Employers in the Philippines should be aware of the business implications of the 13th Month Pay benefit at all times throughout the financial year – not just at the end of the year!
From an accounting, bookkeeping and finance perspective, the implications that 13th Month Pay will have for a company should be considered across various business activities. For example, when recruiting a new employee, when preparing yearly business plans, when generating budgets or when managing cash flow.
So, whether your business is at the startup stage, in the midst of managing a crisis such as COVID-19, or developing plans to scale, be sure to consider the 13th Month Pay obligation in the context of these plans!
To help, this article explains all you need to know about employer obligations relating to the 13th Month Pay benefit in the Philippines.
What is 13th Month Pay in the Philippines?
Many years ago, the Philippine Government wanted to support Filipino households during the Christmas season by legislating for a mandatory “13th Month Pay” benefit for employees.
As a result, Presidential Decree No. 851, S. 1975, entitled “Requiring All Employers to Pay their Employees a 13th-Month Pay” was implemented into the labor laws of the Philippines. This law has been amended since its implementation leaving us with the present law which we have outlined below.
In short? 13th Month Pay is a statutory benefit to be paid to rank-and-file employees in the Philippines each year. Employees, with at least one month of service, are entitled to receive an additional payment equivalent to one-twelfth (1/12) of the employee’s basic salary for the relevant calendar year.
Who is statutorily entitled to receive 13th Month Pay?
All rank-and-file employees in the Philippines, who have worked for at least one month during the relevant calendar year, are entitled to receive the 13th Month Pay benefit from their employer.
A rank-and-file employee differs from a managerial employee. A managerial employee is one who has the power to implement management policies and perform functions in a managerial capacity (e.g. lay-off, hire, transfer, suspend, assign or discipline). Employees not falling within this definition would be considered rank-and-file employees.
Time of Payment of 13th Month Pay
Employers in the Philippines are required to pay the 13th Month Pay to all relevant employees on or before 24 December each year.
Employers can pay the 13th Month Pay benefit in installments – but remember, the full amount must be paid no later than 24 December!
Some employers may have in place a collective bargaining agreement with their employees, in which the mechanism or timeframe for the 13th Month Pay might be included.
13th-Month Pay v Bonus
The 13th Month Pay benefit and the company bonus – whether it’s a Christmas bonus or a performance bonus or any other type of bonus, are not the same and should not be confused by employers.
As mentioned above, 13th Month Pay is a statutory obligation that employers in the Philippines are strictly mandated to pay.
In contrast, the Christmas Bonus is an entirely discretionary payment that employers are not obliged to pay but may choose to pay at their own discretion, perhaps in line with a company policy or maybe simply as the employer might decide from time to time.
Taxable or Non-Taxable?
In the Philippines, employees are entitled to an exemption from income tax in relation to benefits/allowances up to the total value of Ninety Thousand Pesos (₱90,000.00) each year. This means that if the total value of the 13th Month Pay benefit combined with any other allowances or benefits received by an employee during the year, does not exceed ₱90,000, such benefits/allowances will be exempt from income tax.
However, the value of any such benefits or allowances over and above the ₱90,000 will be subject to income tax for the relevant year and should be deducted at source by the employer (i.e. the excess will be subject to income tax).
Computation of the 13th-Month Pay
Computation of the 13 Month Pay benefit is simple. The formula below shows how the benefit should be computed:
|Total basic salary earned during the year|
|=||13th Month Pay|
“Basic salary” means all remunerations paid by an employer to an employee for services rendered.
The general rule is that allowances and benefits which are not integrated as part of the basic salary such as the cost of living allowance (COLA), profit-sharing payments, cash equivalent of unused vacation and sick leave credits, overtime, premium and holiday pay are excluded from the computation. However, if such allowances or benefits are included as part of the basic or regular salary (e.g. under the employment contract), they should be included in the computation of basic salary.
In this example, Mr Jay, an employee of AAA Company, receives a monthly basic salary of P14,000.00. His earnings for the current year are as follows:
|February||1 day leave w/ pay||₱14,000|
|April||on leave w/o pay||₱0.00|
|August||5 days leave w/ pay||₱14,000|
|Total Basic Salary Earned During the Year||₱154,000|
Mr Jay’s 13th Month Pay is computed as:
|=||₱12,833.33 is the value of the 13th Month Pay benefit to be received by Mr Jay.|
13th Month Pay for Resigned or Terminated Employees
Where an employee resigns or is terminated from their employment at any time during the year, the employee is still entitled to receive a 13th Month Pay benefit, but based only on the number of months the employee was employed during the year and salary paid.
So, suppose that Mr Jay was employed at the beginning of a year and worked all the way up to 31 August when he resigned. His earnings for the current year would be as follows:
|February||1 day leave w/ pay||₱14,000|
|August||5 days leave w/ pay||₱14,000|
|Total Basic Salary Earned During the Year||₱112,000|
Mr Jay’s 13th Month Pay in these circumstances should be computed as follows:
|₱14,000 x 8|
|=||₱9,333.33 is the amount of the 13th Month Pay benefit payable to Mr Jay.|
Employers’ Report of Compliance
To ensure that employers are indeed complying with their statutory obligations to pay their employees their 13th Month Pay, employers must submit a report each year to their nearest Department of Labour and Employment, or DOLE, Regional Office confirming that they have complied with 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
- 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
A feature of the 13th Month Pay benefit is its non-inclusion in the computation of an employee’s regular wage. This means that the 13th Month Pay should not be credited as part of the employee’s regular wage when determining overtime, premium pay, fringe benefits, premium contributions to the State Insurance Fund, Social Security System (SSS), National Health Insurance Program or PhilHealth and private welfare and retirement plans.
From an accounting and bookkeeping perspective, the requirement to pay 13th Month Pay must be considered during the year. If not, a business owner will have a real surprise when she finds out that her payroll bill is going to increase significantly in Q4!
Employers should also consider the cost of 13th Month Pay to the business and the implications for payroll when recruiting a new employee.
The following are employers in the Philippines that are exempted from having to pay the 13th Month Pay benefit to their employees:
- 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.
Other Payroll Deductions and Contributions in the Philippines
The 13th-Month Pay benefit is just one of the many mandatory payroll-related obligations with which employers in the Philippines must comply. We recently wrote about the other mandatory payroll deductions and contributions that employers need to consider, including:
- Withholding Taxes
- SSS and GSIS
For more information, check out our article on the mandatory payroll deductions and contributions that employers in the Philippines need to consider.
Expert Accounting, Bookkeeping and Payroll Services in the Philippines
CloudCfo supports companies in the Philippines across the range of payroll-related services. We can advise on existing payroll solutions, assist with the implementation of new payroll software and design processes to ensure your payroll function is fully efficient, optimised 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 us at email@example.com to discuss how we can help your business grow here in the Philippines!