P42.50 +P10.625 = P53.125

Alternatively, the overtime would be:

Overtime rate = P42.50 x 125% = P53.125

On Rest Day and Special Day

Employees generally have their rest days, which may not fall on a Sunday. If an employee is made
to work on Sunday, his rest day could be Monday or any other day of the week to compensate for
the Sunday that he worked. If an employee is made to work on his rest day or a special holiday like
Maundy Thursday or Good Friday, which dates are not fixed, the computation of his pay would be
as follows:

Hourly rate = 130% of Regular hourly rate

(On rest or a special day = 130% x P42.50 = P55.25 per hour

To determine overtime rate per hour:

Overtime rate = Hourly rate on rest day + 30% Hourly rate on rest day.
= P55.25 + (30% of P55.25)

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 =P55.25 + P16.575
= P71.825

Alternatively, the overtime rate per hour would be:

Overtime rate = Hourly rate on rest day x 130%
=P55.25 x 130%
= P71.825

Example:
Linda earns the regular daily rate of P340.00 giving her an hourly rate of P42.50. She was requested
her boss to work on a Saturday, her rest day.
a. She worked for 8 hours
b. She worked for 10 hours

On Rest Day which falls on special day:

Hourly rate = 150% of regular hourly rate

(On rest day which falls on a special day) = 150% x P42.50
= P63.75
To determine Overtime rate per hour:
Overtime rate = Hourly rate on rest day + 30% of Hourly rate on rest day
= P63.75 + (30% of P63.75 + P19.125 = P82.875
Alternatively,
Overtime rate = Hourly rate on rest day x 130%
= P63.75 x 130%
=P 82.875

Example
Zenaida earns the regular daily rate of P340 giving her an hourly rate of P 42.50. She was requested
by her boss to work on her rest day, which falls on Maundy Thursday.

a. She worked for 8 hours

b. She worked for 10 hours

On A Regular Holiday

Hourly rate = 200% of Regular Hourly rate

On regular holiday = 200% x P42.50
= P85.00 per hour

Overtime Rate per hour = Hourly rate on regular holiday +

30% of an hourly rate on regualr holiday.
=P85.00 + (30% of P85.00)
= P85.00 + P25.50
= 110.50

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 Alternatively Overtime rate = Houlry rate on regular holiday x 130%
= 85.00 x 130%
= 110.50

Example:
Ester earns the regualr daily rate of P340.00 giving her an hourly rate of p42.50. She was requested
by her boss to work on May 1, Labor Day. a. She worked for 8 hours
b. She worked for 10 hours

On a Rest Day which Falls on a regular Holiday

Hourly Rate = 260% of Regular hourly rate (on rest day which falls on a regular
holiday)
=260% x P42.50
=P110.50

Overtime rate = Hourly rate on a rest day + 30% of hourly rate which
falls on a regular holiday P110.50 + ( 30% of P110.50)
= P110.50 + P33.15
=P143.65

Alternatively,
Overtime rate = Hourly rate on rest day which falls on a regualr holiday x 130%
= P110.50 x 130%
=P143.65

Example

1. Teresita earns the regular daily rate of P340.00 giving her an hourly rate of P42.50. She
was requested by her boss to work on December 30, Rizal Day, which is a regular holiday. However,
Rizal day fell on a Monday, which was Teresita’s rest day. a. Teresita worked for 8 hours, b. She
worked for 10 hours.

2.a Joselito is paid on a hourly basis. Forty hours a week is considered his regualr hours and
anything excess of such 40 hours is considered overtime. His regular rate is P15.00 per hour and
he is paid 25% premium overtime. He worked on the following hours for the past week:

Monday - 8 hours Thursday - 10 hours

Tuesday - 4 hours Friday - 8 hours
Wednesday - 4 hours

Required: Compute for his gross earnings using the formula: Gross earnings = Number of hours
worked x Hourly rate.

2.b Assuming that instead of 8 hours for Wednesday and Friday, Joselito worked 10 hours for
those days. Compute for his Gross earnings and Overtime rate and pay.

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 2.c In the example (a) above, if Joselito is paid overtime on all hours in ecxess of 8 hours per
day, how much is his gross earnings?

Practice Items

1. Find the gross weekly wage of the following employees. Check your work using Excel.

Employees Production Piece Rate Gross Earnings

a. F. Morato 105 P0.30 -------------

b. A. Obidos 75 P2.50 -------------

c. I. Reyes 236 P1.15 -------------

d. T. Abad 25 P10.50 -------------

e. H. Lopez 6 P25.00 -------------

2. E. Razon is a waiter at the Barrio Fiesta. His rest day is Wednesday. He is paid overtime
in excess of 40 hours a week. His hourly rate is P13.75. For the week, he worked for 50 hours,
excluding the 5 12 % hours he rendered on Wednesday. His regular overtime premium is 25% and
his holiday overtime premium is 100%. Compute his gross earnings.

3. Eric Andal is a machinist. He is paid P50.50 per hour, time and a hlaf for all hours worked
over 40, and double time on Sundays. He worked the following hours this week:

Monday Tuesday Wednesday Thursday Friday Sunday

9 9.5 8.75 9.25 8 6

How many hours did Eric work? - - - - - - - - - - What is his gross pay? - - - - - - - - - -

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SALARY
Earnings of employees paid on a monthly or annual basis is generally referred to as salary. It is,
sometimes, necessary to convert salaries on an annual basis into monthly basis, weekly to monthly,
monthly to semi-monthly, etc. In these cases, we should always remember that:

1 year = 12 months = 24 semi-monthly = 6 bi-monthly

1 year = 52 weeks = 26 bi-weekly

1 month = 2 semi monthly

semi monthly = 52 every month

bi-monthly = every two months

bi-weekly = every two weeks

Take note that the prefix ”semi” means 21 , while the prefix ”bi”means twice. It is likewise,
important to note that a month is not equal to 4 weeks. If it were, then there would be 48 weeks
in a year, which is not the case. There are 52 weeks in a year, not 48. Hence, to convert monthly
salary into weekly salary, we have to convert the monthly into annual salary first and then divide
by 52.

Les us study the following conversions, assuming an annual salary of P72,000:

Annualsalary
a. Monthly salary = 12 = P 72,000.00
12 = P6,000
Annualsalary
b. Semi-monthly salary = 24 = P 72,000.00
24 = P3,000
Annualsalary
c. Weekly salary = 52 = P 72,000.00
52 = P1,384.62
Annualsalary
d. Bi-weekly salary = 26 = P 72,000.00
26 = P 2, 769.23

OR = Weekly salary x 2 = P1 384.62 x 2 = P 2 769.24

To convertmonthly salary into hourly rate, we first determine the number of regular hours in a
work week. Some companies have 40-hour workweek while others have 48-hour workweek.
If the regular week load is 40 hours,

a. Hourly rate = W40hours

eeklyRate

If the regular week load is 48 hours,

b. Hourly rate = W48hours

eeklyRate

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INCOME
Income is a broader term than wages or salary. Wages and salaries are income to the persons
receiving it. However, for people who are not employees, their income may not be in the form
of wages or salaries. They can have commission income if they are paid for the commission on
sales they make, rental income if they have properties they rent out, dividend income if they are
stockholders, royalties if they are authors, and other income for whatever endeavor they engage in
including profit-making businesses. A business firm’s income in the form of profits that the business
earns what we have studies in the preceding chapter.

Examples
a. Janine is a stockholder of the Wisdom Corporation. For the current year, the corporation de-
clared a 10% cash dividend to stockholders. Janine owns 1 000 shares of the company’s P10.00 par
value shares.

To compute for her dividend income, Janine’s dividend income

= No. of shares x par value x Dividend rate
= 1 000 shares x P10.00par value x 10% = P1 000

b. John Abraham is an author and his book sold 10 000 copies for the first semester. His book
sells at P375 per copy. He receives a 22% royalty from his publisher.

His royalty income would be:

John’s royalty income = 2 500 copies x P375 x 22% = P 206 250

EMPLOYEE BENEFITS
Employee benefits cover remuneration other than basic pay. It includes vacation leaves, medical
and hospitalization benefits, meal allowance, transportation allowance, clothing allowance, etc; and
incentive pay for productivity such as commissions, overrides, bonuses and profit sharing. For the
Philippines the folowing benefits are given to employees:

Vacation pay: Thirteen (13) vacation days, with additional one vacation day every year starting
on 2nd year of service and convertible to cash at the end of each year. Maximum total vacation
leave is 18 days.

Sick Leave
Twelve (12) days per year for the first two years of service. With additional one sick leave every
year starting on the 2nd year of service. maximum total sick leave is 15 days. All unused leave
days are convertible to cash in December of each year.

Holiday pay
In lieu of vacation pay, Article 95 of the Labor Code provides fpr service incentive leave for
every employee who has rendered at least one year of service of 5 days with pay.
Some benefits are taxable, just like wages, salaries, commission, royalties, etc. However, some ben-
efits are non-taxable. Revenue Regulations (RR) No. 5-2011 dated March 16, 2011 published in
Manila Bulletin march 18,2011 cites the non-taxable benefits as follows:

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 The BIR issued Revenue Regulations No. 5-2011 limiting the items of ’de minimis’ benefits
that are exempt from witholding tax on compensation (WTC) or to Fringe benefits tax (FBT) to
the following:

1. Monetized unused vacation leave credits of private employees not exceeding 10 days;

2. Monetized value of vacation and sick leave credits paid to government employees;

3. Medical cash allowance to dependents of employees, not exceeding P750.00 per employee per
semester pf P125.00 per month;

4. Rice Subsidy of P1 500.00 or one (1) sack of 50 kg of rice per month amounting to not more
than P1 500.00;

5. Uniform and clothing allowance not exceeding P4 000 per annum;

6. Actual medical expenses not exceeding P10 000 per annum;

7. Laundry allowance not exceeding p300.00 per month

8. Annual achievement awards with an annual monetary value not exceeding 10 000.00;

9. Gifts during Christmas and major anniversaries not exceeding P5 000.00 per annum;

10. Daily meal allowance for overtime work and night shift not exceeding 25% of the basic minimum
wage.

RR 5-2011 emphasized that other than the above benefits, all other benefits given by employers to
employees shall not be considered ”de minimis” benefits, and hence, shall be subject to income tax
as well as witholding tax on compensation or fringe benefits tax.

Practice Items

1. Complete the following table. Round off your answer to nearest centavo. Place computation
on a yellow legal pad. Alternatively, use Excel to check your work.

Employees Annual Monthly Semi-Monthly Weekly Bi-weekly

L. Carlos P96 000
O. Homer P66 500
V. Abad P3 400
E. Roldan P4 250
A. Ignacio P3 175
N. Toledo P5 025
D. Asuncion P2 000
J. Belezza P1 250
O. Lopez P3 750
Y. Espinosa P4 125

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 2. Compute for the daily rate of foregoing employees assuming:

5-day Workweek 6-day Workweek

a. L. Carlos --------------- -----------------

b. O. Homer --------------- -----------------

c. V. Abad --------------- -----------------

d. E. Roldan --------------- -----------------

3. Compute for the hourly rate of the following employees mentioned in (a) above assuming:

5-day Workweek 6-day Workweek

a. N. Toledo --------------- -----------------

b. D. Asuncion --------------- -----------------

c. J. Belleza --------------- -----------------

d. O. Lopez --------------- -----------------

e. Y. Espinosa --------------- -----------------

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 B. PAYROLL DEDUCATIONS

An employee generally does not receive his gross earnings intact every payday. There are certain
deductions from gross earnings to arrive at or compute for an employee’s net pay or take home pay.
These deductions may include, among others, the following:

1. Employee’s SSS contribution for private employees

2. Employee’s GSIS contribution for government employees

3. Philhealth contribution for all employees

4. Withholding taxes for all employees

5. Salary advances or temporary vales (IOUs)

6. Union dues

Rate of Contribution to SSS

All employees of private enterprises are covered by the Social Security Service. Self-employed
individuals can also become members. The monthly contribution are based on the compensation of
members (Please see Appendix C). The current SSS contribution rate is 11% of the monthly salary
credit not exceeding P16 000.00 and this is being shared by the employer (7.37% and the employee
3, 63.% The table if SSS contribution is in Appendix C.

Self-employed and voluntary members pay the 11% of the monthly salary credit (MSC) based
on the monthly earnings declared at the time of registration. For OFW’s the minimum monthly
salary credit is pegged at P 5 000.00. For the non-working spouse, the contribution will be based
on 50% of the working spouses last posted monthly salary credut but in no case shall it be lower
than P 1 000.00

Rate of Contribution to Philhealth

All employees, whether or private entities of government entities, are to be members of Phil-
health. This is basically intended to cover them and their beneficiaries help in times of sickness.
Appendix D shows the Philhealth contributions of employers and employees. The first in the list
shows:

Salary Bracket Salary Base Total Mo. Employee Employer

Premium

8 999.99 and 8 000.00 200.00 100.00 100.00

below

9 000 - 9 000.00 225.00 112.50 112.50

9 999.99

10 000 - 10 000.00 250.00 125.0 125.00

10 999.99

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Note
a. Employee share represents half of the total monthly premium while the other half is shouldered
by the employer. b. For a Kasambahay helper receiving a wage of less than Five Thousand Pesos
(5 000.00) per month, the employer will shouldre both the employee and employer’ share based on
the premium schedule.

Rate of Contribution to GSIS

All government employees holding permanent and non-permanent positions are members of the
GSIS. Premium contributions are based on monthly compensation.
There are two types of insurance coverage, namely:

1. Regular - refers to compulsary premium payments on life insurance and retirement bene-
fits

2. Employees Compensation Fund - refers to premium payments paid by your government

agency so you get full coverage in case of a work-related accident.

Rate of premium contributions are as follows:

Type of Insurance Personal Personal Government Government

Coverage Share Share Share Share
Life Retirement Life Retirement

Regular 2% 7% 2% 10%

Employees Com- none 0% none 1% not to exceed

pensation Fund P 100

Withholding Taxes Withholding tax on compensation is the tax withheld from income
payments to individuals arising from an employer-employee relationship. Witholding tax table is
also available from the BIR and in the internet. See Appendix C.
How to compute your BIR Witholding Tax for the month, the following information are needed.
You may want to check out your payslips for the other information.

• Your BIR Tax Status (single/married)

• Do you have any dependents and how many?

• How much is your SSS/Philhealth and PAG-IBIG Contributions?

• Allowances and other benefits (if any)

• Copy of the latest BIR Witholding Tax Table

Let’s assume the following:

• Basic Salary: P15,000.00

• Status: Single (No dependents)

• Overtime Pay: P 2 500.00

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 • Late/Undertime deduction: P500.00

• SSS Contribution: P500.00

• Philhealth Contribution: P250.00

• Pag-IBIG Contribution: P 100.00

To get your taxable income, add the following: basic salary and overtime pay then deduct the
late/undertime deduction, SSS, Philhealth and Pag-IBIG Contributions.

Your taxable income for the motnh is P16 150. That would result of P15 000 + P2 500 - P500-
P500- P250- P100 Your tax will be computed based on your taxable income. The tax can be com-
puted with the help of the BIR Witholding Tax Table. Using the BIR Witholding Tax Table, look
for the nearest amount to your taxable income which is P16 150. Look under the monthly category.

In this case, the nearest value is the P15 833. Take note of the tax rates above and the amount
above it. Now, we got three important factors in computing your BIR Witholding Tax Table:
P15 833, P1 875, and lastly the + 25% over.

The tax computation would be:

P16 150.00 (Taxable Income) - P 15 833.00 (Tax Base) = P 317.00
P317.00 x 25% = P 79.25
P79.25 + P1 875.00 = P 1 954.25 your BIR Witholding Tax for the month

Pag-IBIG Contributions

The Home Development Mutual Fund (HDMF), more populary known as the Pag-IBIG Fund,
was established to provide a national savings program and affordable shelter financing for the
Filipino workers. The Fund offers its members short-term loans and access to housing programs.
It is mandatory for all SSS and GSIS covered employees; uniformed memebrs of the AFP, BFP,
BJMP and PNP; as well as Filipinos employed by foreign based employers. With the signing of
Republic Act No. 9679, membership to the Fund shall be mandatory for the following:

a. All employees, workers, professionals, officers and companies who are compulsorily covered by
the SSS and GSIS

b. Uniformed members of the Armed Forces of the Philippines, the Bureau of Fire Protection, the
Bureau of Jail Management and Penology, and the Philippine National Police;

c. Overseas Filipino Workers (OFWs)

d. Filipinos employed by foreign-based employers, whether deployed locally or abroad.

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 The monthly contribution is shown below:

Percentage of Monthly Compensation

Monthly Compensation Employee Share Employer Share

P1 500 and below 1% 2%

Over P1 500 2% 2%

Therefore, a person who earns P12 000.00 per month will contribute 2% of such salary or
P240.00 to the Pag-IBIG Fund.

How to Compute for Net Pay

To compute for NET PAY:
Net Pay = Gross Earnings - Deductions

Example:
Joy receives a basic pay of P8 500.00 a month and 1 1% commission on her sales. She sold P65
000 for the month. her deductions are: 4% for SSS based on her basic monthly pay; P100.00 for
Philhealth; Pag-IBIG, 2% and 10% Witholding Tax based on gross earnings.
Compute for her net pay.

Solution:

a. Step One: Compute for her gross earnings.

Gross Earnings = Monthly pay + Commission

b. Step Two: Compute for her deductions.

SSS = 4% x basic monthly pay
Philhealth
Pag-IBIG
Witholding tax

c. Step Three: Compute for her net pay.

Net Pay = Gross earnings - Deductions

There are tables available to facilitate computation of SSS contributions, GSIS contributions,
Philhealth contributions, and Witholding Taxes as shown in our previous discussion and whcih
are in the appendices of this lecture. Witholding taxes are based not only on gross earnings of
employees but also on their civil status (single, married, head of the family) as well,. SSS, GSIS,
and Medicare contributions are based on salary brackets of employees.

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Salary Graph

We can graphically present details of a person’s gross earnings. This is best shown using a pie
graph. We simply have to compute the corresponding percent of the deductions and the net pay
with the gross earnings representing 100%. For our example above regaridng Joy’s earnings, let us
summarize the data:

Gross Earnings P9 150 (100%)

SSS P340 4%
Philhealth P100 1%
Pag-IBIG P183 2%
Withholding Tax P915 10% (1.538) (17%)

Net Pay Earnings P7 612 (83%)

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 Practice Items

1. Below are the employees of the Summit Co., Inc. indicating their basic salary er month. Consult
the Appendices for the SSS contributions, Philhealth contributions, Pag- IBIG contributions, and
Witholding tax table. Compute for their net pay using Excel.

Basic Monthly Salary

Abigail M. Marinas P50 000.00

Bernadette M. Lopez P45 000.00

Catherine L. Macuja P30 000.00

Dory B. Agapito P28 000.00

Efren C. Seguerra P22 000.00

Assume they are single with no dependents

2. Cathy Agno has a basic annual salary of P720 000.00. She generally pays a 10% Withold-
ing tax on her salary. She pays the regular 3.63% for SSS, P437.50 for Philhealth, and 2% for
Pag-IBIG. Prepare a pie chart to show the composition of her gross earnings.

3. C. Villafuerte is a Product Manager receiving an annual salary of P156 000.00. he receives

commission on her own sales of 1% and override of 12 % of 1% on his men’s sales. He sold P228 340
for the past month. His men all receive a basic pay of P9 100 a month and a commission of 3%
on his respective sales plus bonus of 1% on all sales exceeding P200 000.00. His men’s sales are as
follows: E. Cruz, P215 320.00; F. Santos, P106 750.00; G. Delos Reyes, P391 560.00; and H. dela
Cruz, P182 765.00

The company deducts SSS contribution of 3.63%, and Philhealth Contributions of P100.00 and
5% for Witholding Tax.

Compute for:

a. Gross Earning of C. Villafuerte

b. Net pay of C. Villafuerte

c. Gross Earnings of each of the salesmen

d. Use Excel to incorporate (a) and (b)

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