CHAPTER 10- COMPENSATION INCOME

EMPLOYER-EMPLOYEE RELATIONSHIP
 EMPLOYER – a person who has control over the payment of employee remuneration.
 EMPLOYEE – who is recipient of wages.

ELEMENTS OF EMPLOYER AND EMPLOYEE RELATIONSHIP UNDER CASE LAW:

1. Selection and engagement of employees
2. Payment of wages
3. Power of dismissal
4. Power of control

TYPES OF EMPLOYEE
A. AS TO FUNCTION
1. Managerial employees – who are given powers to lay down and execute managerial policies.
2. Supervisory employees – who effectively recommend such managerial actions.
3. Rank and file employees – who hold neither managerial nor supervisory functions.
B. AS TO TAXABILITY
1. Minimum wage earners – worker in private sector that is paid of minimum wage or an employee in
public sector with compensation income of not more than the statutory minimum wage . Exempt
from income tax on their compensation.
 Statutory minimum wage – 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.
2. Regular Employees – subject to regular progressive income tax.
THE TAX MODEL ON COMPENSATION INCOME
Gross Compensation Income P xxx,xxx
Less: Non-taxable compensation xxx,xxx
Taxable Compensation income xxx,xxx

NON-TAXABLE COMPENSATION
A. MANDATORY DEDUCTIONS – contributions to GSIS, SSS, Philhealth, HDMF, and union dues.
B. EXEMPT BENEFIS
1. Benefits excluded under NIRC and special laws.
2. Benefits exempt under treaty or international agreements.
3. Benefits necessary to trade, business, or conduct of profession of the employer.
4. Benefits for convenience or advantage of employer.
EXEMPT BENEFITS UNDER THE NIRC, AS AMENDED, AND SPECIAL LAWS
1. Remunerations received as incidents of employment.
2. De minimis benefits
3. 13th month pay and other benefits not exceeding P90,000.
4. Certain benefits of minimum wage earners.

DE MINIMIS BENEFITS
- Facilities or privileges that are relatively small value and are furnished by employer by means of
promoting the health, goodwill, contentment, or efficiency of his employees.
- Are petty fringe benefits exempt from income tax.

TAXABLE DE MINIMIS BENEFITS

1. Excess de minimis benefits over their regulatory limits.
2. Other benefits of relatively small value that are not included in the minimis benefits.

TREATMENT OF TAXABLE DE MINIMIS BENEFITS

1. For rank and file employees – treated as other compensation income under “13 th month pay and
other benefits”.
2. For managerial and supervisory employees – treated as fringe benefits subject to final fringe
benefit tax.

Employees of Philippines embassies or consulate offices are not considered non-resident citizens and
are subject to Philippine income tax.
Summary of rules
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

COMPOSITION OF TAXABLE COMPENSATION INCOME

1. Regular compensation – pertains to fixed remuneration received by employee every payroll
period such as:
a. Basic salary
b. Fixed allowances
 2. Supplementary compensation - pertains to performance-based pays to employees with or
without regard to payroll period.
The following are 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
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

13th month pay and other benefits includes:

1. 13th month pay
 Of government employees consist of Christmas bonus equivalent to one-month
salary plus P5,000 cash gift.
 Of private employees is equivalent to one-month salary.

2. Other benefits
a. Christmas bonus – non-performance-based incentive pay is part of other benefits.

Government employees Private employees

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

b. Cash gifts
c. Additional compensation allowance
d. 14th month pay , 15th month pay, etc.
e. Other fringe benefits – include all other taxable fringe benefits not specifically included
in compensation income as regular, supplementary or 13 th month pay, and other
benefits under current tax rules.

TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS

- Are exempt from withholding on compensation provided they do not exceed P90,000.

TAXABILITY OF MINIMUM WAGE EARNERS (MWE)

Minimum wage earners are exempt from income tax on the following:
1. Basic minimum wage
2. Other benefits
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential pay

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.
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.
3. When an employee ceases to be a minimum wage earner during the year by disqualification.

TREATMENT OF COST LIVING ALLOWANCE OF MWEs

Under RMO23-2011, COLA which forms part of the new wage rates prescribed to be statutory ,minimum
wage and shall not be treated as a separate or other benefit.

THE WITHHOLDING TAX ON COMOENSATION

- Method of collecting income tax at source upon receipt of income. It applies to all employed
individuals whether citizens or aliens. The employer is constituted as the withholding agent.

PROCEDURAL COMPUTATION OF WITHHOLDING TAX ON COMPENSATION

1. Determine the total 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 regular compensation. Subject the total to the
incremental tax rate for the bracket.
4. Total the basic tax and the incremental basic tax.

BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION UNDER RR2-98, AS AMENDEND:

1. Remuneration received incidents of employment.
2. Remuneration paid for agricultural labor and paid entirely in products of the farm where the
labor is performed.
3. Remuneration for domestic services.
4. Remuneration for casual labor not in the course of an employer’s trade or business – treated as
other income.
5. Compensation for services by a citizen or resident of the Philippines for a foreign government or
an international organization.
 6. Damages paid by the employer to employees
7. Proceeds of life insurance
8. Amounts received by an insured employee as a return of premium
9. Compensation for injuries or sickness
10. Income exempt under treaty
11. 13th month pay and other benefits not exceeding total of P90,000.
12. GSIS, SSS, PhilHealth, and other contributions.
13. Compensation income including overtime pay, holiday pay, night shift differential pay, and
hazard pay of Minimum Wage Earners.
14. Compensation income of employees in public sector if the same does not exceed those of
minium wage earners in non-agricultural sector.

DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAAX ON COMPENSATION

 Employees shall file 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 on or before January 15 of
succeeding year.
 Employers are also required to file Annual Information Return of Income Taxes Withheld
on Compensation and Final withholding Taxes on or before January 31 of the following
year in which the compensation income payments and passive income payments were
made.
 Employers shall furnish each employee-taxpayer a copy of Certificate of Compensation
Payment or Income Tax Withheld on or before January 31 of succeeding year.

PENALTIES FOR NON-COMPLIANCE

 Employers are subject to same penalties discussed in chapter 4 for non- compliance of
withholding tax requirements.

TREATMENT OF WITHHOLDING TAX ON COMPENSATION

 The withholding tax on compensation is credited against the total tax due in consolidated
income tax return.
SUBSTITUTED FILING OF TAX RETURN
 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.