CHAPTER 10 – COMPENSATION INCOME or to an employee in the

public sector with

Elements of employer and employee compensation income of
relationship under case law: not more than the
1. Selection and There is a screening statutory minimum wage
engagement of process for employees in the non-agricultural
sector where he or she s
employees to hire.
assigned.
The employer usually Exempt benefits:
2. Payment of wages fixes and controls the 1. Remunerations
payment of wages. received as incidents of
Employer has power to employment
retrench or terminate a. exempt retirement
benefits
employees when
3. Power of dismissal b. exempt termination
incurring heavy losses benefits
or other reasonable c. benefits from the US
basis. Veterans Administration
The employer has d. social security,
power to control the retirement gratuities,
employee on the means pensions, and similar
4. Power of control benefits from foreign
and methods by which
gov’t agencies and other
the work is institutions, private or
accomplished. 1. Benefits excluded
public
and/or exempted under
e. benefits from SSS
the NIRC and special
f. benefits from GSIS
laws
TYPES OF EMPLOYEES AS TO FUNCTION g. COVID-19 benefits
Those who are given - Special Risk Allow.
powers or prerogatives - Actual Hazard Duty
Pay
to lay down and execute
- Compensation paid
1. Managerial managerial policies to private and public
employees and/or to hire, transfer, health workers who
suspend, layoff, recall, have contracted COVID-
discharge, assign or 19 in the line of duty
discipline employees. 2. De minimis benefits
Those who effectively 3. 13th month pay and
other benefits not
recommend such
exceeding P90,000
managerial actions if the 4. Certain benefits of
exercise of such minimum wage earners
2. Supervisory
authority is not merely Employee benefits of
employees
routinary or clerical in non-Filipino nationals
nature but requires the and/or non-permanent
use of independent residents of the
2. Benefits exempt Philippines from foreign
judgement.
under treaty or governments,
Those who hold neither international embassies or diplomatic
3. Rank and file
managerial nor agreements missions, and
employees
supervisory functions. international
organizations in the
Philippines are exempt
TYPES OF EMPLOYEES AS TO TAXABILITY from income tax.
Employees who are Benefits or allowances
recipients of minimum furnished by the
1. Minimum wage employer to the
wage. They are exempt 3. Benefits necessary to
earners employees to enable
from income tax on their the trade, business, or
compensation. them to appropriately
conduct of profession of
Employees who are and effectively execute
the employer
2. Regular employees subject to the regular their duties as required
progressive income tax. by their employment and
exempt from income tax.
4. Benefits for the Benefits or allowances
Minimum wage earner Refers to a worker in the convenience or which are intended for
private sector who is advantage of the the furtherance of the
paid the minimum wage employer interest of the
employer’s business or
 to ensure its smooth - includes performance-
operations are likewise based remunerations to
Supplementary
exempt from income tax. an employee in addition
Compensation
to the regular
compensation with or
TAX MODEL ON COMPENSATION INCOME without regard to the
Gross compensation income P xxx,xxx payroll period.
Less: Non-taxable compensation xxx,xxx__ 1. Overtime pay
Taxable compensation income P xxx,xxx 2. Hazard pay Constitute additional
3. Night shift differential compensation, except
pay when derived by MWE
DE MINIMIS BENEFITS 4. Holiday pay
1. Monetized unused Incentives intended to
Not exceeding 10 days
vacation leave credits of 5. Commissions stimulate sales. May be
during the year
private employees given as a profit sharing
2. Monetized unused or performance bonus.
vacation and sick leave 6. Fees, including director’s fees
credits paid to Full Pertain to any pay in
government officials and general, additional
7. Emoluments and
employees payments for attending
honoraria
3. Medical cash Not exceeding P1,500 to special tasks or
allowance to per employee per assignments.
dependents of semester, or P250 per 8. Taxable retirement and separation pay
employees month When employee
Not exceeding P2,000 receives free living
or 1 sack of 50-kg rice quarters or meals in
4. Rice subsidy
per month amounting to addition to salary for
not more than P2,000 services rendered, the
Not exceeding P6,000 value to the employee of
5. Uniform and clothing
per year, P500 per such living quarters or
allowance
month meals is included in
Not exceeding P10,000 9. Value of living compensation income.
6. Actual Medical quarters or meals When furnished to an
per year, P2,500 per
Assistance
quarter employee for the
Not exceeding P300 per convenience of the
7. Laundry allowance employer or out of
month
8. Employee Not exceeding P10,000 necessity of the
achievement award annual monetary value employer’s business,
9. Gifts given during the value thereof is not
Not exceeding P5,000 compensation income,
Christmas and major
per employee per year but a business expense.
anniversary celebrations
10. Daily meal Not exceeding 25% of The excess of the book
allowance for overtime the basic minimum value or fair value of the
work and night or wage on a per region stocks, whichever is
graveyard shift basis higher, less the exercise
11. Benefits received by price set at grand date is
an employee by virtue of 10. Gains on exercise of treated as follows:
Do not exceed P10,000 stock options a. Additional
a collective bargaining
per employee per compensation income –
agreement and
taxable year rank and file employees
productivity incentive
schemes b. Fringe benefits –
managerial or
supervisory employees
Includes fixed 11. Profit sharing and taxable bonuses
remunerations due to be
received by an
employee every period 13TH MONTH PAY AND OTHER BENEFITS
such as: a. for government
1. Basic salary employees consists of a
2. Fixed allowances Christmas bonus
Regular Compensation equivalent to one-month
(cost-of-living allowance,
fixed housing allowance, 1. 13th month pay salary plus a P5,000
representation, cash gift.
transportation, and other b. for private employees
allowances paid to an is consist to one-month
employee every payroll salary
period) 2. Other benefits
 Government & private
employees:
a. Christmas bonus
13th month pay and
other benefits
Government employees:
13th month pay and
b. Cash gifts other benefits
Private employees:
De minimis
c. additional compensation allowance of
government personnel
d. 14th month pay, 15th month pay, etc.
1. Employee personal
expenses shouldered by
the employer
e. Other fringe benefits
2. Taxable de minimis
of rank and file
benefits such as:
employees
a. Excess de minimis
b. Benefits not included
in the de minimis list

Tax treatment of Other Fringe Benefits

a. For rank and file Treated as
employees compensation income
as part of “other
benefits” under “13th
month pay and other
benefits”
b. For managerial or Treated as fringe benefit
supervisory employee subject to fringe benefit
tax

TAX TREATMENT OF 13TH MONTH PAY AND

OTHER BENEFITS
The excess above
P90,000 is subject to the
RR2-98 provides that withholding tax on
13 month pay and
th
compensation.
other benefits are The excess of “13th
exempt from withholding month and other
on compensation benefits” over P90,000
provided that they do should be treated as
not exceed P90,000. compensation income
subject to regular
income tax.