BUSINESS MATHEMATICS

TOPIC: SALARIES AND WAGES

MODULE 12
Taxable and Nontaxable Benefits

INTRODUCTION

This module is intended to help you continue studying Business Math at home. It is designed to provide
you with meaningful and engaging learning experiences that will help you enhance your skills in comprehension,
computation, analysis and real-life applications.

In each lesson, you will review basic concepts. Then, you will discover the relationship and connectivity
to the lesson. After the presentation of new concepts, you will do self-check exercises that will lead you to an
application task. Finally, you will be guided in managing your takeaways.

Please handle this module with utmost care and use separate sheets in answering pre-test, self-test
activities and post-test. Happy Learning!

LEARNING COMPETENCIES

This module was designed and written for your meaningful learning. It is here to provide information
about the taxable and nontaxable benefits given to wage earners. The scope of this module provides you the
knowledge to identify these benefits, the standard deductions with the corresponding computations, thereby
applying the principles and skills learned in real-life situations in the business industry. The quantitative
understanding of the basic concepts of fractions, decimals, and percent are required for a comprehensive learning
and output.

After going through this module, you are expected to:

1. Distinguish taxable from nontaxable benefits;
2. Enumerate the standard deductions, and
3. Apply the computations to the benefits given to a wage earner.

PRE-TEST:

Find the value of x in the following equations:

1. 10,000,000 = (27.5)(x)(60,000)

2. 3x – 18,190 = x + 10,000
𝑥
3. = 15,378.67
12

LEARNING ACTIVITIES

Consider the problem below.

Mr. Kiel has been working in Company A for four years, then he transferred to Company B. He noticed
that there are differences with the payslips of the two companies. In his previous employer, he sees the word “De
minimis”, while in his new employer, he sees the word “allowance” instead. So, he asked himself, what could be
the difference between the two? And how does it affect the withholding tax? Here is the sample of his payslips
(old and new). Information from both payslips were summarized below.

COMPANY A COMPANY B
Withholding Tax Php 4,530.00 Php 9,865.38
De Minimis Php 1,925.00
Living Allowance Php 8,909.57

1 Prepared by Elvira B. Cristobal, LPT, MBA

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Total Earnings and Deductions (Company A)

EARNINGS DEDUCTIONS
Regular Pay: 18,382.35 Withholding tax: 4,530.00
De Minimis: 1,925.00 SSS Premium: 500.00
Perf Bonus: 560.00 Phil Health: 250.00
BASIC PAY: 20,867.95 Pag-ibig Cont: 100.00
Overload-Coll: 1,769.50 PAG-IBIG LOAN: 220.00
ADJUSTMENTS: 6,748.88 RETIREMENT FUND: 626.00
College Faculty Club 30.00
Charges/Misc: 360.00

Total Earnings and Deductions (CompanyB)

EARNINGS

Basic: 14,850.43 PREV.OL/EL:

Absences BSC: RLE-ALW:
LA/SFA: 8,909.57 OTH-ALW/HON:
Other Earn: Prev. RLE:
ABS Allows: Prev. Basic:
TTL.: 2,887.50 Prev. LA/SFA:
Holiday Pay: 4,400.00
OL/EL: 9,900.01
Total Earnings: 40,947.51
____________________________________________________________________________

DEDUCTIONS

Tax Whld: 9,865.38 Retloan:

SSS Prem: 581.30 :
Phil Hlth: 437.50 :
Pag-Ibig: 100.00 :
SSS Ln: 692.17 :

Cash Adv: :
Pag-Ibig Ln: :

Ret Cont: :

Total Deductions: 11,676.35

_____________________________________________________________________________

Mr. Kiel knows that the computation for the withholding tax does require some table provided by the
BIR (Bureau of Internal Revenue). So, the increase of withholding tax maybe due to the increase of his total
earnings. The total earnings are composed of two different details, the old one with the Performance Bonus and
the De Minimis, while the new one has Living Allowance (LA)/Special Financial Assistance. Mr. Kiel wants to
understand if the additional earnings has substantial contribution on the increase of tax.

To explain such dilemma, Revenue Regulation No. 5-2011 was consulted. It is stipulated in the said
regulation that the de minimis benefit should not be taxed with some constraints. For example, uniform and
clothing allowance not exceeding Php 4,000 shall not be taxed. It is clear that, in the old company where Mr. Kiel
had worked for, the de minimis amounting to Php 1,925 was not taxed, while the living allowance in his new
company contributed to the tax since the term “living allowance” is not mentioned in the said regulation. Though
we can consider living allowance as a daily meal allowance, still it is said that exemption to tax for daily meal
allowance is only possible if it does not exceed 25% of the basic minimum wage. Mr. Kiel’s problem is a bit
more complex.

2 Prepared by Elvira B. Cristobal, LPT, MBA

 BUSINESS MATHEMATICS

As stated in the Revenue Regulation No. 5-2011 of the Bureau of Internal Revenue, the following benefits are
not taxable (de minimis benefits).

1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year.
2. Monetized value of vacation and sick leave credits paid to government officials and employees.
3. Medical cash allowance to dependents of employees, not exceeding Php 750 per employee per semester or
Php125 per month.
4. Rice subsidy of Php1,500 or one (1) sack of 50 kg rice per month amounting to not more than Php1,500.
5. Uniform and clothing allowance not exceeding Php4,000.
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 Php 10,000 per annum.
7. Laundry allowance not exceeding Php300 per month.
8. Employees 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.
9. Gifts given during Christmas and major anniversary celebrations not exceeding Php 5,000 per employee per
annum.
10. 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.

After identifying taxable benefits and knowing that tax is one of the standard deductions, here are the
deductions in the payslips above. They are

1. Withholding Tax 2. SSS Premium

3. Philhealth 4. PAG-IBIG
5. PAG-IBIG/SSS Loan 6. Retirement Fund
7. Charges/Miscellaneous

These are some standard deductions for a wage earner. Withholding tax is the amount contributed by any wage
earner to the government. The SSS (Social Security System) or GSIS (Government Services Insurance
System) collects annual /quarterly/monthly contributions from its members to ensure that they will receive their
benefits. Philhealth and Pag-ibig are almost the same with SSS/GSIS only that Philhealth focuses more on
providing discounts when it comes to health-related problems, while Pag-ibig Fund focuses on providing
monetary assistance for lands or mortgages. Charges/Miscellaneous can be best interpreted as deductions made
by the employer for some reasons. (e.g. tardiness/absences).

Examples:

Mr. Faham is a government employee and has ten (10) days sick leave credits and seven (7) days vacation leave
credits. His daily rate is Php525 and did not avail the sick and vacation leave credits, so the agency monetized it.
How much will be his additional earnings and how much of it will be taxed?

Solution: (10 + 7) x 525 = Php 8,925

Therefore, Mr. Faham will receive an additional earning of Php 8,925 and will not be taxed since he is a
government employee.

An employer provides a living allowance to his employees monthly. Considering that the living allowance is
defined as follows:

Living allowance = clothing + laundry + daily meal + transportation

How much of the additional earnings will be taxed if an employee’s living allowance is Php 5,000 and each
part in the definition is 0.25 of the living allowance?

3 Prepared by Elvira B. Cristobal, LPT, MBA

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Solution: Allowances or benefits that are not included in the de minimis benefits are considered taxable.

In every part of the living allowances, we have 0.25x, where x is the amount of the living allowance.
Then 0.25x = 0.25(5000) = 1250. The taxable portion is the sum of the four taxable parts.

For clothing allowance, which is 1250, the nontaxable part is only Php4,000/12, and for laundry, the
nontaxable part is 300, and the other two, daily meal and transportation are all taxable.

Note that the only exemption for clothing is Php 4,000 per annum, for laundry is Php300 per
month, daily meal allowance for overtime, and transportation is not stated in the de minimis benefits.
We let T be the taxable portion of the allowance, thus, we get

T = [1250 – 4000/12] + (1250 – 300) + 1250 + 1250 = Php 4,366.67

Therefore, the portion of the living allowance, which is Php 4,366.67 is taxable.

The employee’s earning has a tax percentage of 20%. Twenty-two percent of his total allowances comes from
Christmas gifts, all other allowances are not taxable, and his total allowance is 17% of his basic pay (less the
allowances) which is Php 100,000. What is his total earning and how much is his tax?

Solution:

Let T be the total earnings, B be the basic pay, and A be the total allowances.
A = 0.17B = Php 100,000
B = 100,000/0.17 = Php 588,235.29
T = B + A = 588,235.29 + 100,000 = Php 688,235.29

So, his total earning is Php 688,235.29

Let t be his tax.
t = 0.2 [B + (0.22A – 5000)]
t = 0.2 [588,235.29 + (0.22)(100,000) – 5000]
t = Php 121,047.06

So, his tax is Php 121,047.06

To see how the equation for t becomes t = 0.2 [B + (0.22A – 5000)], please refer to item 9 of Revenue
Regulations 5-2011 of BIR

SELF-EVALUATION

Identify if the statement is True or False:

1. All allowances are nontaxable.

2. If the monthly clothing allowance is Php400.00, then the taxable amount for clothing allowance is Php1200.
3. Allowances are considered part of earnings.
4. Nontaxable benefits include all monetized leave credits.
5. Some bonuses or allowances are nontaxable.
6. All benefits of government officials and employees are nontaxable.
7. Taxes are added in the deduction.
8. Thirteenth month pay may or may not be taxed.
9. If the total deduction is 0, then it follows that gross earnings is nontaxable.
10. There is a possibility that a certain employee will be exempted from tax even if she/he receives some
benefits.

4 Prepared by Elvira B. Cristobal, LPT, MBA

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POST TEST

Solve the following problems below.

1. The CNA (Collective Negotiation Agreement) is considered as a benefit for public employees computed in
one year. Given the formula below:
CNA + 13th Month Pay + other benefits > Php 30,000 are taxable.

Suppose a certain government employee earns a CNA = Php 12,764.12, 13 th Month Pay = Php 24,291.78,
and he has no other benefits. How much of his additional earnings will be taxed?

2. In connection with the previous problem, suppose a certain government employee earns a CAN = Php 2,214.12
per month, 13th Month pay = Php 12,119.72, and he has other benefits amounting to Php 4,000. How much of
the additional earnings will be taxed?

3. Suppose in the previous problem, the other benefits include clothing allowance. Will there be a change in the
amount taxable? If yes, how much? If no, why?

4. If an employee X has CAN = Php 18,291.09, 13 th Month Pay = Php27,891.00, other benefits = Php 10,000,
and Php 3,000 of the other benefits is clothing allowance. How much of his benefits is taxable? How much is
nontaxable?

5. Based on the previous problem, if his tax rate is 0.08, how much is his tax and what is his net amount from
his benefits?

5 Prepared by Elvira B. Cristobal, LPT, MBA

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6 Prepared by Elvira B. Cristobal, LPT, MBA