Understanding the 13th Month Pay and Christmas Bonuses in the Philippines
- Employers in the Philippines should understand the obligations around the 13th month pay and Christmas bonuses.
- The 13thmonth pay is exempt from tax, up to a limit of PHP 90,000 (US$1,778) and is mandatory, while the Christmas bonus is at the discretion of the employer.
The 13th month pay and Christmas bonuses in the Philippines are an important aspect of HR policy that employers need to understand.
A key topic that often prompts questions is the distinction between the two systems and the tax rules surrounding them. Though both bonus payments are distinct, they can interact to create diverse tax outcomes.
Distinction between 13th month pay and Christmas bonuses
The key distinction between the 13th month pay and Christmas bonuses is that the former is mandatory by law for all non-managerial staff, while the latter is at the discretion of the employer.
Eligibility and calculation of 13th month pay
Employees excluded from the 13th month pay fall into the following categories:
- Employees covered by civil service law;
- Housekeepers and persons in the personal service of another; and
- Employees paid on commission or task basis.
The 13th month pay can be calculated as one-twelfth (1/12) of the basic salary of the employee within one calendar year. Alternatively, if the employee is paid on a monthly basis, the following equation can be used:
(Basic Monthly Salary x Number of Months Worked) / 12
Taxation of 13th month pay
The 13th month pay is exempt from tax, up to a limit of PHP 82,000 (US$1600). However, in January 2018, the government issued the Tax Reform for Acceleration and Inclusion (TRAIN) law which raised this limit to PHP 90,000 (US$1,778). If the 13th month pay exceeds this limit, the excess will be added to the salary of the employee and included in the income tax calculation.
The Christmas bonus is not an enforceable obligation and can only be released at the employer’s discretion. They are usually issued to show appreciation and gratitude to employees for their services during the year.
Taxation of Christmas bonuses
The taxation of Christmas bonuses must be split into two parts: non-performance-based bonuses (also known as ‘other benefits’) and performance-based incentives.
‘Other benefits’ fall into the same category as the 13th month pay and are subject to the same PHP 90,000 limit (US$1,778). In other words, if ‘other benefits’ and the 13th month pay combine to a total of less than PHP 90,000 (US$1,778), no tax is to be paid. If the combination of ‘other benefits’ and the 13th month pay exceeds the limit, the excess will be subject to income tax.
Taxation of performance-based incentives
Collective Bargaining Agreements (CBAs) and productivity incentive schemes are subject to a PHP 10,000 (US$197) tax-free limit. If the performance-based bonus exceeds PHP 10,000, the whole amount (not just the excess) will be counted as ‘other benefits’ and included in the PHP 90,000 (US$1,778) tax-free limit. Any excess over PHP 90,000 (US$1,778) will be taxable.
If ‘other benefits’ (13th month pay and non-performance-based incentives) already exceed the tax-free limit, the performance-based incentives will automatically be subject to the normal income tax rate. For example:
- An employee earns PHP 10,000 (US$197) in performance-related incentives – no tax is payable on this bonus;
- An employee earns PHP 15,000 (US$296) in performance-related incentives, as well as PHP 20,000 (US$395) in ‘other benefits’ – no tax is payable;
- An employee earns PHP 20,000 (US$395) in performance-related incentives, as well as PHP 80,000 (US$1,581) in ‘other benefits’ – tax is payable on the PHP 10,000 (US$197) excess, (20,000 (US$395) + 80,000 (US$1,581) – 90,000 (US$1,778)); or
- An employee earns PHP 30,000 (US$592) in performance-related incentives, as well as PHP 100,000 (US$1,976) in ‘other benefits’ – tax is payable on the PHP 30,000 (US$592) bonus.
Foreign investors are advised to use the services of registered local tax advisors to ensure they remain compliant with current regulations.
This article was originally published on December 20, 2016, and was updated on December 12, 2019.
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