How to Compute Payroll

Michael John Natabla

Learning Points

Computation of Basic Rates

Computation of Net Basic Pay
Computation of Holiday, Premium, Overtime and Night Shift Differential
Computation of 13th Month Pay
Taxable and Non-taxable Compensation
Withholding Tax on Compensation
Mandatory Payroll Deductions and Contribution
Payroll Accounting Journal entries
Compensation Defined (RR 2-98, Sec
2.78.1 (A))

Compensation Income — In general, the term "compensation"

means all remuneration for services performed by an employee
for his employer under an employer-employee relationship,
unless specifically excluded by the Code.
Employer and Employee
Employee includes any person in the employ of an employer.

Employer — the person for whom an individual performs or performed

any service, of whatever nature, as the employee of such person, except
that:
(1) If the person for whom the individual performs or performed any service does
not have control of the payment of the wages for such services
(2) In the case of a person paying wages on behalf of a nonresident alien individual,
foreign partnership or foreign corporation not engaged in trade or business
within the Philippines
How to Compute Basic Rates
Estimated Equivalent Monthly Rate (EEMR)

Formula : Applicable Daily Rate (ADR) x Equivalent no. of days per year
12 months

Common Equivalent no. of days per year

a. 365
b. 393.80
c. 313
d. 261
 Equivalent No. of Days per Year
4 Ordinary Working Day
12
365 DAYS
52

Rest Day

Regular Holiday

297

Special Day

Paid every day of the month, including unworked rest day,

special day and regular holiday.
 Equivalent No. of Days per Year
5.2 Ordinary Working Day
393.80 DAYS
24

67.6
Rest Day

Regular Holiday

297

Special Day

Employees who work everyday, including rest day, special

days, regular holidays.
 Equivalent No. of Days per Year
4 Ordinary Working Day
12
313 DAYS

Rest Day

Regular Holiday

297
Special Day

Do not work and are not considered paid on one rest day per
week.
 Equivalent No. of Days per Year
4 Ordinary Working Day
12
261 DAYS

Rest Day

Regular Holiday

245
Special Day

Do not work and are not considered paid on two rest days per
week.
Sample Problem

Sample Problem: A has a daily rate of P537.00. If he is paid for a total of

313 days per year, how much is his EEMR?

EEMR = ADR x Equivalent no. of days per year

12
= P537.00 x 313
12
=P14,006.75
Daily rate Computation

Formula : Applicable Monthly Rate x 12 months

Equivalent No. of Days per year
Sample Problem: A has a monthly rate of 14,006.75. If he is paid for a
total of 313 days per year, how much is his daily rate?

Daily Rate = P14,006.75 x 12

313
= P537.00
Hourly rate Computation

Formula : Applicable Monthly Rate x 12 months

Equivalent No. of Days per year
normal working hours
or
ADR
normal working hours
Sample Problem

Sample Problem: A works 8 hours a day with a daily rate of P537.00 and a
monthly rate of 14,006.75. If he is paid for a total of 313 days per
year, how much is hourly rate?

Hourly rate = ADR

normal working hours
= P537.00
8
=P67.125
Computation of Net Basic Pay
Net Basic Pay Computation

Formula: Basic Pay xx

Less: Absences xx daily rate x no of days of absence
Late/Tardiness xx
Undertime xx xx hourly rate x no of hours applicable
Net Basic Pay xx
Sample Problem
Compute for the Net Basic Pay:
Basic Rates
Name of employee Monthly Rate Daily Rate Hourly Rate

A 14,006.75 537.00 67.125

Absences Lates Undertime

3 days 1 hour 45 minutes

Solution:

Basic Pay Absences Late Undertime Net Basic Pay

14,006.75 1,611.00 67.13 50.34 12,278.28

537 x 3 1x 67.125 45 x 67.125

60
Computation of Holiday, Premium, OT,
and Night Shift Differential
Regular Holiday
General Rules:

1.Work performed on that day merits at least twice (200%) the

daily wage of the employee.

2. Employee is entitled to atleast 100% of his/her minimum wage

rate even if he/she did not report for work.
-The employee should be present or on paid leave on the
working day immediately preceding the holiday.
Rules on absences
The preceding day Paid/not
Leave with pay Y

Leave without pay N

Rest Day Y

Non-working day Y

Successive Regular Holiday First holiday Second Holiday

Present on the day preceding Paid Paid
the holiday
Absent on the day preceding Not paid Not paid
the holiday
Absent on the day preceding Double pay paid
the holiday but present on
the first holiday
Absent on the day preceding Not paid Double paid
the holiday but present on
the second holiday
Coverage
Generally, all are entitled to holiday pay, except:
o Government employees;

o Retail and service establishments regularly employing less than 10

employees;
o Domestic helpers;

o Field Personnel and other employees whose time and performance is

unsupervised by the employer
Coverage
o Manager
• Manages the establishment/department/subdivision

• Direct the work of two/more employees therein

• Have the authority/the suggestions and recommendations have

weight in hiring, firing and/or promotion of other employees
Coverage
o Officers/members of a managerial staff
• Directly related to management policies

• Customarily and regularly exercise discretion and independent judgment

• Directly assist a proprietor/managerial employee in the management of the

establishment

• Execute, under general supervision, work along specialized/technical line

• Execute, under general supervision, special assignments and task

• Do not devote more than 20% of their hours worked in a workweek to the activities
which are not directly or closely related to those mentioned above
List of Regular Holiday
Holidays Dates

New Year’s Day January 1

Maundy Thursday Movable

Good Friday Movable

Araw ng Kagitingan April 9

Labor Day May 1

Independence Day June 12

National Heroes’ Day August 30

Eidl Fitr Movable

Eidl Adha Movable

Bonifacio Day November 30

Christmas Day December 25

Rizal Day December 30

Sample computation

Basic Rates
Name of employee Monthly Rate Daily Rate Hourly Rate

A 14,006.75 537.00 67.125

1. A is on leave without pay on March 31, but he worked on April 1. Compute his combined salary for April 1 and 2.

Date 100% of the basic Additional 100% for RH Total

rate
April 1 537.00 537.00 1,074.00

April 2 537.00 - 537.00

Total 1,074.00 537.00 1,611.00

Sample computation

Basic Rates
Name of employee Monthly Rate Daily Rate Hourly Rate

A 14,006.75 537.00 67.125

2. Compute the monthly gross compensation based on the provided details in number one.

Name Basic Rate Absences Holiday Pay Gross

Compensation
A 14,006.75 -537.00 537.00 14,006.75

Total 14,006.75 -537.00 537.00 14,006.75

Premium Pay
Refers to the additional compensation for worked performed on
non-work days. Special Nonworking
Holiday

Special Days

Premium Pay Special Working Holiday

Rest Days
Special Days
1. Special Non-working Holiday

No work no pay, unless there is a voluntary practice or Collective Bargaining

agreement (CBA).

Work performed merits additional compensation of atleast (30%) of the basic

wage.
Special Days
1. Special working Holiday

No premium pay is required.

For work performed, an employee is entitled only to his/her daily wage.

Special Days
2. Rest Day

It shall be the duty of every employer to provide each of his employees a rest
period of not less than twenty-four consecutive hours after six consecutive
normal work day.

The employer shall determine and schedule the weekly rest day of his ees, but
should respect the ees preference when such preference is based on religious
ground.

Work performed merits additional compensation of atleast (30%) of the basic

wage.
Special Days
2. Rest Day

If rest day falls on regular holiday : 260%

If rest day falls on special non-working holiday : 150%

Coverage
Generally, all are entitled to premium pay, except:
o Government employees;

o Family members of the employer who depend on him for support;

o Domestic helpers;

o Field Personnel;

o Persons who provide personal service to other people; and

o Workers who are paid by results as determined by the Secretary of Labor

in appropriate regulations.
Coverage
o Manager
• Manages the establishment/department/subdivision

• Direct the work of two/more employees therein

• Have the authority/the suggestions and recommendations have

weight in hiring, firing and/or promotion of other employees
o Officers/members of a managerial staff
• Directly related to management policies

• Customarily and regularly exercise discretion and independent

judgment

• Directly assist a proprietor/managerial employee in the management

of the establishment

• Execute, under general supervision, work along specialized/technical

line

• Execute, under general supervision, special assignments and task

• Do not devote more than 20% of their hours worked in a workweek to

the activities which are not directly or closely related to those
mentioned above
Normal Working Hours

All time which employee is required to be on

duty/prescribed workplace;
Must not exceed eight hours a
day.
All time being during which an employee is
suffered or permitted to work;
Exclusive of one (1) hour daily
lunch break
Rest period of short duration during working
hours
Overtime

- An additional compensation equivalent to the employees’

regular wage plus at least twenty-five percent (25%) thereof.

Rate per hour Number of OT Overtime Rate Total

67.125 4 hours 125% 335.625
Overtime

Holiday or Rest Day : at least an additional thirty percent (30%)

of the regular hourly rate.

Rate per hour Number of OT Overtime Rate Total

67.125 4 hours 130% 349.05
Undertime Not Offset by Overtime

Undertime work on a business day shall not be offset by overtime

work on any other day.
Night Shift Differential

Additional compensation of 10% of an employee’s regular wage

for each hour of work performed between 10 p.m. and 6 a.m.
Summary

Work on: Rate

Ordinary day 100%

Rest Day 130%

Special Non-Working Day 130%

Special Non-Working Day falling on Rest Day 150%

Regular Holiday 200%

Regular Holiday falling on Rest Day 260%

Double Holiday 300%

Double Holiday falling on Rest Day 390%

Summary

Night Shift during: Rate

Ordinary day 100% x 110%

Rest Day 130% x 110%

Special Non-Working Day 130% x 110%

Special Non-Working Day falling on Rest Day 150% x 110%

Regular Holiday 200% x 110%

Regular Holiday falling on Rest Day 260% x 110%

Double Holiday 300% x 110%

Double Holiday falling on Rest Day 390% x 110%

Summary

Work on: Rate

Ordinary day, overtime, night shift 100% x 125% x 110%
Rest Day, overtime, night shift 130% x 130% x 110%
Special Non-Working Day, overtime, night 130% x 130% x 110%
shift
Special Non-Working Day falling on Rest Day, 150% x 130% x 110%
overtime, night shift
Regular Holiday, overtime, night shift 200% x 130% x 110%
Regular Holiday falling on Rest Day, 260% x 130% x 110%
overtime, night shift
Double Holiday, overtime, night shift 300% x 130% x 110%
Double Holiday falling on Rest Day, overtime, 390% x 130% x 110%
night shift
Summary

Overtime During during: Rate

Ordinary day 100% x 125%

Rest Day 130% x 130%

Special Non-Working Day 130% x 130%

Special Non-Working Day falling on Rest Day 150% x 130%

Regular Holiday 200% x 130%

Regular Holiday falling on Rest Day 260% x 130%

Double Holiday 300% x 130%

Double Holiday falling on Rest Day 390% x 130%

13 Month Pay Computation
th
13TH Month Pay

Employers are required to pay their rank and file employees 13 th

Month Pay, regardless of the nature of their employment and
irrespective of the methods by which their wages are paid.

The employee should worked for atleast one month during a

calendar year.
Rank-and-file defined

The labor code distinguishes a rank-and-file employee from a

managerial employee.
Managerial Rank-and-file
Vested with power or prerogatives to all employees not falling within the
lay down and execute management definition of managerial
policies
Has power or prerogatives to hire,
transfer, suspend, layoff, recall,
discharge, assign, or discipline
employees, or to effectively
recommend such managerial action
Minimum amount

Shall not be less than one-twelfth (1/12) of the total basic salary
earned by an employee in a calendar year.

Shall not include allowances and monetary benefits which are

not considered or integrated as part of the regular or basic salary,
such as monetized leave, overtime premium, night shift
differential, holiday pay and cost of living allowance.
Formula and Computation

13th month pay = total basic salary earned during the year
12 months
Formula and Computation
Basic Pay Absences Late Undertime Net Basic Pay
14,006.75 - - 201.38 - 13,805.38
14,006.75 - - - 14,006.75
14,006.75 - - - 22.38 13,984.38
13th Month = 163,136.13
14,006.75 - - 201.38 - 13,805.38
12
14,006.75 -2,685.00 - - 11,321.75
14,006.75 - - - 22.38 13,984.38
= 13,594.68
14,006.75 - - 201.38 - 13,805.38
14,006.75 - - - 14,006.75
14,006.75 - - - 14,006.75
14,006.75 -1,611.00 - - 12,395.75
14,006.75 - - - 14,006.75
14,006.75 - - - 14,006.75
Total 163,136.13
Time of Payment

Shall be paid not later than December 24 of every year. The

frequency of payment may be the subject of an agreement between
the employer and the employee.
Taxable vs. Non-taxable
Compensation
Taxable Compensation

General Rule : All Compensation are taxable unless otherwise

specifically excluded by the Code.

Characteristics of Taxable Compensation

1. Personal Service of an individual

2. In furtherance of an ee-er relationship
3. Valuable remuneration (In cash or in kind)
4. Actually paid/payable
5. Not excluded by law or regulation
Non-taxable Compensation

Common Non-taxable Compensation:

1. Facilities and privileges of relatively small values (De minimis Benefit)

Ordinarily, facilities and privileges furnished or offered by an employer to his

employees merely as means of promoting the health, goodwill, contentment, or
efficiency of his employees.
De Minimis Benefits (RR No. 5-2011,
1-2015, 11-2018)
a. Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year;
b. Monetized value of vacation and sick leave credits paid to government
officials and employees;
c. Medical cash allowance to dependents of employees, not exceeding
₱1,500 per employee per semester of ₱250 per month;
d. Rice subsidy of ₱2,000 or one sack of 50kg. rice per month amounting
to not more than ₱2,000;
e. Uniform and clothing allowance not exceeding ₱6,000 per annum;
De Minimis Benefits (RR No. 5-2011,
1-2015, 11-2018)
f. Actual medical assistance, e.g., medical allowance to cover
medical and healthcare needs, annual medical/executive check-
up, maternity assistance, and routine consultations, not
exceeding P10.000 per annum;
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards which must be in the form of a
tangible personal property other than cash or gift certificate with
an annual monetary value not exceeding P10,000, received by
the employee under an established written plan which does not
discriminate in favor of highly paid employees.
De Minimis Benefits (RR No. 5-2011,
1-2015, 11-2018)
i. Gifts given during Christmas and major anniversary celebrations not
exceeding P5.000 per employee per annum;
j. Daily meal allowance for overtime work and night/ graveyard shift not
exceeding 25% of the basic minimum wage on a per region basis; and,
k. Benefits received by an employee by virtue of a collective bargaining
agreement (CBA) and productivity incentive schemes provided that the
total annual monetary value received from both CBA and productivity
incentive schemes combined, do not exceed ten thousand pesos per
employee per taxable year
(Note: Any excess may be included in the 13th month pay and other benefits.)
Non-taxable Compensation

2. 13th month Pay and Other Benefits (threshold of P90,000)

Includes:
a. 13th month Pay;
b. Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift
in cash or in kind, and other benefits of similar nature actually received by officials
and employees of both government and private offices, including the Additional
Compensation Allowance (ACA) granted and paid to all officials and employees of the
National Government Agencies (NGAs) including State Universities and Colleges
(SUCs), Government-Owned and/or Controlled Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local Government Units (LGUs).
Non-taxable Compensation

3. Retirement Benefit Plan under the following:

a. Retirement benefits received under RA 7641 without a retirement plan
◦ Employee at least 60 years old & compulsory retirement is 65 years old
◦ Served for at least 5 years
◦ Availing for the first time
b. Retirement benefits under a Retirement Benefit Plan under RA No. 4917
(RR 1-68/RR1-83/RR 11-01)
◦ Plan must be reasonable
◦ Employee service for at least 10 years
◦ Not less than 50 years old at retirement
◦ Availing for the first time
Non-taxable Compensation

4. Separation pay due to any cause beyond the control of the employee

Any amount received by an official or employee or by his heirs from the employer due
to death, sickness or other physical disability or for any cause beyond the control of
the said official or employee, such as retrenchment, redundancy, or cessation of
business; (Sec 32 (B) (6) (b) of the Tax Code)

5. Social security benefits, retirement gratuities, pensions and other

similar benefits received by residents or non-resident citizens of the
Philippines or aliens who come to reside permanently in the Philippines
from foreign government agencies and other institutions private or
public.
Non-taxable Compensation
6. Payments of benefits made under the Social Security System Act of 1954
as amended.

7. Benefits received from the GSIS Act of 1937, as amended, and the
retirement gratuity received by government officials and employees.

8. Life insurance – upon death of the insured.

9. Amount received by insured as return of premium.

Non-taxable Compensation
10. Compensation for injuries and sickness.

11. Income exempt under treaty.

12. Compensation for services by a citizen or resident of the Philippines for a

foreign government or an international organization.
Non-taxable Compensation
13. Compensation income of MWEs, including:
◦ Basic Pay
◦ Night Shift differential
◦ Holiday Pay
◦ Hazard pay
◦ Overtime pay

(Note : Use the EEMR in determining if the ee is an MWE earner or not)

Computation of Withholding Tax on
Compensation
Employer’s Responsibility to Withhold

Requirement of Withholding. — Except in the case of a minimum wage

earner as defined in Section 22(HH) of this Code, every employer making
payment of wages shall deduct and withhold upon such wages a tax
determined in accordance with the rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.
(Tax Code, Title II, Chapter XII, Section 79 (A), As amended by RA No. 9504 dated June
17, 2008 effective July 6, 2008)
Employer’s Responsibility to Withhold
The withholding of tax on compensation income is a method of collecting
the income tax at source upon receipt of the income. It applies to ALL
employed individuals whether citizens or aliens, deriving income from
compensation for services rendered in the Philippines. The employer is
constituted as the withholding agent. (RR 2-98, Section 2.78)
Withholding Tax Computation (RR 11-
2018)
Step 1. Determine the total monetary and non-monetary compensation paid to
an employee for the payroll period (monthly, semi-monthly, weekly or daily)
excluding non-taxable benefits and mandatory contributions.

Classify taxable compensation into regular and supplementary compensation.

Regular compensation includes basic salary, fixed allowances for representation,

transportation and other allowances paid to an employee per payroll period.

Supplementary compensation includes payments to an employee in addition to the

regular compensation, such as commission, overtime pay, taxable retirement, taxable
bonus, and other taxable benefits, with or without regard to a payroll period.
Withholding Tax Computation (RR 11-
2018)
Step 2. Use the appropriate table.

Step 3. Determine the compensation range of the employee by taking into

account only the total amount of taxable regular compensation income and
apply the applicable tax rates prescribed thereon.

Step 4. Compute the withholding tax due by adding the tax predetermined in
the compensation range as indicated on the column used and the rate oftax
on the excess of the total compensation over the minimum of the
compensation range.
Revised Withholding Tax Table
(RMC 105-2017)
TRAIN (R.A. 10963) – PERSONAL
INCOME TAXATION
BIR Forms required to be submitted by ER
Form Period Description Deadline
BIR Form 1601C Monthly This return shall be filed in triplicate by every Withholding On or before the tenth
Agent (WA)/payor required to deduct and withhold taxes on (10th) day of the following
compensation paid to employees. month
BIR Form 1604F Annually This return shall be filed by every withholding agent/payor On or before January 31
required to deduct and withhold taxes on  income payments of the year following the
subject to Final Withholding Tax. The tax rates and nature of calendar year
income payments subject to final withholding taxes are printed
in BIR Form Nos. 1601-FQ, 1602Q and 1603Q respectively.  
BIR Form 2316 Annually Certificate of Compensation Payment/Tax Withheld For BIR – February 28 of the
Compensation Payment With or Without Tax Withheld following year
EE – January 31 of the
following year
Mandatory Government Contribution
and Deduction
Social Security System

• Government agency that provides retirement and health benefits to all paid
up employees in the Philippines.

• Covered employees are entitled to a package of benefits under the Social

Security and Employees' Compensation (EC) Programs in the event of
death, disability, sickness, maternity and old age.
Circular No 2020-33
Compensation Defined (RA No 11199)
SSS Payment Deadline (Circular Nos.
2019-003-b, 2019-12)
Philippine Health Insurance Corporation
(PHIC)

PhilHealth is a tax-exempt Government Corporation attached to the

Department of Health for policy coordination and guidance. (Article IV, Section
15 of RA 7875 as amended).
PHIC Contribution Computation
Basis of Computation (PHIC Circular 2020-
0005)
PHIC Contribution Payment Schedule
Home Development Mutual Fund (HDMF)

The Home Development Mutual Fund (abbreviated as HDMF), more

popularly known as the Pag-IBIG Fund, is a Philippine government-owned
and controlled corporation under the Housing and Urban Development
Coordinating Council responsible for the administration of the national
savings program and affordable shelter financing for Filipinos employed by
local and foreign-based employers as well as voluntary and self-employed
members. It offers its members short-term loans and access to housing
programs.
HDMF Contribution Computation

The contribution rate of all members, except for non-working

spouses of PAG-IBIG members, shall be as follows (Circular No.
274):
Monthly Compensation Contribution Rate
EE ER
P1,500 and below 1% 2%
Over 1,500 2% 2%

Monthly Maximum Compensation to be used shall not be more than P5,000.00

Monthly Compensation Defined

“Monthly Compensation” shall refer to the basic salary and other

allowances where basic salary included, but is not limited to fees,
salaries, wages, and similar items received in a month. It shall mean
the remuneration or earnings, however designated, capable of being
expressed in terms of money, whether fixed or ascertained on a time,
task or piece or commission basis or other method on calculating the
same , which payable by an employer to an employee or by one person
to another under a written or unwritten contract of employment for work
done or to done, or for services rendered or to be rendered.
HDMF Contribution Computation
Payroll Journal Entries
 Payroll Register Sample
Basic Rates Overtime Mandatory Gov. Contri
Name of Monthly Daily Hourly Under- Net Basic
employee Rate Rate Rate Basic Pay Absences Late time Pay RH OD RH Gross Pay SSS PHIC HDMF Net Taxable WTW CA Net Pay

A 14,006.75 537.00 67.125 14,006.75 1,611.00 67.13 50.34 12,278.28 537.00 335.625 349.05 13,499.96 607.50 210.10 100.00 12,582.36 - - 12,582.36

ER Gov Contribution
SSS EC PHIC HDMF Total Salaries Expense 13,499.96

1,147.50 10.00 210.10 100.00 2,935.20 SSS Contribution 1,157.50

PHIC Contribution 210.10

HDMF Contribution 100.00

SSS
Payable 1,765.00

PHIC Payable 420.20

HDMF Payable 200.00

SSS Loan Payable -

HDMF Loan Payable -

Advances to employer -

Salaries Payable 12,582.36

Withholding tax Compensation Payable -

“TIME IS MONEY”
– Benjamin Franklin