2024 UPDATED! 13th Month Pay in the Philippines: A Guide for Employers

As the year comes to a close, it’s time for employers in the Philippines to prepare for the 13th Month Pay. This mandatory benefit is crucial for payroll compliance, affecting key business functions like accounting, HR, and employee communications.

To help you stay on track and meet your Q4 2024 obligations, we’ve put together a short guide on navigating 13th Month Pay compliance in the Philippines.

What is 13th Month Pay in the Philippines?

The 13th Month Pay is a mandatory benefit introduced by the Philippine government to support employees during the Christmas season. Under Presidential Decree No. 851, S. 1975, entitled “Requiring All Employers to Pay their Employees a 13th-Month Pay,” private employers must provide their rank-and-file employees with an additional monetary benefit each year.

While the law has been amended over time, the core framework remains: covered employees are entitled to a payment equal to one-twelfth (1/12) of their annual salary.

For more information on payroll contributions and deductions, check out our guide on mandatory payroll deductions and contributions for employers in the Philippines.

Who is statutorily entitled to receive 13th Month Pay?

This crucial labor law applies broadly to employees in the Philippines. All rank-and-file employees who have worked for at least one month during the calendar year are entitled to receive the 13th Month Pay from their employer.

Who qualifies as a rank-and-file employee?

Rank-and-file employees are those who are not in management or supervisory roles. They handle day-to-day tasks and operations across various industries, including administrative staff, clerks, sales personnel, technicians, and laborers. These employees typically make up the majority of a company’s workforce and are entitled to standard benefits like the 13th Month Pay.

When Must the 13th Month Benefit Be Paid?

The law is clear on when the 13th Month Pay must be paid. In the Philippines, employers must provide it to all rank-and-file employees by December 24 each year, ensuring they receive it before the holidays.

If an employee leaves before the payment date, they are still entitled to a prorated 13th Month Pay based on their time worked during the year. While most employers pay this benefit in one lump sum, they also have the option to pay it in installments.

13th Month Pay vs Bonus

It’s important to note that the 13th Month Pay is separate from any bonus or compensation scheme an employer may offer. Discretionary bonuses, such as Christmas or performance bonuses, are not mandated by labor laws and should not be confused with the mandatory 13th Month Pay.

For example, a Christmas bonus is optional, while the 13th Month Pay is a legal requirement. Employers must ensure the 13th Month Pay is treated as a distinct payment and not used to replace or supplement any other bonus scheme, as this would not comply with labor regulations.

Is 13th Month Pay Taxable or Non-taxable?

When computing payroll in the Philippines, employers should consider the income tax exemption threshold for benefits. Employees can receive up to ₱90,000 in benefits, including the 13th Month Pay, without paying income tax.

What does this mean for 13th Month Pay? If the total value of the 13th Month Pay and other benefits does not exceed ₱90,000, it will be tax-exempt. However, any amount over ₱90,000 will be subject to income tax. Employers must ensure the taxable amount is deducted at source.

For more details, check out our guide on computing withholding tax on compensation in the Philippines.

Computation of 13 Month Pay

It’s relatively straightforward to compute the 13th Month Pay benefit. The formula is as follows:

(Total Basic Salary Earned During the Year) / 12 Months = 13th Month Pay

Basic salary refers to all regular compensation paid to an employee for services rendered. Non-integrated allowances and benefits, like Cost of Living Allowance (COLA), profit-sharing, and cash equivalents of unused leave, are excluded from the computation—unless specifically included in the employment contract.

For example, Mr. Jay, an employee at AAA Company, receives a monthly basic salary of ₱14,000. His earnings for the year are as follows:

Mr. Jay’s Total Basic Salary Earned During the Year: ₱154,000
Mr. Jay’s 13th Month Pay Computation:
₱154,000 / 12 Months = ₱12,833.33

13th Month Pay for Resigned or Terminated Employees

Employees who resign or are terminated during the year are still entitled to receive a prorated 13th Month Pay. This means the benefit is calculated based on the number of months the employee was actually employed. Employers and HR teams need to consider this cost when processing payroll and final pay for departing employees.

Let’s take the earlier example of Mr. Jay, who started work on January 1 but ended employment at the end of August. His earnings and 13th Month Pay would now be different due to the shorter employment period.

Total Basic Salary Earned During the Year: ₱112,000
Mr. Jay’s 13th Month Pay Computation (for 8 months):
₱112,000 / 12 Months = ₱9,333.33

Employers’ Report of Compliance

To ensure compliance with the statutory obligation to pay the 13th Month Pay benefit, employers in the Philippines must submit an annual report to their nearest Department of Labor and Employment (DOLE) Regional Office. This report confirms that the employer has met the 13th Month Pay requirement.

Employers are required to submit the Compliance Report to DOLE no later than 15 January of the following year. The report on compliance should include the following information:

• Name of establishment
• Address
• Principal product or business
• Total employment
• Total number of workers benefited
• Amount granted per employee
• Total amount of benefits granted
• Name, position and telephone number of person providing the information

Accounting and Bookkeeping for 13th Month Payments

PH employers should be aware that the 13th Month Pay benefit would not be included in the computation of an employee’s regular wage.

This means that the 13th Month Pay benefit should not be credited as part of the employee’s regular wage when computing overtime, premium pay, fringe benefits or premium contributions to any of the three mandatory government agencies – SSS, Pag-IBIG and PhilHealth.

However, from an accounting and bookkeeping perspective, considering that it is cash outlay at the end of the year, every company has to accrue 13th month pay on a monthly basis and manage and allocate funds in Q4. This is to stagger the expense presentation of such expenses on a monthly basis rather than a significant one time expense presented on the profit or loss statement.

If it is not included in the budget or financial forecasts, a business owner will have financial considerations if they release their payroll bill is going to increase significantly in Q4 and their payroll costs for the year are much higher than anticipated!

Employers should always consider the cost of 13th Month Pay when recruiting a new employee – employers need to consider the full cost to the business when hiring an employee!

Exempted Employers

Certain employers in the Philippines are exempted from having to pay the 13th Month Pay benefit to their employees.

This is as outlined below:

• Distressed employers with prior authorization from the Secretary of Labor to be qualified for exemption;
• The government and its political subdivisions, including government-owned and controlled corporations (GOCC), except those corporations operating essentially as private subsidiaries of the Government;
• Employers who are already paying their employees 13th Month Pay or equivalent;
• Employers of persons in the personal service of another in relation to such workers; and
• Employers of those who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing specific work, except those workers who are paid on piece-rate basis, in which case the employer shall grant such workers the required 13th Month Pay.

Expert Accounting, Bookkeeping and Payroll Services in the Philippines

CloudCFO supports companies in the Philippines across the range of payroll computation and payroll tax services.

We advise on existing payroll solutions, assist with the implementation of new payroll software and design processes to ensure your payroll function is fully efficient, optimized and integrated across your business.

We can help compute the correct mandatory contributions, deductions and withholding taxes and ensure that your business is achieving full compliance when it comes to payroll.

Visit us at cloudcfo.ph or contact our Specialist Payroll Team at hello@cloudcfo.ph to discuss how we can help your business grow here in the Philippines!

DISCLAIMER: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.