Chapter 10

Chapter 10 - Compensation Income
chapter 10 - Compensation Income

CHAPTER 10 t:fe111ents of employer and employee relationship under case law:
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COMPENSATION INCOME
\
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
Chapter Overview and Objectives ·------------------------------------
····-················ ------ wages.
~~;;~~;~;~;-~~;~:;~;;~he employee benefits considered as compensation-i~::;·· 3. Power of dismissal .. Employer has power to retrench or terminate employees
. tlle types of employees, and exempt and taxable benefits. It e. when incurring heavy losses or other reasonable basis.
It d1scusses . . b' t aIs0
delineates the gap between the compensation income su Jee to regular incorne 4. Power of control - The employer has power to control the employee on the
tax and the fringe benefits subject to fringe benefit tax. means and methods by which the work is accomplished.
After this chapter, readers are expected to demonstrate: An arrangement which do not manifest all the elements is not an employer-
1. Understanding of the concept of an employer-employee relationship employee relationship but an independent contract for the provision of services.
2. Knowledge of the classifications of employees and the tax treatment of their
compensation income and fringe benefits The following are not considered employees:
3. Mastery of the list of employee benefits exempted under the NIRC and special 1. Consultants
laws and the de minimis list 2. Directors without management function
4. Knowledge of the condition for exemption of employee benefits under treaty 3. Talents and artists on TV shows or radio broadcasts (Sonza vs. ABS-CBN
or international agreements Broadcasting Corporation, G.R. No. 138051)
S. Understanding of the concept of "employer convenience" rule and the The income or fees of these individuals are not compensation income but are
"necessity of the employer" rule business or professional income.
6. Understanding of the conditions of exemption of a minimum wage earner
7. Knowledge of the classification rules for items of gross taxable compensation TYPES OF EMPLOYEES AS TO FUNCTION
income
1. Managerial employees - Those who are given powers or prerogatives to lay
8. Mastery of the composition of" 13th month pay and other benefits" for rank and
down and execute managerial policies and/or to hire, transfer, suspend, lay-
file employees and managerial or supervisory employees
off, recall, discharge, assign or discipline employees.
9. Comprehension of the fringe benefits subject to regular tax and fringe benefits
subject to fringe benefits tax 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.
EMPLOYER-EMPLOYEE RELATIONSHIP
3. Rank and file employees - Those who hold neither managerial nor supervisory
Employer - refers to any person for whom an individual performs any service of functions.
whatever nature as employee of such person.
TYPES OF EMPLOYEES AS TO TAXABILITY
An employ_er is the person who has control over the payment of the employee
~e~unerat!on. However, if such person is a non-resident not engaged in trade or 1. Minimum wage earners - Employees who are recipients of minimum wage.
They are exem pt from income tax on their compensation.
USliless 1.n ~he Philippines, the employer is deemed the person paying
remuneration m their behalf. 2. Regular employees - Employees who are subject to the regular progressive
income tax.
Employee - refers to an · ct·1 1•d • }ude5
ff Y m v ual who is a recipient of wages and inc
o ICer, employee or elected ffi . f . or anY It must be noted that the "special alien" classification was removed into law by virtue
political subdivi~ions . o •c~a o the Government of the Philippine~ l des I
an officer of ' ~gency or 10st rumentality thereof. The term also inc u of a preside · eto to the TRAIN law. The special alien under the old law must be
a corporation. treated a1 regular employees.
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Chapter 10 - Compensation Income chapter 10 - Compensation Income
Minimum Wage Earner . . . b. Actual Hazard Duty Pay
A minimum wage earner refers to a worker I~ the priva~e sector who _1s P_aid the c. Compensation paid to private and public health workers who have
• · um wage or to an employee in the pubhc sector with compensation inco"" contracted COVID-19 in the line of duty
mimm (' h 'th 1 d ·••e
of no t more than the statutory minimum wage . I.e., t• osed WI sa ary gra e 1 ~o 3) z~ De minimis benefits
in the non-agricultural sector where he or she IS assigne •
3. 13th month pay and other benefits not exceeding P90,000
The statutory minimum wage refers to rate fixed by the Regional Tripartite Wage
and Productivity Board of the Department of Labor and . Employment or 4. certain benefits of minimum wage .e arners
PS,000/month or P60,000/year, whichever is higher. De minimis benefits
De minimis benefits are facilities or privileges such as. entertainment, medical
THE TAX MODEL ON COMPENSATION INCOME 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,
Gross compensation income p xxx,xxx goodwill, contentment, or efficiency of his employees. De minimis benefits are
Less: Non-taxable compensation xxx.xxx petty fringe benefits exempt from income tax.
Taxable compensation income p xxx.xxx
As originally conceived, other petty fringe benefits which fall within the purview
GROSS COMPENSATION INCOME of de minimis even if not part of the de minimis list are normally treated as de
Gr<?ss compensation income generally includes all remunerations received under minimis and are also exempt from income tax.
an employer-employee relationship. However, the BIR and the Department of Finance changed the rule under RRS-
NON-TAXABLE COMPENSATION 2011, as last amended by RR 11-2018 wherein the term "de minimis benefits" was
A. Mandatory deductions restricted to mean only the following:
These includes employees' mandatory contribution to GSIS, SSS, PhilHealth, 1. Monetized unused vacation leave credits of private employees not
HDMF, and union dues exceeding 10 days during the year
2. Monetized unused vacation and sick leave credits paid to government
B. Exempt benefits officials and employees
1. Benefits excluded and/or exempted under the NIRC and special laws 3. Medical cash allowance to dependents of employees not exceeding Pt.500
2. Benefits exempt under treaty or international agreements per employee per semester, or P250 per month
3. Benefits necessary to the trade, business, or conduct of profession of the
employer 4. Rice subsidy not exceeding P2,000 or 1 sack of SO-kg rice per month
amounting to not more than P2,000
4. Benefits for the convenience or advantage of the employer
5. Uniform and clothing allowance not exceeding P6.000 per annum (RRll-
EXEMPT BENEFITS UNDER THE NIRC, AS AMENDED, AND SPECIAL LAWS 2018)
1. Remunerations received as incidents of employment 6· Actual Medical Assistance, e.g., medical allowance to cover medical and
a. Exem?~ retirement benefits under RA 7641 including exempt retirement healthcare needs, annual medical/executive check-up, maternity assistance,
gratu1t1es to government officials and employees and routine consultations not exceeding Pl0,000 per annum
b. Exempt termination enefits 7
· Laundry allowance not exceeding P300 per month
c. Benefits from the United States Veterans Administration 8
· Employee achievement award, e.g. for length of service or safety
d. Soci~l security, retirement gratuities, pensions, and similar benefits froITl
achievement, which must be in the form of tangible property other than cash
foreign government agencies and other institutions, private or public
or gift certificates, with an annual monetary value not exceeding Pl0,000
e. Benefits from SSS, under the SSS Act of 1954, as amended
r:ceived by the employee under an established written plan which does not
f. Benefits from GSIS under the GSIS Act of 1937, as amended
discriminate in favor of highly paid employees.
g. COVID-19 benefits to health workers under RA 11494 (BAYANIHAN 2)
a. Special Risk Allowance
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Chapter 10 _ compensation Income Chapter 10 - Compensation Income
_9 Gifts given during Christmas and major anniversary celebration
. · exceeding P~,000 per employee per annum (i.e., Christmas gifts
anniversary gifts) , d
:1 · Solution:
Monetized unused VL P
Actual
5,400 p
Limit Excess
6,000 p . 0
1 o. Daily meal allowance for o_vert~m_e work and night or grav~yard shift n Monetized unused SL 5,400 0 5,400
exceeding 25% of the basic m1n1mum wage on a per region basis (' 0t Medical assistance 7,000 10,000 0
overtime meal) · I.e., Rice subsidy 30,000 24,000 6,000
Clothing allowance 9,000 6,000 3,000
11. Benefits received by an employee by virtue of a collective bargain•
Laundry allowance 6,000 3,600 2.~QQ
agreement (CBA) and productivi~ incentive schemes provided that~~!
Taxable de minimis as "other benefits" p 16.BQQ
total annual monetary value received from both CBA and productiVi
incentive schemes combined do not exceed Pl0,000 per employee per taxab~ Note: Private employees
~ I
1. The~~~value of the monetized unused VL was computed a P600 x 9 hile the limit was
( P600 ~ - --- /
Note that only CBA benefits and productivity incentives amounting to Pl0,000 or less 2. The 10-day rule applies only to vacation leaves. Monetization of sick leaves of private
is de minimis. If the amount exceeds P10,000, the entire amount is a taxable "other employees is taxable. (BIR Ruling No. 227-2013,June 20, 2013).
benefits." 3. 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.
Taxable de minimis benefits
1. Excess de minimis over their regulatory limits Illustration 2
2. Other benefits of relatively small value that are not included in the list of de Hazelyn, a overnment rank and file employee, received the following benefits:
minimis benefits Monetized unused vacation leave credits (10 days) P· 6,000
Monetized unused sick leave credits (15 days) 9,000
Treatment of taxable de minimis benefits Uniform allowance 5,000
a. For rank and file employees - taxable de minimis is treated as other Laundry allowance 4,800
compensation income under the category" 13 th month pay and other benefits" Required: Determine the amount to be included in other benefits.
b. For managerial and supervisory employees -the taxable de minimis is
treated as fringe benefit subject to final fringe benefit tax Solution:
Actual Limit Excess
DETERMINATION OF EXCESS DE MIN/MIS BENEFITS Monetized unused VL P 6,000 exempt p 0
Illustration 1: De minimis limits Monetized unused SL 9,000 exempt 0
Alexanderia, a .erivate employee who is paid a P600 daily rate, receives the following Uniform allowance 5,000 6,000 0
Laundry allowance 4,800 3,600 1,200
benefits during the year 2021:
Taxable de minimis as "other benefits" P 1.200
Monetized unused vacation leave credits 9 days ✓
"'> Monetized unused sick leave credits 9 days / , -Ii· M-\f Note: It is clear under RRS-2011 that the vacation leave and sick leave of government employees
Medical assistance P 7,000 ✓ ' are not subject to the 10-day limit rule.
Rice subsidy (P2,500 per month) 30,000 2-00("f o
Illustration 3
Clothing allowance 9,000 \( . y Professor Estoque was one of the Hall ·of Fame awardees of You bee University. He was
Laundry allowance 6,000 ( '\ )_ J\
granted P25,000 ·cash as loyalty award for his ~ years of service. He was also given
Required: Determine the taxable amount of de-minimis benefits. Pl0,000 Christmas gift and an additional Pl0,000 gift during the institution's
,
Founding Day Anniversary. Besides, he was also given free lunch meals with a total
value of PlS,00O during the same year.
Required: Compute the total taxable de-minimis benefits as oth~r benefits.
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_ compensation Income
Solution: chapter 10 •
Limit Excess aon from withholding tax does not mean income tax exemp~1on .
Actual
Loyalty or service award P 25,000 P 0 P 25,000 Ete"!P government embassies, diplomatic missions and international
Christmas and anniversary gift 20,000 5,000 15,000 fore•~ations are immune from income tax including the obligation to withhold
Meals 15,000 0 15,000 organiz taX by virtue of international comity as embodied in several international
Total taxable de minimis as "other benefits" P 55.000 incom;ents to which the Philippines is a signatory. ·
agree
Note: · k. d ever, this exemption from the obligation to withhold tax does not mean
1. The limit on loyalty or service awards applies only if it is given in_ ~n .·
2. Only ineals for overtime or graveyard shifts are considered de mmimis. Other meal benefits ~owme tax exemption of their Filipino employees. In fact, most of the
are no longer considered de minimis. ~ntrnational agreements to which the Philippines is a signatory limit exemption
:n~to non-Filipino nationals and/or non-residents of the Philippines.
Note that ·in all three illustrations, if the employee is a managerial or supervisory
employee, the entire excess de minimis shall be considered as other fringe Filipino employees of foreign governments, international missions, and
benefits subject to fringe benefits tax. organizations are taxable as a rule except only to employees of the following
organizations:
Note to readers: 1. United Nations (UN)
Many follow the practice of treating excess de-minimis benefits as part of 13th 2. Specialized Agencies of the United Nations
month pay and other benefits regardless of whether the ·employee is a managerial, 3. Australian Agency for International Development (AUSAID)
supervisory or rank and file. This treatment is based on the erroneous use of the 4. Food and Agriculture Organization (FAO)
phrase "income tax as well as withholding tax on compensation income" in section 2 S. World Health Organization (WHO)
of RRS-2011. This inadvertence was subsequently clarified and corrected by then 6. United Nations Development Programme (UNDP)
Commissioner Henares as "fringe benefits tax" under RMC20-2011. It must be 7. International Organization for Migration (IOM)
clarified therefore that the excess de-minimis benefits of managerial or 8. International Seabed Authority (ISA)
supervisory employees is subject to final fringe benefits tax and is not part of 13th
month pay and other benefits. 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.
Commutation of accumulated leave credits
The terminal leave pay or the commutation of unused leave credits due to Confirmation of Tax Exemptions
involuntary separation from employment of the employee is now treated as de The exemption of Filipino employees is not automatic. Filipinos claiming
minimis benefits subject to the 10-day leave credit limit and is no longer exempt exemptions under the terms of international agreements or under provisions of
as part of exempt termination benefits. special laws granting privileges to international organizations shall file an
application for confirmation of tax exemption with the BIR's International Tax
13th month pay and other benefits not in excess of p 90 000 ~~airs Division (ITAD). The confirmation shall serve as proof of exemption.
The composition of the "13th month pay and other benefits"' will be discussed later ithout the confirmation certificate, the employee is taxable.
under taxable benefits.
!IDployees of Philippine embassies or consulate offices
Ph·~~o~ld be recalled that employees working in Philippine embassies or
BENEFITS EXEMPT UNDER TREATY OR INTERNATlONAL AGREEMENTS 11
th PPtne consulate offices are not considered non-resident citizens and are
Employee benefits of non-Filipino nationals and/or non.permanent re idents of the erefore subject to Philippine income tax.
Philippines from foreign governments, embassies or diplon1ati mi ion , and
international organizations in the Philippines are exen1 pt from in ome tax.
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339
Summary of rules Examples: . . .
Philippine embassy -
1. work-related mobile phone allow~nce and transportation allowance pa~1cularly
Foreign embassy,
or consulate o ce
to employees of call centers which are operated on a 24-hour basis where
missions, or or.qanization
employees are required to be available always for assignment and consultation
In the Philippines (BIR Ruling DA-233-07)
- Filipino citizens Taxable* N/A
Exempt N/A - 2. outstation allowance for employees who will be out from office site at least 8
- Aliens hours to visit lotto franchise holders for repairs and/ or inspection of equipment
Abroad leased by the employer (BIR Ruling No. 013-02)
- Filipino citizens Exempt Taxable
Exempt Exempt 3. Grant of housing privilege to employees working at distant or remote facilities
- Aliens . even if the dwelling is distanced from the facility in compliance to labor safety
* Taxpayer must prove if there is an exemption grant under contract or special law. standards (BIR Ruling No. 055-99)
4. Car incentives to employed on-call medical doctors
BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO, THE TRADE 1
BUSINESS OR CONDUCT OF PROFESSION OF THE EMPLOYER S. Scholarship grants to employees under contract to remain in service for a
specified period upon completion of the study
Benefits or allowances furnished by the employer to the employees to enable ·
6. Housing privilege of military officials of the AFP located inside or near the military
them to appropriately and effectively execute their duties as required by their camps
employment are exempt from income tax. This is referred to as "necessity of the
employer rule." These types of employer spending are regarded as business expense~ and are not
considered as employee reward because they are not intended for the free
Examples:
personal consumption or disposal of the employees but as implements of the
1. Necessary traveling, transportation, representation, or entertainment expenses
employer's business to ensure the employer's convenience.
that are subject to an accounting or liquidation in accordance with specific
requirements of substantiation of expense. However, if the expense is unreasonably excessive making it depart from the
2. Allowances which essentially constitute reimbursement to government personnel nature of a reasonable business expense such as when it is delibe rately granted to
for expenses they incurred in the performance of their official duties, such as: include a benefit for the employee, the portion of the expense representing
a. Representation and Transportation Allowance (RATA) of public officers and provision or privilege to the employee is consi dered a taxable fringe b ene t. These
employees under the General Appropriation Act types of expense are regarded as "hybrid expenses" because t ey are partially
business expense and partially employee benefits.
b. Personnel Economic Relief Allowance (PERA) (RRl0-2008)
3. Reasonable amounts of reimbursements or advances to employees for travelling COMPOSITION OF TAXABLE COMPENSATION INCOME
and representation which are pre-computed on a daily basis and which are paid to 1. -Regular compensation - This pertains to the f,xed remuneration recei e
any employee while on assignment or duty. by the em ployee every payroll period.
These amounts given to the employee are not income but are expenses of the 2. Supplemental compensation - Thi pertain to other performanc . e
th
trade, business or profession of the employer that are incurred or paia through ~ pays to em ployees with or without regard to the payroll period.
employee. These are not employee benefits since they are mere advances ;
An adjunct cat gory to the upplemental c mp n tion, 1 th mon
replenishments of what are supposed to be direct cash outflows frorn t e
other benefit is nece ary to contain incentive pay an 11 oth r t
employer; hence, these are not considered as compensation income.
mploy e enefi not classifiable a regular or uppl m n l omp n ion. 1 th
~onth pay and other hen fit not x ding P90,000 i n ~1u i n from gross
BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER t of income. The excess above 9 ,0 00 is ad e( to s uppl 'ment~ll comp us .. tion.
Benefits or allowances which are intended for the furtheran ce of the interesrnpt
, b usmess
th e emp layers . . smooth operations are h'kew1·se exe,,
or to ensure its Illustration
from income tax. This is referred to as the "convenience of the employer ,-u/e, . An employee received P400,000 r gula omp . n tion, Pl 20,000 supplemental
compensation, and Pl00,000 13th month pay and oth r b n fit .
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341
The taxable compensation income shall be computed as follows: Chapter 10 - Compensation Income
p
Regular compensation 400,0 00 3. Tips and gratuities
Supplemental compensation (P120,000 + (Pl00,000 - P90,00)] 130,0Q_Q Tips and gratuities paid directly to an employee by customers of the employer
p s3o,ooo which are not accounted for by the employee to the employer are not
Taxable compensation income <
considered as compensation income, but are to be reported as "other income"
REGULAR COMPENSATION INCOME . in the income tax return of the employee.
The regular compensation includes fixed remunerations due to be received by an
1
employee every period such as: Valuation of compensation paid in kind
1. Basic salary Compensation in kind is taxable at the fair value of the consideration received. If
2. Fixed allowances such as cost-of-living allowance, fixed ?ousing allowance received in shares, the fair value of the shares at the date services were provided
representation, transportation, and other allowances paid to an employe~ is used.
every payroll period
Illustration 1
ixed allowances,
The following pertains to an employee in 2021:
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 Gross salaries P 400,000
compensation. This applies even if a portion of the allowances are actually used in Cost-of-living allowance 36,000
the employer's business. Fixed monthly transportation allowance (P2Kx 12) 24,000
edu-ctio~ -for w ithholding tax on compensation 10,000'
Exception rule on the taxability of allowances: Deduction for employeeshare in SSS, PHIC, and HD MF 32,000
a. Ordinary and necessary allowances for travelling, representation or
entertainment expense of employees incurred in the pursuit of the employer' The taxable compensation income shall be computed as follows:
trade, business or profession. Gross salaries P 400,000
b. The expense is subject to accounting or liquidation. Cost-of-living allowance 36,000
c. Any excess advances are returned to the employer. Fixed monthly transportation allowance 24,000
Regular compensation income P 460,000
Hence, variable and liquidated allowances are not subject to tax. However,
Less: ~on-taxable compensation
amounts of allowances that are retained by the employee for himself shall be 32,000
Mandatory deduction
considered compensation. Taxable compensation income P 428,000
Paid vacation and sick leave allowances Illustration 2
The paid absences of an employee applied against his vacation or sick leave An employee who was terminated in 2021 due to business closure of the employer
credits which are normally received as part of the regular salary is part of the received the following:
i:.egular compensation.
Unpaid 2021 salaries P 200,000
Non-compensation items Unpaid 2020 salaries 20,00-0
Reimbursement for transportation expenses ---~.:;..--~1......0__
,0:'"0'.':-:0
1. Fees Termination pay 100,000
Retai~er .fees of co~sultants, talents, and directors who have no ma~age!ll:::
function in the busmess are professional incom , not compensation mcorn The taxable compensation income shall be computed as follows:
the recipient.
Gross compensation income (P200K + P20K + PlOOK) P 320,000
2. Comm1ss10ns
· · to non-employees such as independent sales agents are business Less: Non-taxable compensation
income to the sales agent. Non-taxable benefits
Taxable compensation income
Note:
l. Reimbursement for transportation expense is not an income to the employee.
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Chapter 10 _ Compe.nsation Income . Chapter 10 - Compensation Income
. . . • l ded 1·n gross compensation income, but 1s also deducted as n 2. Cash-settled options - entitles the employee to receive in cash the excess of the fair
2 The termmation pay is me u . . . d h l , on.
. taxable compensation because the reason of te~mmatio? is b~yon ~ e emp oyee s control, value of stocks over the exercise price without actually delivering s~ocks
SUPPLEMENTARY COMP'ENSATION Upon the exercise of the option, the excess of the book value or fair value of the stocks,
Supplementary or . additional com~~nsation , includes perform~nce-~ased whichever is higher, less the exercise price set at grant date is treated as follows:
remunerations to an employee in add1t1on to the regular compensation with or a. Additional compensation income - if the employee is a rank and file
b. Fringe benefits - if the employee is a managerial or a supervisory employee
without regard to the payroll period.
The following are the additional compensation ~nder current tax rules: This rule is aQ lied regardless of the type of the option. (RMC 79-2014)
1. Overtime pay
Illustration - equity-settled option
2. Hazard pay Mr. Anthony, a rank and file employee, received a stock option from his employer,
3. Night shift differential pay
ABC, Inc., entitling him to buy 10,000 of ABC's share at a strike price of PlOO. In April
4. Holiday pay 2021, Mr. Anthony exercised the option when ABC shares was selling Pl SO/share. The
5. Commissions shares had a book value of P145/share in the latest published financial statements of
6. Fees, including director's fees (if director is an employee) ABC, Inc. After two years, he sold the shares for P180/share.
7. Emoluments and honoraria
8. Taxable retirement and separation pay Fair value of stocks (PlSO x 10,000 shares) P 1,500,000
9. Value of living quarters or meals Less: Exercise price of option (PlOO x 10,000) 1,000.000
10. Gains on exercise of stock options Compensation income ( discount) P 500.000
11. Profit sharing and taxable bonuses Note:
Overtime, holiday, hazard, and night differential pay , 1. The PlS0/share fair value is used since it is higher than the P145/share book value.
2. For listed shares, the fair value of the stock is based on the simple average of high and low
These constitute additional compensation, except when derived by a minimum wage (
on the exercise date. For non-listed shares, the book value per share is simply used in the
earner. absence of an over-the-counter (OTC) market price available.
Commissions, emoluments and honoraria 3. The compensation income shall be reported by Anthony in his 2021 income tax return.
Comm issions are incentives intended to stimulate sales. These may be given as a profit 1
4. If Mr. Anthony is a supervisory or managerial employee, the PS00,000 shall not be treated as
a co.mpensation but as a fringe benefit subject to a gross-up fringe benefits tax.
sharing or performance bonus. Emoluments pertain to any pay in general while
honoraria are additional payments for attending to special tasks or assignments. Treatment of the subsequent sale of the shares
Living quarters or meals . I If the employer corporation is a:
If an employee receives free living quarters or meals in addition to salary for services , 1. Domestic corporation, and the sale of the stocks is made:
rendered, the value to the employee of such living quarters or meals is included in a. through the PSE the sale is subject to the stock transaction tax of 60% of 1 %
compensation income. However, when the same was furnished to an employee for the of the gross selling price. The tax would be computed as:
convenience of the employer or out of necessity of the employer' s business, the value
thereof is not compensation income, but a business expense. Selling price (P180 x 10,000) P 1,800,000
Multiply by: stock transaction tax rate 60% x 1% . DOC!>
Stock option plans
To motiv~~e employees, employers give stock options to employees allowing them t: Stock transaction tax P 10,800
The tax will be withheld by the broker who effected th e sale. The gain from
ear? add1~1onal 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 th the sale of the stocks would not be subj ect to income tax.
exercise price fixed at the grant date.
b. directly to buyer, the net gain on th e sale is subj ect to the 15% capital gains
Types of options tax. The tax shall be computed as follows:
1. Equity-settled options - entitles employees to purchase shares of stocks of th e Selling price (P180 x 10,000) P 1,800,000
employer at a pre-determined exercise price fixed on the gr~nt date Less: Tax basis of shares sold 1.500,000
Capital gains P 300,000
344 345
Chapter 10 - Compensation Income r 10 - Compensation Income
P 300,000 chaPte
Capital gains
Multiply by: CGT tax rate 15°/o
P 45.000 Number of shares 3,333.33
Capital gains tax
Multiply by: 153
Stocks (Fringe benefit subject to final tax) P 510,000
2. Foreign corporation, the net gain on the salel is:...caphit~: ;ain subj:ctdto t~e rules of
regular income tax. The gain subject to regu ar LaX s a e compu e as 1ollows:
The subsequent sa~e of the stocks would be subject to the stock transaction tax.
p 1,800,000 There would be no income tax on the realized gain.
Selling price (P180 x 10,000)
Less: Tax basis of shares sold l.SQO.QOQ
p 300,000 profit sharing or taxable bonus
Capital gains
Multiply by: Holding period rate (>1 year) 50% Profit sharing is a reward for churning the business to post a profit. It is a
.
Capital gain subject to regular tax p 150,000 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
The rules on dealings in other capital assets will be discussed in Chapter 12. enjoyed by individual employees such as salesmen, division heaas, key officers, or
by all employees collectively.
Illustration - cash-settled option
Mr. Anthony, a uperviso9 received a cash-settled stock option from his employer, Bonuses are supplemental or additional compensation. However, if they are linked
ABC, Inc., entitling 1m roreceive the increase in the company's closing share price on solely to productivity under the productivity incentive plan of the employer
exercise date over the strike price of PlOO/share covering 10,000 ABC shares. On pursuant to RA 6971, they should be considered as de minimis benefits.
March 23, 2021, Mr. Anthony exercised the option. ABC shares traded P156/share Productivity incentive bonus
high, P146/share low and closed PlSO/share at the Philippine Stock Exchange. The
The Productivity Incentive Act of 1990 (RA 6971) encourages private employers
volume weighted average traded price was P148/share. ABC shares had a book value
to set-up productivity incentive programs.
of P153/share in the latest published financial statements.
A productivity incentive is linked to improvements in productivity usually in
Based on the ABC, Inc.'s option plan, Mr. Anthony shall receive cash instead of stocks terms of cost savings through waste reduction, efficient labor utilization, or
amounting to: increase in volume of production. Under the NIRC, productivity incentive bonus is
considered as part of "other benefits" under "13 th month pay and other benefi ts".
Fair value of stocks (Pl SO x 10,000 shares) P 1,500,000 Under the revision of RA 10653, productivity incentive is now a de minim is
Less: Exercise price of option (P100 x 10,000) 1,000,000
Cash (Fringe benefit subject to final tax] benefit
P 500,000
Productivity incentive distinguished from profit sharing bonus
What if the option is an equity-settled option?
Productivity incentive is anchored on improvements in the factors of production
If the option would have been an equity-settled option, Mr. Anthony shall receive the
and is usually enjoyed collectively by employees due to the inherent difficulty of
following number of ABC shares pursuant to the terms option plan:
tracing productivity to individual performance. It is based upon cost savings;
Fair value of stocks (P150 x 10,000 shares) hence, it is payable even if the business poses a loss. Profit sharing is payable on y
P 1,500,000
Less: Exercise price of option (PlOO x 10,000) When the business post a profit.
1,000,000
l~c~ease in value of stocks covered by the option p 500,000
Divide by: Exercise day closing price · 13TH MONTH PAY AND OTHER BENEFITS
150
Number of shares "13th Month Pay and Other Benefits" includes:
3333,33
1. 13th month pay
Under the regulations, the fair value of listed stocks is the simple average of high and 2· Other benefits
lo_w, comput~d as (Pl5 6 + P146)/2 = PlSl/share. Pursuant to RMC 79 -20 141 ~:
frmge benefits would be valued based on the PlS 3 / h h " h book value a. Christmas bonus of private employees
follows: s are 1g er
b. Cash gifts other than Christmas or anniversary gifts of private employees
346 (RR2-98, as amended by RRS-2011)
347
C Additional compensation allowance (ACA) of government pers ~ Employee personal expenses shouldered by the employer
1· Taxable de minimis benefits such as:
(RRB-2000) 2
· a. Excess de minimis ,
d. 14th month pay, 15th month pay, etc.
b. Benefits not included in the de minimis list
e. Other fringe benefits of rank and file employees
• 13th month pay Employee personal expenses

a. The 13th month pay of governmeht employees consists of a Christmas hon Employee personal expenses such as, but not limited to, rental of residence,
equivalent to one-month salary plus a PS,000 cash gift. (RA6686 as amend~; grocery, association or club membership dues, travel or vacation expense or
by RA 8441) tuition fees, when assumed or paid by the employer, constitute fringe benefits to
b. The 13th month pay of private employees is equivalent to one-month safary. the employee. This fact holds true even if the expense is receipted in the name of
the employer.
(PD851)
Taxable de minim is benefits
Christmas bonus and Christmas gift
All other benefits of relatively small value which are not included in the list of de
The Christmas bonus of government employees is their 13th month pay. In private
minimis benefits shall not be considered as de minimis but as ordinary fringe
companies, the term "Christmas bonus" may pertain to the 13th month pay, a
benefits. Corollary to this rule, excess de minimis benefits should be considered as
separate incentive pay, or to a profit sharing. taxable ordinary fringe benefits.
Christmas bonus of private employees which is a non -performance-based
Tax Treatment of Other Fringe Benefits
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 a. For rank and · file employees - treated as compensation income as part of
benefits." The nature of the Christmas bonus of private employees shall determine "other benefits" under "13 th month pay and other benefits"
its tax classification. b. For managerial or supervisory employee - treated as fringe benefit subject to
fringe benefit tax
The Christmas gift of government employees is specifically designated as part of
"13th month pay and other benefit" under Sec. 32(B)(7)(e)(i) of the NIRC. RRS- It must be emphasized that the "oth er fringe benefits" of managerial or supervisory
2011 includes Christmas gift in the list of de minimis benefits. But since revenue employees are excluded from their "13th month pay and other benefits."
regulations cannot amend the law they implement, RRS-2011 should be
Illustration 1
interpreted to apply only to Christmas gifts of private employees.
The employer pays for the tuition fee of the employee in addition to his regular
Hence, compensation.
Government Private The tuition fee paid is a fringe benefit which will be treated as follows:
employees employees 1. As a compensation income as part of "other benefits" under "13 th month pay and
Christmas bonus 13th month pay 13th month pay other benefits" if the employee is a rank and file employee
and other benefits and other benefits 2· As a ff inge benefit subject to fringe benefit tax if the employee is a managerial or
Christmas gift 13th month pay De minimis supervisory employee _
and other benefits 3· As an exempt fringe benefit, regardless of the type of employee, if the same was
Bonus vs. Gift given by the employer for his convenience OT business necessity such as when the
Bon~s i~ perf?rmance-based and is no n-o iscretionary t o the employer while a gift is a gratuitY employee is required to study to acquire expertise for the future use of the
and 1s d1scret1onary upon the employer. employer's business
Other fringe benefits Illustration 2

~ther fri~ge benefits include all other taxable fringe benefits not specificallY ~n employee receives a monthly rice allowance of P3,000 a month which is Pl,000 in
mcluded m cor~pensation income as regular, supplementary or 13th month paY, Xcess of the P2,000 a month de minim is limit for rice allowance.
and other benefits under current tax rules such as:
348 349
l
J
Chapter 10 - Compensation Income j

The Pl,000 month ly excess constitutes a taxable de minimis benefit ta 1
compensation as part of "other benefits" for a rank an fil e employee. It . }(able a l I 1Uu•stration 2 . . . . ., . , ..
, . 1 Is a f s A private ran~ and file employee Working in a remote tower statfen of Snail Internet
benefit subject to final fringe bene fl t tax ,or a managena or supervi sory em
1
tin0 '
PI0 Yee. Cl~ company received the following benefit during 2021:
TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS 13th month pay p 72,000 /
RR2-98 provides that 13th month pay and other benefits are exem performance bonus 15 000
width lding on compensation provided they do not exceed P9o,ooo. It ~t ft% Christmas gift 30:000 / · ,
therefo.r e, that the excess above P90,000 Is subject to the withholding
0
!oits, Danger exp~~ure allowance (hazard pay)
Housing privilege
6,000 ~ -co~"~"~
38 000
compensation. ~ °"
Uniform and clothing allowance s:ooo ~K
RR3-98, the revenue regulation implementing the fringe benefit tax, also pr . Laundry allowance 6,000 tt.>41)()
' . part o f compensation
that it does not cover benefits 1ormmg . .ncome subjectoVides
t
withholding tax on compensation.
0
the The housing privilege pertains to the annual value of the employees' living quarters
furnished by the employer to employees for staying on-site. ·
Hence, the excess of "13th month pay and other benefits" over P90,000 should b
Required: Compute the excess 13th month pay and other benefits.
treated as compensation income subject to regular income tax. e
Solution:
Illustration 1 De Other
A government rank and file employee received the following benefits aside from th mini mis Limit Benefits
basicpayin2021: e Christmas gift P 30,000 P · s:ooo P 25,000
Christmas bonus Uniform and clothing allowance 8,000 6,000 2,000
P 70,000
Cash gift Laundry allowance 6,000 3,600 2,400
5,000
Additional compensation allowance Excess de minimis benefits (other fringe benefits) P ?9,400
36,000 13th month pay · · 72,000
Personnel Economic Relief Allowance (P2,000/month) 24,000
Monetized value of vacation leave and sick leave (18 days) Total 13th month pay and other benefits P 101,400
9,000 Less: Exclusion threshold 90,000
Uniform and clothing allowance 7,000 Taxable 13th month pay and other benefits P 11,400
Required: Determine the taxable "13th month pay and other benefits." Note: Private employees
Solution: 1. Performance bonus is a supplemental or additional compensation.
2. The laundry allowance limit is computed as P300 x 12 = P3,600.
Christmas bonus (13th month pay of gov't employees) P 70,000 3. Christmas gift is a de minimis benefit for private employees unaer RRS-2011.
Cash gift
5,000 4. The housing privilege is exempt under the convenience of the employer rule.
Additional compensation allowance 5. The "13th month pay and other benefits" of rank and file employees includes "other fringe
36,000
Excess uniform and clothing allowance (P7,000 - P6,000) 1,000 benefits."
Total 13th month pay and other benefits
Le s: Exclusion Threshold P 112,000 Illustration 3
90,000 A managerial employee received the following benefits in 2021:
Taxabl 13th month pay and other benefits
P 22,000
o -0 government employees: 13th month pay P 95,000
1. Pen,onnel Economic Relief All . hi' ng tJ.' Rental expense on condominium unit 18,000
(Under RR8 -2000 . . f owance 15 not sub1 t to income tax and withho 1
. . , as a 1rmed by RR 0-2008). . . Salary of personal body guard 12,000
2· The PS,000 Chnstrnas gif 0 f artot
''13th } governm nt employ e is d si n t d by the NIR to b P
Profit sharing 12,000
mon , pay and oth r benefit ". h . . Rice allowance 32,400
3. Under RR ~201! h . . s ' enc , tis not ad minimis benefit. ment
offic1·a1 i ' m n tization f va ion l v and ick l v r dits of govern Clothing allowance 7,000
· • an ex mpt de · · · b Night shift differential pay 11,000
mmimi n fi withou r gard to th numb r of day ·
350 351
De Non- Other Taxable
Required: Determine the taxable "13t~ month. pay and other benefits," addition
compensation, and the fringe benefit subJect to frmge benefit tax. al mtnimi~ Taxable Benefits Benefits
~,. qnd suppl~mentazy compensation:
Solution: a.,t<.x \1. Mandatory deduct1~ns p 80,000
I
De Other Regular compensation (Pl,044,000 _ PB0,000) p 964,000
minimis Limit ~- Benefits supplerne~tal compensation
Rice allowance p 32,400 P 24,000 P 8,400 ttonorana 15,000
Clothing allowance 7,000 6,000 1,000 RATA 18,000
Excess de minimis P 9,400 PERA 24,000 ------- - - - - -
Other fringe benefits: Total p 0 p 979,000
Rent of residence paid by employer 18,000 llth month pqy and other benefits:
Salary of personal body guard 12,000 Christmas bonus
p 39,400 P 87,000
Total fringe benefit subject to fringe benefit tax Christmas gift 5,000
Excess De minimis:
Profit sharing p 12,000
Uniform allowance P 12,000 P 6,000 6,000
Night shift differential pay 11,000
p 23,000
Total P 12,000 P 48,000 P 98,000
Total supplemental compensation Exclusion threshold (up to P90,000J 90,000 + - 90,000
p 95,000 Total P 138,000 P 8,000
Total 13 th month pay and other benefits
90,000 Total non-taxable compensation P 218,000 (SG r+ 1is1t)
Less: Exclusion threshold
p Taxable excess 13th month pay and other benefits - 8.000-+ 8,000
Taxable 13th month pay and other benefits 5,000
Taxable compensation income P 987,000
INTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME Note:
1. The taxable regular compensation income is computed as (Pl,044,000 - P80,000).
2. The excess of the P90,000 threshold over the actual 13 th month pay and other benefits is
Integrative Illustration 1
non-deductible to other items of compensation income. [RR3-2015)
A government rank and file employee had the following summary of his compensation
and benefits in 2021: Presentation in the Income Tax Return of the employee:
Gross compensation income (i.e., Pl,061,000 + P144,000) P 1,205,000
Gross compensation income P 1,044,000 Less: Non-taxable compensation income
Less: Employee payroll deductions Mandatory deductions p 80,000
Employee contribution to GSIS, PHIC; HDMF Exempt benefits 138,000 218,000
P 80,000
Taxable compensation income P 987,000
Employee deduction for withholding tax 64,000 144,000
Net regu]ar payroll P 900,000 Integrative Illustration 2
Representation and Transportation Allowance 18,000 Aprivate employee derived the following remunerations and benefits in 2021:
Personnel Economic Re1ief Allowance 24,000 Basic compensation, net of P32,OOO SSS, PHIC, Phil Health,
Christmas bonus HDMF, union dues, and P35,OOO withholding tax p 533,000
87,000
Uniform allowance Overtime pay 21,000
12,000
Christmas gift Vacation expenses of the employee paid by employer 24,000
5,000
Honoraria ~0st·of-living allowance (COLA) 12,000
15,00Q R~e-computed daily transportation allowance 16,000
Total compensation
p 1.061.000 31,200
1~ce subsidy (12 cavans worth P2,6OO each)
l• th rnonth pay 50,000
The taxable compensation income shall be computed as follows: 1,10n t' ) 18,000
lJ . e •zed unused leave credit (10 VL and 8 SL
1'niforrn allowance 9,000
Ota] compensation income
p 714,200
352 353
...
Chapter 10 - Compensation Income Chapter 10 - Compensation Income

The non-taxable compensation income and the gross taxable compensation incollle income Tax Due
shall be co·m puted as follows: rhe income tax due of the employee would be computed as follows:
For a rank and file employee: Taxable income Tax

' P 603,200
De Non- Other Taxable ~ ♦ Les: Lower limit of applicable bracket
400,000 P 30,000
minimis Taxable Benefits . Benefits_ Excess
P 203,200
Re.gular and sup,p,lementary comp,ensation: Multiply by: incremental tax rate
Income tax due 25%1 50,800
Mandatory deductions P 32,000 p p 80,800
Regular compensation (P600,000 - P32,000) 568,000
'
Over But Not Over
Supplementary compensation ' Basic Tax Plus% Of excess over
21,000 250,000.00 400,000.00
Overtime pay I '
' 8-00,600,00____
0 20% 250,000.00
COLA
12,000 •-- 400,000.00
30,000 25% 400,000.00
P 16,000 - - - - - - - - - 800,000.00 2,000,000.00
Daily transportation allowance 130,000 30% 800,000.00
p Op 601,000
Total Note: Check the complete Individual Income Tax Table in Chapter 7 or in the Appendix.
13th month pay and other benefits:
13th month pay P 50,000
For a mana&erial or supervisory employee:
Other benefits:
Vacation expense paid by employer 24,000 De Non- Other Taxable
Excess de minimis benefits: Minimis Taxable Benefits Benefits
Rice subsidy P 31,200 24,000 7,200
Regular and supplementary compensation:
Monetized VL 10,000 10,000 Mandatory deductions P 32,000
Monetized SL 8,000 8,000 Regular compensation P 568,000
Uniform allowance 9,000 6,000 3,000 _ _ _ __ Supplemental compensation
Total P 58,200 P 56,000 P 92,200 P 601,000
Overtime pay 21,000
Exclusion threshold 90,000 +- 90,000 COLA 12,000
Total P 146,000 P 2,200
Daily transportation allowance 16,000
Total non-taxable comp~nsation P 178,000 '·:~' r : '· ·." -)
Total
Taxable 13th month pay and other benefits - 2,200 .: ► __
. ., 2=.2: . . : :0c.><.0 P 601,000
Taxable compensation income ~P==6~0~3~,!:!'!2::!:0=0 13th month pay and other benefits:
Note: Exclusion threshold (up to P90,000) 50,000 + - 50,000
1. The P568,000 basic compensation may also be computed as PS33,000+P35,000. Note that Total P 66,000 P 0
the withholding tax is not an exclusion from gross income.
Excess 13th month pay & other benefit _ __......0-+ 0
2. The limit of the monetized unused VL is computed as PlB,000 x 10 /18 = Pl0,000. The SL
pay is computed as P18,000 x 8/18 = P8,000. Taxable compensation income P 601.000
3. The vacation expense shouldered by the employer is a fringe benefit forming part of Qther fringe benefits:
compensation income of a rank and file employee under "other benefits."
Vacation expens; paid by employer P 24,000
Presentation in the Income Tax Return of the employee: Excess de minimis benefits
Rice subsidy P 31,200 24,000 P 7,200
Gross compensation income* p 781,200
Monetized unused VL 10,000 10,000
Less: Non-taxable compensation income
Monetized SL 8,000 0 8,000
Mandatory deductions P 32,000 Uniform allowance 9,000 6,000 3,000
Exempt benefits 146,000 178,000 Total p 58,200 P 1Q6,000 P 18,200
Taxable compensation income P 603,200 Tota} non-taxable compensation P 138,000
*P714,200 net pay+ {P32,000 + P35,000) payroll deductions
Excess de minimis benefits . - ,18,200-+ 18,200
Tota} fringe benefits subject to final tax P 42,20Q
354 355
The gross compensation income is computed as follows: b. Hazard pay
Total remunerations and benefits P 781,200 c. Overtime pay
Less: Fringe benefit subject to final tax 42,200 d. Night shift differential pay
Gross compensation income P 739.000
Presentation in the Income Tax Return of the employee: These shall be p rese nted as exempt ben efits under non-taxable compensation
Gross compensation income P 739,000 income. Since exempt from income tax, the exempt benefits of MWEs shall not be
Less: Non-taxable compensation income subject to withholding tax.
Mandatory deductions P 32,000
Exempt benefits 106.000 138.000 Illustration
Taxable compensation income P 601,000 Ms. Guevarra, a minimum wage earner employed by CSO Company, derived the
following benefits during the year:
Income Tax Due
The income tax due of the employee would be computed as follows: Basic minimum wage P 124,000
· Tax 13th month pay 11,000
Taxable income P 601,000 Overtime pay 80,000
r- ♦ Les: Lower limit of applicable bracket 400,000 P 30,000 Night shift differential pay 30,000
Excess P 201,000 Hazard pay 15,000
Multiply by: incremental tax rate _ _2~5~0fc-o 50,250 Holiday pay 15,000
Income tax due P 80.250
Total P 275,000
Less: SSS, PhilHealth, HDMF contributions 5,000
Over But Not Over Plus%---
Basic Tax --------------------· Of excess over
Net total P 270.000
250,000.00 400,000.00 ------------- 0 20%------
250,000.00
•-- - 400,000.00 800,000.00 30,000 25% 400,000.00
800,000.00 2,000,000.00 130,000 30% 800,000.00 The taxable compensation income should be computed as follows:
The fringe benefits tax on managerial or supervisory employees Gross compensation income P 275,000
The fringe benefits of managerial or supervisory employees is subject to a grossed-up Less: Non-taxable compensation income
final tax at the rate of 35%, computed as follows: Mandatory deductions P 5,000
Taxable fringe benefits p 42,200 Exempt benefits 270,000 275,000
Divide by: Gross-up by rate 65°{0 Taxable compensation income p 0
Grossed-up monetary value p 64,923
Multiply by: Tax rate 35Cz:'o Receipt of other taxable income by MWEs
Fringe benefits tax p 22.Z23 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
The fringe benefits tax is a final tax which be paid y the employer to the government. concurrent em loyers, traae, business or practice of a profession.
It is presumed withheld out of the fringe benefits of the managerial or supervisory
employee. The detailed rules on fringe benefit taxation will be discussed in the MWEs are subject to tax only to the extent of income other than the
following chapter. It is merely shown here for you to obtain preliminary
aforementioned exempt benefits. (RRll-2018) Hence, additional compensation
understanding.
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable
TAXABILITY OF MINIMUM WAGE EARNERS (MWE) amount of P90,000, taxable allowances and other taxable income given by the
Minimum wage earners are exempt from income tax on the following: same employers to WEs are subject to withholding tax. Despite this, it must be
1. Basic minimum wage noted that MWEs will actually pay income tax only if their total taxable income
2. Other benefits (HHON) exceeds P250,000 for the year.
a. Holiday pay
356
357
Illustration 1: With other taxable compensation income chapter 10 - Compensation Income
Mary Dela Fuente, a minimum wage employee, was able to close a sale.s deal fi Jun's taxable income shall be computed as follows:
employer during the year. She received the following compensation during the or her
.Year: Gress compensation income (i.e., P 290K + p SK+ P20K) p 315,000
Basic minimum wage, net of Less: Non-taxable compensation income
PB,000 mandatory deductions p 160,800 Mandatory deductions p 5,000
13 th month pay 14,000 Exempt benefits 290,000 295,000
Holiday pay
Overtime pay
Night shift differential pay
Hazard pay
4,000
70,000
15,000
10,000
I raxab\e compensation income
Net income from business
Taxable income
p 20,000
300,000
:!!::::p==3~2!!!:::0~.::!!:0::!!:0~0
Rules of change in status as a Minimum Wage Earner during a year

Profit sharing bonus 12,000
Commission income 370,000 1. When an employee becomes a minimum wage earner during the year, he shall
Total p 655,800 be subject to income tax only on compensation earned _before becoming a
minimum wage earner.
The taxable compensation income should be computed as follows:
Illustration 1
Gross compensation income {i.e., P 655,800 + P ~000) P
663,800 Anthony had a basic pay of P400 / day when the minimum wage was P382/ day. He
Less: Non-taxable compensation income
Mandatory deductions is also receiving overtime pay and the year-end 13th month pay. On<July 1, 2021, ·
p
I
8,000 the Regional Wages and Productivity Board increased the minimum- wage -by
Exempt benefits
273,800 281,800 P22/day to P404/day. Anthony's employer increased his salary to the minimum
Taxable compensation income
p 382,00Q P404/day.
Exempt benefits consist of the following: Anthony shall be taxed on his income from January 1 to June 30 because he is not yet
a minimum wage earner. The employer shall regularly deduct the withholding tax
Basic minimum wage on compensation from his salary but shall stop withholding by June 30. Anthony's
13 th month pay P 160,800
14,000 compensation starting July 1 including overtime pay and year-end 13th month pay
Holiday pay shall be tax exempt
Overtime pay 4,000
Night shift differential pay 70,000 If the exact amount of income taxes had been withheld by the employer for the
Hazard pay 15,000 January 1 to June 30 compensation, Anthony need not file an income tax return.
Total exempt benefits 10,000 Otherwise, Anthony shall file an adjustment return reflecting his compensation from
P 273.BOQ January 1 to June 30 and shall pay the tax still due or claim for refund in case of
Mary's tax due shall be computed as: excess withholding.
This rule may also apply in cases of:
Taxable compensation income p Tax Due a. Transfer to an employer paying salary at the minimum wage
Less: Lower limit of the income bracket 382,000 b. Transfer of employment to a region with higher minimum wage
where the taxable income qualifies I
I
Excess 250,000 p O 2. When an employee ceases to be a minimum wage earner during the year due
Multiply .by: P 132,000 1 to increase in salary, only the income for the rest of the year is taxable
Total tax due 20% 26,400 Illustration 2
P 26,400 Andrea is a minimum wage earner. She was promoted and was given a salary
Illustration 2: With busi .
Jun a m · · ness income raise above the minimum wage starting August 1, 2021.
. '. in1mum wage employee do p t . d total ' Andrea shall be exempt from income tax from January 1 to July 31 because she is a
minimum wage of P290 000 . j . ar -time business after work He receive ooO ,
mandatory deductions H I me us1_ve of Pl 1,000 13th month pay. but net of p5, d minimum wage earner. Effective August 1, 2021, Andrea shall be subject to tax. The
P300,000 from his side~lineeabso _received a performance bonus of P20 000 and earne
usmess. ,
359
358
I •~t
Chapter 10 - Compensation Income ., . ·, ,/2
employer shall start deducting the withholding t-ax on compensation frorn Andre , C Chapter 10 - Compensation Income
salaries effective the same date. Qs ~ I
If the employer properly withheld the Income tax for the Pl;riod August 1 ~ C
-
REVISED WITHHOLDING TAX TABLE
-- .
December 31, Andrea need not file an lnco~e tax return. Othe~1se, she s~all file to prescribed
Withrolding Tax [:] 0.00
+20% over
Pl0,417
P 1,250
+ 25% over P
16,667
P 5,416.67
+ 30%overP
33,333
P 20,416.67
+ 32% over P
83,333
P 100,416.67
+ 35%overP
333,333
tax still due or claim for refund m case of excess withholdmg. e ~ONTHLY .II 1
II 2
II 3
II 4
II s II 6 I
• .
compensation Range
P 20,833 and
below
I P 20,833- P P 33,333- P P 66,667 - P P 166,667- P P 666,667 and
33,332 66,666 166,666 666,666 above
This rule applies in cases of: . .
a. Transfer to an employer paying salary above the m1n1mum wage prescribed [:] o.oo P 2,500.00 P 10,833.33 P 40,833.33 P 200,833.33
+ 20%over P + 25% over P + 30% over P + 32% over P + 35%over P
b. Transfer of employment to a region with lower statutory minimum wage Withholding Tax
20,833 33,333 66,667 166,667 666,667
3. When an employee ceases to be a minimum wage earner during the year by ~ f
disqualification (i.e., earning taxable income) l, Procedural computation of the withholding tax on compensation
1. Determine the total monetary and non-monetary compensation of the
Note that if the taxable income of the employee does not exceed P250,000 for the employee for the payroll period: monthly, semi-monthly, weekly or daily.
year, there will be no income tax due for the period under the tax table. Segregate non-taxable benefits, mandatory contributions and supplemental
compensation.
Treabnent of Cost-of-living Allowance of MWEs 2. Determine the bracket that applies to the regular compensation of the
Under RMC23-2011, COLA which forms part of the new wage rates prescribed to employee for the applicable payroll period. Determine the basic tax for the
be the tatutory minimum wage should be treated as part of the minimum wage 1 bracket.
and shall not be treated as a separate or other benefit. 3. Add supplemental compensation to the excess of the regular compensation.
Subject the total to the incremental tax rate for the bracket.
THE WITHHOLDING TAX ON COMPENSATION 4. Total the basic tax and the incremental basic tax.
The withholding tax on compensation is a method of collecting the income tax at Illustration 1: Weekly payroll period
source upon receipt of the income. It applies to all employed individuals whether Olongapo Company pays Employee Marudo weekly. Marudo has a weekly salary of
citizens or aliens. The employer is constituted as the withholding agent. Pl0,000, before P500 mandatory contributions for SSS, PhilHealth, HDMF and Union
dues and Pl,000 non-taxable benefits.
Reproduced herein is the withholding tax table for semi-monthly compensation:
Marudo's taxable compensation shall be computed as:
-
I REVISED WITHHOLDING TAX TABLE J Gross compensation p 10,000

!DAILY I 1 II 2
I 3
11
4
II 5 II 6 J Less: Mandatory contributions p 500
1,000 l,500
P 685 and P 685 - P P 1,096 - P 2,192 - P P 5,479 - P p 21,918 and Non-taxable benefits
Compensation Range 11
below 1,095 P2,191 5,478 21,917 above ~ Taxable income e 8,500
Prescribed
Withhold ing Ta >< IIG I
0 .00
+ 20% over
P685
P 82.19
+ 25% ove r P
1,096
P 356.16
+ 30% ove r P
2,192
P 1,34 2. 47
+ 32% ove r P
5,479
p 6,602.74
+ 35% overP
21,918 __
Marudo's PB,500 weekly taxable income qualifies under Column 3 under the weekly
payroll period. ABC Company shall compute the withholding tax on compensation as
follows:
\WEEKLY 1 2
11 3
11 4
II 5 I~P 153,846 and Iax
Compe nsation Ra nge P 4,808 and P 4,808 - P P 7,692 - P P 15,385 - P P 38,462 - P
G be low 7,691 a boVe___...,:::: Regular compensation income p 8,500

15,384 38,461 153,845
~ p 46,346.15 Less: Base amount at Column No. 3 - weekly 7,622 p 576.92
' Prescribed P 576.92 P 2,500.0 P 9,423.08
o.oo
+ 20% over P + 25% over P
+ 35%over P Excess p 808
Withholding Ta>< + 30% over P + 32% over
~
4,808 7,692 15, 385 38,462 Multiply by: Incremental tax rate Z5°1Q 2Q2.Q0
lsEMI-MONTHLY I[ I I ] Total withholding tax on compensation e ZZ8.92
P 10,417 and
1 2
P 10,417 - P
3 -II 4 I 5
:==- 333 and
Compensation Range P 16,667 - P P 33,333 - P 383 333 - P P 333 ,
below 16,666 ' b e
33,332 P83,332 333,332 a ov
361
360
er o_Compensation Income
Chapter 10 _ compensation Income
chaPt 1
ti. . n income that will be released to Marudo shall be:
der-withholdillB shall be deducted on the final payroll of the employee. An over-
The amount of compensa o
P 10,000.00 :;thholding shall be refunded to the employee.
Gross compensation p 500
Less: Mandatory contributions_ 1,500.00 £NEFJTS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION UNDER
· Non-taxable benefits 1.000
P 8,500.00 :ai-98, AS AMENDED:
Taxable income . 778.92
Less: Withholding tax on compensation 1. Remunerations received as incidents of employment
p 7.721.08
Net payroll due to Marudo 2. Remuneration paid for agricultural labor and paid entirely in products 0'JF the
farm where the labor is performed
Illustration 2
ABC Company employs Mr. Penoy with a basic. monthly salary of P70,000 which is 3 Remuneration for domestic setvic~s
.
paid semi-monthly every 1Sth a~d 30 th day of the month. For the second_ half of the Note that the minimum wage for domestic workers or "kasambahay'' prescribed under
month, Penoy earned total overtime pay of P12,000. Total monthly contributions for Sec. 24, Art. IV of RA 10361 or the Domestic Workers Act or Batas Kasambahay of
SSS, PhilHealth, HDMF and union dues wer~ P2,400. • 2013 ranges from Pl,500 to P2,500 a month - ~oo low compared to the tax exempt
minimum wage for commercial, industrial, or agricultural workers.
Penoy's semi-monthly regular compensation is P33,800, computed as (P70,0QQ. 4. Remuneration for casual labor not in the course of an employer's trade or
P2,400)/2. This qualifies under Column 4 under ~he semi-n,ionthly payroll perioJ!. ABC business - treated as other income
Company shall compute the withholding tax on compensation as follows:
Tax S. Compensation for setvices by a citizen or resident of the Philippines for a
Regular compensation income p 33,800 foreign government or an international organization
Less: Base amount at Column No. 4 - semi-monthly 33.333 p 5,416.67 Under RMC 31-2013, this is not compensation income subject to withholding, but
Excess p 467 it is still taxable compensation income; hence, it must be repo~ed by the
Add: Supplemental compensation 12.000 employee.
Total p 12,467 6. Damages paid by the employer to employees
Multiply by: Incremental tax rate 30°/Q 3.740.10
7. Proceeds of life insurance
Total withholding tax on compensation e
9,156.77
8. Amounts received by an insured employee as a return of premium
The amount of semi-monthly pay that will be released to Penoy shall be: 9. Compensation for injuries or sickness
10. Income exempt under treaty
Regular compensation P 35,0Q0.00
11. 13th month pay and other benefits not exceeding a total of P90,000
Supplemental compensation 12,000.00
Total compensation P 47,000.00 12. GSIS, SSS, PhilHealth, and other contributions
Less: Mandatory deduction P 1,200.00 13. Compensation income including overtime pay, holiday pay, night shift
Non-taxable benefits 0.00 1.200.00 differential pay, and hazard pay of Minimum Wage Earners
Taxable income P 45,800.00 l4. Compensation income of employees in the public sector if the same does not
Less: Withholding tax on compensation 9.156.77 exceed those of minimum wage earners in the non-agricultural sector
Net payroll due to Penoy P 36.643,23 These listed benefits are not considered compensation income; hence, they are
The procedures discussed herein are also applicable for daily or monthly payroll exempt from the withholding tax on compensation.
periods but of course using their respective withholding tax table.
DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON
COMPENSATION
Year-end Tax Adjustment
illlployers shall file the BIR Form 1601-G [Monthly Remittance Return of Income
It must be noted that the total amount withheld on every payroll date maY n~: axes Withheld on Compensation) on or before the 10th day of the following month
exactly match the annual tax due. Due to this the income of the employee nee tfihe Withholding was made except for taxes withheld for December which shall be
' · AnY
to be reckoned at the end of the year and adjustment is made as necessary. ~d/. .
Paid on or before January 15 of the succeedmg year.
362 363
Employers are also required to file BIR Form..1604-~F (An~ual Information Retu CHAPTER 10: SELF-TEST EXERCISES
,r ri· es ,ATithheld on Compensation and Fmal W1thholdm9 Taxes1 "n
01 1ncome ax 1
ff • h. h h 'J on 0
before January 31 of the following calendar year In w IC t e compensati t
0n Discussion Questions.
income payments and passive income payments were ~ade. 1. Enumerate and explain the elements of an employer-employee relationship.
2. What are the types of employees as to function? Enumerate and explain.
Employers shall furnish each employee-taxpayer a cop~ of BIR Form 2316 3. What are the types of employees as to taxability? Distinguish each.
(Certificate of Compensation Payment or income Tax Withheld) on or before 4. Who are minimum wage earners? Enumerate their exempt benefits.
January 31 of the succeeding year. s. Demonstrate the tax model on compensation income.
Penalties for Non-compliance 6. What are the classifications of compensation income? Discuss each.
1
Employers are subject to the same penalties discussed in Chapter 4 for non. 7. Enumerate the general classes of non-taxable benefits.
compliance of withholding tax requirements. 8. Enumerate the list of de minimis benefits and their respective thresholds.
9. Explain the "necessity of the employer'' rule and the "convenience of the employer"
Treabnent of the Withholding Tax on Compensation rule.
If the employee has other items of income that are subject to regular income tax 10. Distinguish regular compensation from supplemental compensation. Enumerate
such as income from business or profession, income from other employment or the benefits considered as supplemental compensation.
casual income, he must file a consolidated income tax return to include such items 11. How are stock options taxed under current tax rules?
of income for the entire taxable year. The withholding tax on compensation is 12. Enumerate and explain the components of" 13 th month pay and other benefits."
credit ea against the total tax due in the consolidated income tax return. 13. Discuss the difference in tax treatment of the "other fringe benefits" of rank and
file employees and managerial or supervisory employees.
Substituted filing of tax return 14. Discuss the tax treatment of "13th month pay and other benefit."
Under the substituted filin9 system, the employer files the income tax return of the
True or False 1
employee. If the amount of tax is correctly withheld by the employer, the
1. Benefits for the advantage of the employee are exempt from income tax.
employee no longer needs to file an annual income tax return.
2. A rank and file employee recommends managerial actions.
3. A consultant is not an employee.
4. A manager has the power to lay down and executes policies.
5. A regular employee is subject to the regular income tax.
6. Filipinos employed by international missions are generally exempt.
7. Filipinos working in Philippine embassies are exempt from taxation.
8. A minimum wage earner is exempt from income tax.
9. Compensation income includes regular compensation, supplemental
compensation and 13th month pay and other benefits in excess of P90,000.
10. Compensation income includes all remunerations received under an employer-
employee relationship, including all fringe benefits of managerial or supervisory
employees.
11. Remunerations received as incidents of employment are exempt.
12. The employee's share in SSS, GSIS, PhilHealth, and HDMF are excluded from
compensation income.
13. The exempt vacation leave credit is 10 days for government employees.
l4. Tax exempt de minimis benefits include all benefits of relatively small value. ·
lS. The excess de minimis are considered "other income" for any employ~e.
16 - The sick leave credit of private employees up to 10 days is exempt de minimis.
17 - The overtime pay of minimum wage earners is exempt from tax.
365
364
◄
Exercise Drill N~- 1 . . -
In the blank provided for, indicate whether the specified benefit or remuneration is an
True or False 2 item of: ' .
1. Filipinos employed in Philippine embassies are generally exempt. _ RC - regular compensation, - FB - fringe benefits
2. Supplemental compensations are fixed amounts regularly received by the _. SC - supplemental compensation - OB - 13th month pay & other benefits
employee every payroll period. DM - de minimis benefits - EB - exempt or non-taxable benefits
3. A regular employee can be a managerial, supervisory, or rank and file employe ~
4. Regular compensation includes variable performance•based remunera~ Rank&ftle Manager or

Benefit or remuneration
received by the employee with or without regard to the payro11 period. on ~ employee Supervisor
1.. Uniform allowance
5. All directors are not considered employees.
Commissions
DM ~ -8
6. Rank and file employees do routinary or clerical jobs. 2. '--SC ;5(,
3. Rice allowance
7. A minimum
. .
wage earner with business income is considered a regular employ~ OM re,
4. Productivi_ty incentive
su bJect to mcome tax. -
5. Christmas bonus - government
PM
8. A managerial employee is least likely to be a minimum wage earner. OB uC
9. The statutory minimum wage is P60,000 annually or the amount fixed by the 6. Fixed monthly RAT A - government 0C IE B ·SG lf.:B
7. Medical benefits DM
Regional Tripartite Wage and Productivity Board whichever is lower. tB
10. The position and function test, compensation threshold test, and exclusivity test 8. Additional compensation allowance -
are required for alien employees. government
.
i ,
. •
11. A managerial employee can be a special employee. 9. 13th month pay
12. The Christmas gift of private employees forms part of "other benefits" while that 10. Christmas gift private
of government employees is considered de minimis benefit. 11. Anniversary gift
13. The fringe benefits of managerial or supervisory employees are geperally subject 12. Shuttle allowance to a distant facility 1', I '
to fri nge benefit tax. 13. Excess de minimis benefits

14. Resident Filipinos employed by foreign embassies, missions, or international
organizations are generally taxable.
14.
15.
Basic salary
Profit sharing
I
. '
.
15. Non-resident Filipinos employed by foreign embassies, missions, or international 16. Other employee personal expenses
organizations are generally exempt. paid by employer
16. Half of the benefits given for the convenience or necessity of the employer are 17. Emoluments and honoraria
taxable. 18. Stock bonus
17. Fixed allowances are supplemental compensation income. 19. Educational assistance to employee
18. For managerial employees, the excess of de minimis benefits over their limits are under employment bond
included as "other benefits". 20. Used sick leave credit
19. The excess of the 13th month pay and other benefits over P90,000 is considered 21. Monetized unused sick leave - private I
compensation income. 22. Monetized unused vacation leave

20. The substituted fili ng system applies to employees who have multiple r private
successive employments. 23. Monetized unused sick leave -
21. An employer controls the means and methods by which the work i to be government
accomplished. . t 24. Monetized unused vacation leave -
22 . An employee who became a minimum wage earner during th y r 1 e emp ~
government h
from tax for the entire year. 11 25. Excess over P9 0,000 of 13th mont
23. Minimum wage earners who are di qualifi d for x mption during the year sha ~ pay and other benefits
be taxable as regular employees. IarY
24. Minim um wage earners who br a h d the minimum wage threshol~ by :s~ I l
increase during the year are taxable only star~ing fr?m the months _of •~cr;me ·is in
25. A fringe benefit is usually in the nature of an mcent1ve. Compensat10n me 367
the nature of performance-based pay.
366
Required:
Exercise Drill No. 2 . . , compute the taxable "13th month pay and other benefits" assuming the employee is a:
Assuming that the employee is a private employee with .a b.as1c_salary of P30~ Per da 1. Rank and file employee
2. Managerial or supervisory employee
. a region
m • w1'th a mi·n 1·mum wag·e of P250 per day, 1nd1cate the . annual Inni·t andY
l ·
compute the annual excess de minimis benefits in the spaces provided for.
Exercise Drill No. S
Limit Excess
- An employee with 10 dependent children received the following benefits during the
De minimis benefits
-
1. P100/meal for 158 overtime days year:
durin2 the year Regular compensation P 1,068,000
2. P6,000 monetized value of 15-day Supplementary compensation 340,000
· vacation leave credits 13th month pay 89,000
3. Pl,000 monthly medical allowance to Other fringe benefits 13,000
. dependents of employees
Required: Compute the taxable amount in each of the following taxation schemes:
4. P6,000 monetized value of 15-day
sick leave credits . Progressive Fringe
s. P12,000 medical benefits e tax benefit tax
6. P2,000 quarterly uniform allowance 1. Rank and file employee
7. PSOO monthly laundry allowance '.
2. Mana erial or su ee
8. Pl0,000 achievement award in cash
9. P3,000 Anniversary gift and PS,000
Exercise Drill No. 6
Christmas gift
The following relates to the compensation income of a minimum wage earner
10. P3,000 monthly rice a]]owance
employee:
Exercise Drill No. 3 p 48,000
Compensation and overtime pay (January to April)
A SO-year-old employee retired during the year after 30 years of continuous service Compensation and overtime pay (May to December) 97,000
and received the following remunerations:
13th month pay and other benefits in December 15,000
Bask salary P 350,000
Employee share to SSS, PHIC, HDMF and union dues Required:
24,000
Overtime pay Compute the gros·s taxable compensation income assuming the employee became a:
16,000
Retirement pay 1. M . . .
2,300,000
Benefits from SSS 400,000 2. R
Pro-rated 13th month pay
21,000
Required: Compute the gross taxable compensation income. I Multiple Choice - Theory: Part 1
Exercise Drill No. 4 1. Which is usually an employee?
An employee received the following benefits: a. A director who is at th~ same time the Chief Executive Officer
13th month pay b. A director regularly receiving a retainer's fee
p 60,000
Profit sharing c. Consultant
De minimis benefits: 12,000 d. A hired TV program talent
De minimis benefits within their limits
Excess de minimis benefits 80,000 2- Which is not an element of an employer•employee relationship?
Other de minimis benefits 30,000 a. Selection process c. Power of control
Other fringe benefits 10,000 b. Power to dismiss d. Payment of fixed wages
Total incentives 25.QQQ
I! 182,QQQ
368 369
3. Which is not an employee classificat~on as to function? Multiple Choice - Theory: Part 2
a. Managerial employee c. Special _employee
1. All of these are exempt benefits of a minimum wage earner except
b. Rank and file employee d. Supervisory employee 1 ,
a. hazard pay. c. vacation pay.
b. holiday pay. d. overtime pay.
4 Which is not an employee classification as to taxability?
· a. Regular employee c. Managerial employee
b. Special employee d. Minimum wage earner 2. Which is not a supplemental compensation income?
a. De minimis benefits c. Allowances
b. Honoraria d. Bonuses
s. The statutory minimum wage is . W dp d
a. The amount fixed by the Regional Tripartite , age an ro uctivity Board 3. Fringe benefits includes
b. The rate fixed by the Regional Tripartite Wage and Productivity Board Which
a. Basic salaries c. Retirement and separation pay
must not exceed PS,000 a month or P60,000 annually b. Fees d. De minimis benefits
c. The higher between PS,000 a month or P~~,000 annually or the rate fixed by
the Regional Tripartite Wage and Product1v1ty Board 4. De minimis benefits are generally
d. PS,000 a month or P60,000 annually unless it exceeds the rate fixed by the a. exempt from tax. c. taxable in excess of P90,000.
Regional Tripartite Wage and Productivity Board b. fully taxable. d. subject to fringe benefit tax.
6. Which is not included in the gross taxable compensation income of an employee? 5. Which do not form part of other benefits of rank and file employees?
a. Fixed monthly allowances a. Excess of de minimis over their legal limits
b. Performance based bonuses b. Salaries and wages
c. 13th month pay and other benefits not in excess of P90,000 c. Productivity incentive
d. 13th month pay and other benefits in excess of P90,000 d. Employee educational assistance
7. Which is not an exclusion criterion on employee benefits? 6. The term "de minimis benefits" does not include
a Necessity of the employee rule a. Christmas bonus c. Rice subsidy
b. Convenience of employer rule b. Christmas gift d. Monetized unused vacation leave
c. Exemption by special law
7. Select the most accurate statement.
d. Exemption by treaties or international agreements
a. De minimis benefits are totally exempt from income tax.
8. For purposes of the fringe benefit tax, fringe benefits pertain to b. De minimis benefits in excess of P90,000 are subject to income tax.
a. other fringe benefits not included as compensation income of any employees. c. The excess of "other benefits" over P90,000 constitutes compensation income.
b. other fringe benefits not specifically included as compensation income of d. The benefits of rank and file employees are not subject to fringe benefit tax.
managerial or supervisory employees.
8. Which is taxable as compensation?
c. all fringe benefits of managerial or supervisory employees.
a. SSS benefits c. Termination benefits from resignation
d. all fringe benefits of rank and file employees.
b. Retirement benefits d. Retirement gratuities from foreign institutions
9. Which is a correct statement?
9. Which of the following is subject to income tax?
a. The compensation income of managerial or supervisory employees is subject
to fringe benefit tax. a. Minimum wage
b. De minimis benefits
b. The ~able fringe benefits of rank and file employee are subject to fringe
benefit tax. c. GSIS benefits
d. Voluntary contribution to SSS, PHIC and HDMF
c. The_ taxable fringe benefits of managerial and supervisory employee are
subject to regular income tax. 10. Which is correct when a minimum wage earner derives other income outside his
d. The compensation income of rank and file employees is subject to regular tax. employment?
a. He is subject to withholding tax and income tax.
b. He is neither subject to withholding tax nor income tax.
c. He is exempt from withholding tax, but subject to income tax.
370 371
d. He is subject to withholding tax, but exempt from income tax. chapter 10 - Compensation Income
11. Rice allowance is taxable when 20 . The P90,000 exemption threshold is applicable to
a. paid in cash. c. given more than Pl,000 a month. a. regular employees. c. managerial or supervisory employees.
b. paid in non-cash. d. given more than P2,000 b. rank and file employees. d. all employees.
21. The excess of "13th month pay and other benefits" is
12. Meal allowance is taxable when given a. subject to regular tax. c. subject to fringe benefit tax.
a. for overtime duty. c. for night shift assignment. b. subject to final tax. d. exempt from income tax.
b. in cash. d. as incentive to all employees.
22. Which is subject to the withholding tax on compensation?
13. Which is an exempt de minimis benefit? a. Salary of domestic "kasambahays"
a. 9-day monetized sick leave b. Compensation for injuries and sickness
b. 15-day monetized vacation leave c. Salaries of resident Filipinos working in embassies, international missions
c. Rice subsidy of half sack a month valued at Pl,000 and organizations
d. Uniform allowance of P6,500 d. Salary of minimum wage earners receiving fixed allowances
14. Which is a correct de minimis limit? 23. Statement 1: A minimum wage earner who loses the benefit of exemption by
a. ~ctual medical cash allowance of PS,000 per year transferring to a region with a lower minimum wage is taxable on all income
b. Laundry allowance of P3,600 per year during the year.
c. Employee achievement award of PS,000 per year
d. Christmas gift of Pl0,000 Statement 2: A minimum wage earner who qualifies as such during the year is
exempt from tax on all income earned during the year.
15. Statement 1: Excess de minimis is considered compensation income as "other Which is correct?
benefits" for rank and file employees and managerial or supervisory employees. a. Both statements are correct.
b. Both statements are incorrect.
Statement 2: Excess de minimis is a fri nge benefit subject to the fringe benefit tax.
c. Only statement 1 is correct.
a. Statement 1 is correct. c. Both statements are incorrect. d. Only statement 2 is correct.
b. Statement 2 is correct. d. Both statements are correct.
16. Which is considered compensation? Multiple Choice - Problems: Part 1
a. Reasonable amounts of pre-computed daily transportation allowance 1. Johnny received a salary of 73,000 during the year consisting of: P60,000 basic
b. Cost-of-living allowance salary, PS,000 overtime pay and PS,000 13th month pay. Compute Johnny's
c. Outstation allowance for employees working at distant facilities taxable income using contemporary tax regulations.
d. Car incentives to medical doctors required to report on duty anytime a. p O C. p 68,000
b. P 60,000 d. P 73,000
17. Which of the following remuneration is an item of compensation income?
a. Retainer fees of an outside director
2. Mr. Juanita had the following income in 2021:
b. Customer tips ·l
c. Commissions to a minimum wage earner Compensation income, net of P77,000 SSS,
d. Referral fee to a customer PhilHealth, HDMF and union dues P 300,000
Supplemental compensation income 30,000
18. Night differential pay is exempt fro m taxation when received by a !~
13 th month pay and other benefits 25,000
a. rank and file employee. c. minimum wage earner. IJ
b. special employee. d. managerial or supervisory employee.
What is the taxable compensation income?
19. Which is not subject to the P90,000 exemption threshold for a private employee? ~. a. P402,000 c. P375,000
a. 13th month pay c. Profit sharing bonus b. P330,000 d. P380,000
b. Cash gift d. Productivity incentive
372 373
Chapter 10 _ compensation Income
3. The foJiowing relates to an annual payroll of the employee: chapter 10 - Compensation Income
Profit sharing bonus 240,000
Gross compensation income, before P44,000 13th month pay 95,000
contributions to SSS, PHIC a nd HDMF Pl,068,000
45,000 Determine the taxable compens~tion income.
Additional compensation a. P 1,365,000 C. P 1,335,000
13th month pay and other' benefits 89,000
b. P 1,350,000 d. P 1,330,000
Compute the taxable compensation income. 8. A supervisory employee had the following remunerations during the year:
a. Pl,113,000 c. P 1,069,000
b. Pl,112,000 d. P 1,068,000 Salaries, before P24,000 SSS, PhilHealth
HDMF, and union dues P 258,000
4. Colyong, a government employee, receives a full 13th month pay of p 20 0 Profit sharing 20,000
exclusive of P14,000 other benefits. He was deducted P18,000 during the ye' Oo, Fringe benefits 65,000
premium for his SSS, PHIC, and HDMF contributions. Compute Colyong's ~r :or 13 th month pay and other benefits J 21,000
compensation income. a le
What is the taxable compensation income?,
a P222,000 c. P240,000 a. p 343,QQQ C. p 254,QQQ
b. P226,000 d. P254,000 b. P 278,000 d. P 204,000 .
5. An employee received the following compensation during the year: 9. An employee had the following details of compensation income in 2021:
Gross compensation (Pll,000 x 13 months) P 143,000
Regular compensation income P 780,000
Overtime pay 12,000
Less: Overtime pay 43,000
13th month pay . .- 65,000
SSS, PHIC, HDMF and union dues p 5,200
Withholding tax De minimis benefits:
Netpay 10,000 15,200
Medical assistance to employee 22,000
P 139.800 Total of other de minimis benefits 32,000
Compute the taxable compensation income.
a P149,800 c. P132,000 Compute the taxable compensation income if the employee is a rank and file.
b. P138,800 d. P126,800 a. p 842,000 C. p 823,000
b. P 836,000 d. P 780,000
6. A private employee retired at 60 in th .
following remunerations: e middle of the year and was paid the 10. Compute the taxable compensation income if the employee is a managerial or
Retirement benefits supervisory employee.
P2,000,000 a. P 842,000 C. p 823,000
Terminal leave pay (150 accumulated da s
Compensation, net of P16 000 y ) 120,000 b. P 836,000 d. P 780,000
SSS, PHJC and HDMF , .
Mid-year bonus premium contributions Multiple Choice - Problems: Part 2
128,000
Pro-rated 13th month pay 8,000 1. A managerial employee received the following benefits during the year:
Compute the taxable co . 12,000 Compensation income, net of mandatory contribution P 1,080,000
a. P 2,170,000 mpensat1on income. Housing allowance in addition to regular pay
b. P 238,000 c. P 170,000 (P30,000 x 12; actual rent is P25,000/month) 360,000
d. P 136,000 13th month pay 95,000
7· A managerial e
1
mp oyee received the follow·
Gross salaries, net of SSS p Ing remunerations:
SSS maternity bene flits ' HIC, and HDMF a. P 1,445,000 c. P 1,145,000
Pl,090,000 b. P 1,175,000 d. P 1,085,000
30,000 375
374
Chapter 10 _ Compensation Income ter 10 - Compensation Income
chaP
compute the total non-taxable compensation income.
An employee received the following remunerations aside from the basic pay: 6· a. PO c. P 111,000
2. . rtation allowance p 24,000 b, p 90,000 d. P 140,000
Fixed representation and transpo 12 000
Night shift differential pay 12:000 compute the supplemental compensation.
7· a. p 25,000 C. p 17,000
Hazard pay 8,000
Honoraria 24,000 b. p 22,000 d. P 10,000
Profit sharing 18,000
13th month pay compute the taxable compensation income.
8
· a. p 586,000 c. P 557,000
Compute the supplemental compensation if the employee is a regular employee.
b. p 572,000 d. P 536,000
a. p 68,000 c. P 56,000
b. p 44,000 d. P 32,000 9. Agovernment employee received the following benefits in 2019:
Gross salaries P 1,044,000
3. Compute the supplemental compensation if the employee is a minimum Wage
RATA 12,000
earner.
c. P 56,000 PERA 24,000
a. P 68,000 Additional compensation (ADCOM) 24,000
b. P44,000 d. P 32,000
Christmas bonus 87,000
Christmas gift 5,000
4. A supervisory employee is a recipient of a stock option which vested during the Laundry allowance (P400/month) 4,800
year. The following data pertains to the exercise of the option and its subsequent Contributions to GSIS, PhilHealth and HDMF 62,000
sale by the employee:
Determine the taxable compensation income.
Value of stocks at vesting date P 45,000 a. P 1,071,200 C. p 1,044,000
Exercise price of option 30,000 b. P 1,068,000 d. P 1,009,200
Selling price of stocks 50,000
10. A private employee had the following remuneration in 2019:
Compute the supplemental compensation.
a. p 50,000 C. p 15,QQQ Gross salaries, net of Pl 1,000 mandatory contribution P 314,000
b. P 20,000 d. p 0 Fixed RATA 12,000
Cost-of-living allowance 24,000
S. The following relate to the compensation income of a private rank and file 13th month pay 28,000
employee during the year: Christmas gift 5,000
Annual compensation income Laundry allowance (PS00/month) 8,000
Answer the following questions:
14th month pay 45,000
45,000
Total ~f 11_1onthly rice allowances during the year a. P 314,000 c. P 338,000
Co11_1m1ss1on from employer 26,000
b. P 326,000 d. P 350,000
Christmas gift 12,000
SSS, PhilHealth and HDMF contributions 8,000 ll. What is the total exempt de minimis benefit?
21,000 a. P 13,000 c. P 6,000
Compute the exempt de minimis benefits b. P 8,600 d. P 5,000
a. P 18 000 ·
b. p 24'000 C. p 29,000 12
' d. P 50,000 · What is the total exempt benefit?
a. P 36,000 c. P 52,000
b. P 47,600 d. P 90,000
377
376
13 Jane a recipient of minimum wage, became a regular employee at the start of
. , . d .. . . . the
third quarter of 2021 when she receive a raise m pay.
1st Qtr .2nd Qtr 3rd Qtr 4th Qtr
Compensation income P 24,000 P 24,000 P 33,000 P 33,000
Overtime pay 4,000 5,000 3,000 6,000
Less:
SSS, PHIC, and HDMF 1,000 1;000 1,200 1,200
Creditable WH tax 1,000 2,000
Net pay P 27.000 P 28,000 P 33.800 P 45.300
Compute the taxable compensation income in 2021.

a. P 52,100 c. P 75,000
b. P 72,600 d. P 127,600
14. A regular employee became a minimum wage earner when the minimum wage
was increased effective the last quarter of 2021:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Compensation income P 24,000 P 24,000 P 24,000 P 24,750
Overtime pay 4,000 5,000 3,000 6,000
Less:
SSS, PHIC, HDMF 1,000 1,000 1,000 1,100
Creditable WH tax 1.100 1.100 1.100 1.200
Net pay P 25.900 P 26,900 P 24,900 P 36,513
Compute the taxable compensation income in 2021.
a pO C. p 81,000
b. P29,650 d.Pll0,650
378

Chapter 10

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Copyright:

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Chapter 10

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Chapter 10 - Compensation Income

chapter 10 - Compensation Income

• 13th month pay Employee personal expenses

Other fringe benefits Illustration 2

Chapter 10 - Compensation Income j

Chapter 10 - Compensation Income Chapter 10 - Compensation Income

For a rank and file employee: Taxable income Tax

Rules of change in status as a Minimum Wage Earner during a year

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

I REVISED WITHHOLDING TAX TABLE J Gross compensation p 10,000

G be low 7,691 a boVe___...,:::: Regular compensation income p 8,500

4. Regular compensation includes variable performance•based remunera~ Rank&ftle Manager or

to fri nge benefit tax. 13. Excess de minimis benefits

compensation income. 22. Monetized unused vacation leave

Compute the taxable compensation income in 2021.

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