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COMPENSATION INCOME

 Elements of employer and employee relationship


1. Selection and engagement of employees
2. Payment of wages
3. Power of dismissal
4. Power of control
 Types of employees
1. Managerial
2. Supervisory
3. Rank and file
 Types of employees as to taxability
1. Minimum wage earners –exempt from income taxation
a. 5000 a month /60000 a year whichever is higher
b. Must not have other income aside from their minimum wage and exempt benefits
2. Special aliens -15% final income tax, except those subject to fringe benefit tax
a. Aliens holding managerial or technical position
b. Regional or are headquarters or regional operating headquarters of multinational companies
c. Offshore banking units
d. Petroleum service contractors/subcontractors
Optional final income tax for Filipino employees
-Filipinos who are occupying the same positions as those held by special aliens may opt to be
taxed at 15% final income tax on gross income or the regular income tax, hence “special alien”
include qualifying Filipino employees who opted to be taxed at 15% of gross income
Requirements to Filipinos to be classified as Special alien
-Filipino employed by RHQs or ROHQs, OBUs or petroleum service must met all of the
following:
1. Position and function test –actually exercising a managerial or technical position
2. Compensation threshold test –must have gross annual taxable income of at least P 975,000
3. Exclusivity test –solely employed by RHQ or ROHQ
3. Regular employees –regular progressive income tax
 Tax model on compensation income
Gross compensation xx
Less: non-taxable compensation xx
Gross taxable compensation income xx

 Gross compensation income


o Includes all remunerations received under an employer-employee relationship
 Non-taxable or exempt compensation
o Benefits excluded and/or exempted under the NIRC
o Benefits exempt under treaty or international agreements
o Benefits necessary to the trade, business, or conduct of profession of the employer
o Benefits for the convenience or advantage of the employer
 BENEFITS EXCLUDED UNDER NIRC AND SPECIAL LAWS
1. Remunerations received as incidents of employment
2. Employee mandatory contributions
3. Certain benefits of minimum wage earners
a. Basic minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential pay
e. Hazard pay
COMPENSATION INCOME

4. De minimis benefits
a. Facilities or privileges such as entertainment, medical, services or courtesy discounts on
purchases that are relatively small value and furnished by the employer (petty fringe benefits)
Benefits Limit
Monetized unused vacation leave –private Not exceeding 10 days
Monetized unused vacation and sick leave-
government official and employee
Medical cash allowance to dependents Not exceeding 750 per employee per
semester
Rice subsidy Not exceeding 1500 or 1 sack of 50kg of
rice not more than 1500
Uniform and clothing allowance Not exceeding 5000 per annum
Actual medical assistance Not exceeding 10000 per annum
Laundry allowance Not exceeding 300 per month
Employee achievement award Not exceeding 10000
Gifts given during Christmas and major Not exceeding 5000 per employee per
anniversary celebrations annum
Daily meal allowance for overtime work and Not exceeding 25% of the basic minimum
night or graveyard shift wage on a per region basis
Benefits received (CBA)00 Not exceeding 10000 per employee per
taxable year

Taxable de minimis benefits


1. Excess de minimis over their limit
2. Other benefits of relatively small value that are not included in the list of de minimis
benefits
Treatment of taxable de minimis benefits
1. Rank and file –compensation income under 13th month pay and other benefits
2. Managerial and supervisory – final fringe benefit tax
th
5. 13 month pay and other benefits not exceeding P82,000
 BENEFITS EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS
o Exemption from withholding tax does not mean income tax exemption
 Immune from income tax including the obligation to withhold income tax by virtue of
international comity
 Filipino employees of foreign governments……are taxable as a rule except only to
employees of the following organizations
 United nations
 Specialized agencies of the United Nations
 Australian agency for International Development
 Food and agriculture Organization
 World health organization
 United Nations Development Programme
 International Organization for Migration
 International Seabed Authority
 Confirmation of tax exemptions
 Exemption of Filipino employees is not automatic
 Without confirmation certificate, the employee is taxable
 Employees of Philippine embassies or consulate offices
COMPENSATION INCOME

 Not considered as non-resident citizens and are therefore subject to Philippine


income tax
Foreign embassy, missions, or Philippine embassy or consulate
organization office
In the Philippines
Filipino citizens Taxable* must prove if there is an n/a
exemption grant*
Aliens Exempt n/a
Abroad
Filipino citizens Exempt Taxable
Aliens exempt Exempt

 BENEFITS REQUIRED BY THE NATURE OF , OR NECESSARY TO, THE TRADE, BUSINESS


OR CONDUCT OF PROFESSION OF THE EMPLOYER
o Exempt from income tax – “necessity of the employer rule”
o Are not income but are expenses of the business…of the employer that are incurred or paid
through the employee
o These are not benefits since they are mere advances or replenishments of what are supposed to
be direct cash outflows from the employer
 BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER
o Exempt form income tax – “convenience of the employer rule”
o Regarded as business expenses and are not considered as employee reward
o If the expense is UNREASONABLY EXCESSIVE – the portion of the expense representing
provision or privilege to the employee is considered a taxable fringe benefit(hybrid expenses)

 GROSS TAXABLE COMPENSATION INCOME


1. Regular compensation –fixed remunerations
2. Supplemental compensation –performance-based pays
3. 13th month pay and other benefit –incentive pays (exclusion from gross income)
-in excess of the threshold is considered as supplemental compensation income
 REGULAR COMPENSATION INCOME
1. Basic salary
2. Fixed allowances such as cost of living allowance, fixed housing allowance, representation,
transportation and other allowances
a. Exception rule on the taxability of the allowances
i. If it is an ordinary and necessary in pursuit of trade, business or profession
ii. Expense is subject to accounting or liquidation
iii. Any excess advances are returned to the employer
b. Non-compensation items
i. Fees – business or professional fee
ii. Commissions to non-employees -business income to the sales agent
iii. Tips and gratuities –reported as other income
c. Compensation in kind
i. taxable at the fair value of the consideration received.
ii. Fair value of the shares at the date services were provided
COMPENSATION INCOME

 SUPPLEMENTARY COMPENSATION
1. Overtime pay
Additional compensation except for
2. Hazard pay
minimum wage earner
3. Night shift differential pay
4. Holiday pay
5. Commissions
6. Fees including director fees
7. Emoluments and honoraria
8. Taxable retirement and separation pay -
9. Value of living quarters or meals - should not be for the convenience of the employer
10. Gains on exercise of stock options – constitute a taxable compensation income(foreign corporation
shares) unless they qualify as fringe benefits subject to final tax
11. Profit sharing and taxable bonuses – HOWEVER, if they are linked solely to productivity under
incentive plan of the employer they should be considered as de minimis benefits

 13TH MONTH PAY AND OTHER BENEFITS


1. 13th month pay
a. Government employees –consist of a Christmas bonus equivalent to one month salary plus
5000 cash gift
b. Private employees –equivalent to 1 month salary
2. Other benefits
a. Christmas bonus of private employees
Government employees Private employees
th
Christmas bonus 13 month pay and other 13th month pay and other
benefits benefits
th
Christmas gift 13 month pay and other De minimis
benefits
Bonus –performance based and non-discretionary
Gift –gratuity and is discretionary upon the employer

b. Cash gifts
c. Additional compensation allowance of government personnel
d. 14th month pay, 15th month pay
e. Other fringe benefits of rank and file employees
 TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS
o Exempt from withholding on compensation PROVIDED they do not exceed P82000.
o Excess above P82000 is subject to withholding tax on compensation subject to RCIT
 TAX TREATMENT OF GROSS TAXABLE COMPENSATION INCOME
Type of employee Income tax treatment
regular employee Progressive tax
Special alien 15% final tax
Minimum wage earner Exempt

 TAXABILITY IF MINIMUM WAGE EARNERS


o Loses the privilege of tax exemption when he or she derives other income such as
1. Taxable income from employment
2. Taxable outside employment
o Rules of change in status as a minimum wage earner
COMPENSATION INCOME

1. When an employee becomes MWE during the year –shall be subject to income tax only on
compensation earned before becoming one.
2. When an employee ceases to be a minimum wage earner –only the income fr the rest of the
year is taxable
3. When an employee ceases to be a minimum wage earner during the year by disqualification
o Treatment of cost of living allowance of MWEs
 Should be part of the minimum wage and shall not be treated as a separate or other
benefit
 DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON
COMPENSATION
o BIR FORM 1601-C –monthly remittance return of income taxes withheld on compensation on or
before 10th day of the following month except taxes withheld for December which shall be
filed/paid on or before January 15 of the succeeding year
o BIR FORM 1604-CF –annual information return o or before January 31 of the following
calendar year