Compensation Income

EMPLOYER-EMPLOYEE RELATIONSHIP

 Elements under case law:

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

 Type of Employees
1. As to function
2. As to taxability
 ➢ Non-taxable compensation
A. Mandatory Deductions
B. Exempt benefits

Tax Model on 1. Exempt benefits under NIRC & Special Laws

Compensation Income a) Remunerations received as incidents of
employment
Gross compensation income XXX
Less: Non-taxable compensation XXX b) De minimis Benefits
Taxable compensation Income XXX
c) 13th month pay and other benefits not
exceeding P 90,000.
d) Certain benefits of minimum wage earners
De Minimis Benefits  Laundry allowance not exceeding P300 per
➢ Petty fringe benefits exempt from month;
income taxes  Employees achievement awards, e.g., for
Examples: length of service or safety achievement,
which must be in the form of a tangible
 Monetized unused vacation leave credits of personal property other than cash or gift
employees not exceeding ten (10) days during certificate, with an annual monetary value
the year; not exceeding P10,000 received by the
employee under an established written plan
 Monetized value of vacation and sick leave which does not discriminate in favor of highly
credits paid to government officials and paid employees;
employees;
 Gifts given during Christmas and major
 Medical cash allowance to dependents of anniversary celebrations not exceeding P5,000
employees not exceeding P1,500 per per employee per annum;
employee per semester or P250 per month;
 Daily meal allowance for overtime work and
 Rice subsidy of P2,000 or one (1) sack of 50 night/graveyard shift not exceeding twenty-
kg. rice per month amounting to not more five percent (25%) of the basic minimum wage
than P2,000; on a per region basis; and
 Uniform and clothing allowance not exceeding  Benefits received by an employee by virtue of
P6,000 per annum; a collective bargaining agreement (CBA) and
 Actual medical assistance, e.g. medical productivity incentive schemes provided that
allowance to cover medical and healthcare the total annual monetary value received
needs, annual medical/executive check-up, from both CBA and productivity incentive
maternity assistance, and routine schemes combined do not exceed P10,000 per
consultations, not exceeding P10,000 per employee per taxable year.
annum;
Taxable De Minimis Benefits
 Excess de minimis over their
regulatory limits
 Other benefits of relatively small
value not included in the list.

Tax Treatment:
a) For Rank and File Employees
 Other compensation income under the
category of “13th month pay and other
benefits”

b) For Managerial and supervisory

employees
 Fringe benefits subject to final fringe
benefit tax.
Taxable De Minimis Benefits
 Excess de minimis over their
regulatory limits
 Other benefits of relatively small
value not included in the list.

Tax Treatment:
a) For Rank and File Employees
 Other compensation income under the
category of “13th month pay and other
benefits”

b) For Managerial and supervisory

employees
 Fringe benefits subject to final fringe
benefit tax.
Taxable De Minimis Benefits
 Excess de minimis over their
regulatory limits
 Other benefits of relatively small
value not included in the list.

Tax Treatment:
a) For Rank and File Employees
 Other compensation income under the
category of “13th month pay and other
benefits”

b) For Managerial and supervisory

employees
 Fringe benefits subject to final fringe
benefit tax.
Taxable De Minimis Benefits
 Excess de minimis over their
regulatory limits
 Other benefits of relatively small
value not included in the list.

Tax Treatment:
a) For Rank and File Employees
 Other compensation income under the
category of “13th month pay and other
benefits”

b) For Managerial and supervisory

employees
 Fringe benefits subject to final fringe
benefit tax.
Taxable De Minimis Benefits
 Excess de minimis over their
regulatory limits
 Other benefits of relatively small
value not included in the list.

Tax Treatment:
a) For Rank and File Employees
 Other compensation income under the
category of “13th month pay and other
benefits”

b) For Managerial and supervisory

employees
 Fringe benefits subject to final fringe
benefit tax.
Taxable De Minimis Benefits
 Excess de minimis over their
regulatory limits
 Other benefits of relatively small
value not included in the list.

Tax Treatment:
a) For Rank and File Employees
 Other compensation income under the
category of “13th month pay and other
benefits”

b) For Managerial and supervisory

employees
 Fringe benefits subject to final fringe
benefit tax.
➢ Non-taxable compensation 3. Benefits required by the nature of, or
necessary to, the trade, business or
A. Mandatory Deductions conduct of profession of the employer
B. Exempt benefits  “Necessity of the employer rule”

1. Exempt benefits under NIRC & Special Laws 4. Benefit for the convenience or advantage
of the employer
a) Remunerations received as incidents of
employment  “ Convenience of the employer rule”
b) De minimis Benefits
c) 13th month pay and other benefits not
exceeding P 90,000.
d) Certain benefits of minimum wage earners

2. Exempt benefits under treaty or

international agreements
 Foreign governments, embassies or
diplomatic missions

Tax Model on
Compensation Income
Gross compensation income
Less: Non-taxable compensation
Taxable compensation Income
Composition of Taxable Compensation Income
1. Regular compensation
 Fixed remunerations
2. Supplemental compensation
 Performance based
 Adjunct category: “13th month pay and
XXX other benefit”
XXX
XXX
Regular compensation 400,000
Supplemental compensation 130,000
[(120000+ (100,000-90,000)]
Taxable compensation income 530,000
Valuation of compensation paid in kind
 Taxable at the fair value of the
consideration received.
Supplemental compensation “13th month pay and other benefit”

 Performance based 1. 13th month pay

 Adjunct category: “13th month pay and 2. Other benefits
other benefit”
a. Christmas bonus
 The ff. are the additional
compensation under current tax rules: b. Cash Gift
c. Additional compensation allowance
(ACA)
d. 14th month pay, 15th month pay, etc.
e. Other fringe benefits of rank and file
employees.
a. employee personal expenses
shouldered by the employer
b. Taxable de minimis benfits
a. Excess de minimis

b. Benefits not included in the de

minimis list
Tax treatment: 13th month pay and other
benefit
 The excess over 90,000 should be treated
as compensation income subject to regular
income tax.
Taxability of Minimum Wage Owners
(MWE)
 Exempt from income tax on the ff:
1. Basic Minimum Wage
2. Other Benefits (HHON)
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential
Taxability of Minimum Wage Owners Solution:
(MWE)
 Exempt from income tax on the ff:
Gross compensation income 315,000 (290k+5k+20k)
1. Basic Minimum Wage
Less: Non-taxable compensation
2. Other Benefits (HHON)
a. Holiday pay Mandatory deductions 5,000
b. Hazard pay
c. Overtime pay Exempt benefits 290,000 295,000
d. Night shift differential
Taxable compensation 20,000
Net income from business 300,000
Exercise:
Taxable income 320,000
Mark, a MWE, do part-time business after
work. He received total minimum wage of
290,000 inclusive of 11,000 13th month
pay but net of 5,000 mandatory
deductions. He also received as
performance bonus of 20,000 and earned
300,000 from side-line business.
WITHOLDING TAX ON COMPENSATION
 collecting the income tax at source
upon receipt of income
 employer as withholding agent
EXERCISE

1. Determine the total w/holding

tax on compensation.
2. How much is the net payroll
due?
EXERCISE
1. Determine the total
w/holding tax on
compensation.

2. How much is the net

payroll due?
BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION
BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION
Fringe Benefit Tax
Fringe Benefit
➢ Fringe benefits means any good, service,
or other benefit furnished or granted in
cash or in kind by an employer to an
individual employee.
➢ Any employee, whether managerial,
supervisorial or rank-and-file employee,
may be given fringe benefits as there is
no prohibition under the law.
➢ different tax treatment applies depending
upon who the recipient of the fringe
benefit is
Necessity or convenience of the
employer rule
➢ Ordinary business expense
➢ Not viewed as taxable fringe benefits
Fringe Benefit Tax
CHARACTERISTICS:
1. Final Tax
2. Tax upon fringe benefits of managerial or
supervisory employees
3. Paid by the employer
4. Grossed-up tax
5. Due quarterly
 SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION

RULES ON VALUATION OF
FRINGE BENEFITS
1. Benefits paid in cash
2. Benefits paid in kind
3. Benefits that are furnished
SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION
SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION
SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION
  Grossed-up monetary value

FRINGE BENEFIT TAX RATES

THANK YOU!