An Extensive Glossary of Payroll Terms for Philippine Businesses

Using business jargon is unavoidable. Whether you’re managing an IT team or formulating policies for the company handbook, technical terms may be necessary when exchanging vital information in and out of the organization.

Payroll is another department that uses special terminologies in business comms. And since your employees expect nothing less than accurate handling of their payroll, it’s in your best interest to familiarize yourself with payroll terms and definitions. The more you know about payroll jargon, the less confused you’ll be when doing payroll computations.

So, whether you’re a seasoned entrepreneur or a new business owner, this article is your must-have resource for payroll management. You’ll find every common payroll term, starting with the concept of payroll and its significance to your business. 

What is Payroll and Why is It Important?

Payroll is an umbrella term for the various aspects and activities that your human resources department must account for when processing and distributing your employees’ salaries and wages. As part of payroll management, you must pay your employees fairly, accurately, and without delay. At the same time, proper payroll management lets you plan and stabilize your company’s finances.

Legal implications are also part and parcel of payroll. Remember, every company must adhere to business regulations—or be liable for penalties.

In the Philippines, agencies like the Bureau of Internal Revenue (BIR) work with employers to standardize payroll activities, such as the annual filing of tax returns in January. Likewise, the Department of Labor and Employment (DOLE) sets a full range of labor standards, including regional and national minimum wages, overtime payments, and 13th month pay benefits. 

33 Payroll Terms Every Philippine Business Should Know

The payroll process goes beyond paying your employees a specific amount of money each month after applying the necessary computations and deductions for their wages. As such, this glossary breaks down the As to Zs of payroll terms used in the Philippines to guide your payroll management efforts. 

13th Month Pay

Rank-and-file employees receive this mandatory benefit at the end of each year. The amount to be paid should be at least one month’s worth of an employee’s total base salary earnings for the year—thus, it’s called 13th month pay. Employers must pay this cash benefit to each employee on or before December 24.

Allowance

An allowance is a fixed amount⁠—generally of small value⁠—paid to employees as additional compensation. Depending on the type of expenses to cover, allowances may be taxable or non-taxable. The latter is also known as de minimis benefits and may include allowances for meals during overtime work, medical assistance, clothing and uniform, rice, and internet, among others.

Back Pay

Employees whose tenure in a company ends are eligible to receive back pay benefits, which consist of their final wages, unused leaves, prorated 13th month pay, withholding tax reimbursements, and applicable separation and retirement pay.

Any other form of benefit that employers and employees agreed upon must also be included in the latter’s final pay, which should be given within 30 days from the last day of employment. 

Base Pay

This refers to an employee’s minimum pay, usually derived from their regular hourly or daily rate. Base or basic pay also represents a worker’s fixed salary that does not include additional compensation such as allowances, incentives, or overtime pay.

BIR Form 2316

Tax reporting in the Philippines is done by filing Form 2316 with the BIR. Employers are responsible for preparing this annual tax form, submitting it to the bureau, and issuing an official copy to each employee.

BIR Form 2316 shows how much compensation the employer paid for each employee and how much taxes the employer deducted from that compensation during any given year.

Bonus

Any extra money that employees receive on top of their base salary is called their bonus. Employers usually award bonuses upon reaching specific milestones, such as an employee rendering multiple years of service to the company or the company achieving its goals through their efforts. As such, issuing a bonus depends on the company’s profitability and each employee’s performance.

Commission

Commissions are a form of incentive commonly given to sales personnel, agents, brokers, and employees in similar job roles. Employers pay commissions to encourage employees to meet their sales quotas or performance targets. Depending on the employment contract, some employees may be entitled to receive either commissions only or a base pay with commissions.

Compensation

Often used interchangeably with payroll, the term compensation encompasses all the types of wages and benefits—whether monetary or non-monetary—that companies pay for employing each of their workers.

Deductions

Money taken out of an employee’s paycheck is considered a deduction. Withholding taxes are among the main forms of payroll deductions.

Meanwhile, deductions for the Social Security System (SSS), Government Security Insurance System (GSIS), PhilHealth, and Pag-IBIG are mandatory contributions that provide employees with social security, primary health insurance, and housing benefits, respectively.

Deductions can also be voluntary, meaning the employee chooses to have a portion of their salary allotted for their private health insurance or retirement plan contributions.

Other reasons that may call for deductions in an employee’s salary include tardiness, unworked hours, unauthorized absences, and loans.

Employee Contribution

Employee contribution is the amount deducted from an employee’s salary as payment for various employee benefit programs. For example, government employees must contribute 9% of their monthly salary to GSIS to make them eligible for the agency’s social insurance scheme.

Employer Contribution

Employers must also share in paying for their employees’ benefits with the SSS, GSIS, PhilHealth, and Pag-IBIG. For the latter two, employers have to match their employees’ monthly contributions.

Gross Pay

Gross pay is the salary amount paid to employees before any deductions are made on their paychecks.

The gross pay for hourly employees is their hourly rate multiplied by the number of work hours they have rendered for a particular pay period, as well as their overtime pay, bonus, and any additional wages. On the other hand, salaried employees typically receive a fixed gross pay every payday.

Holiday Pay

Eligible employees must be paid their basic daily wages during non-working holidays, such as New Year’s Day, Christmas Day, and Labor Day, to mention a few. Employees who work during regular and special holidays are compensated with premium pay rates, ranging from 30% to as much as 200% of their base salary.

Incentive Pay

Incentive pay is a broad term that describes the extra payments given to employees, which means performance bonuses can fall under this category. Shift differentials are also another form of incentive pay, as employees who work the night shift typically get higher compensation than their day shift counterparts.

Independent Contractor

Independent contractors are also known as self-employed workers or freelancers. They are hired by companies usually during peak business seasons, so their compensation varies depending on the projects or tasks assigned to them.

Leave Encashment

Leave encashment applies to employees who opt to convert their unused leave credits for the year into cash payments. Policies for this type of leave benefit differ from company to company, but a typical practice is to pay the amount corresponding to the employee’s unused leave within the first few months of the following year.

Some companies also offer the option of carrying over the excess leave days, giving the employee more leave credits for the next calendar year.

Leave Without Pay

Leave without pay (LWOP) is when an employer grants permission to an employee not to report to work, with the employee not getting paid for the missed workdays. LWOP typically happens when an employee has fully utilized all the paid leave credits but has to go on a leave of absence for whatever reason.

Maternity Leave

Maternity or pregnancy leave applies to a female employee who takes time off from work because she’s about to deliver a baby while continuing to receive her salary. As per the Expanded Maternity Leave Act under R.A. No. 11210, female employees are eligible for 105 days of maternity leave with pay and an option to extend for 30 more days without pay.

Minimum Wage

A minimum wage is the lowest salary Filipino employees may receive based on the country’s labor laws. The minimum wage is determined by the Regional Tripartite Wage and Productivity Board, which considers factors like business location, employers’ paying capacities, and social and economic conditions, among others.

The National Capital Region (NCR) has the highest minimum wage in the country. Starting June 4, the minimum wage for NCR shall be ₱570 and ₱533 for non-agriculture and agricultural workers, respectively.

Net Pay

Net pay is the actual amount of salary that employees get to take home, which is why it’s also called take-home pay. The net pay is always lesser than the gross pay, given that all applicable deductions significantly reduce the final amount that employees receive on their paychecks.

Night Shift Differential

Night shift differential is an incentive paid to employees who work between 10 PM and 6 AM. This additional pay must not be less than 10% of their basic pay and must be paid for each hour within the night shift period.

Overtime

Work done more than eight hours is considered overtime (OT) and must have additional compensation of at least 25% of the employee’s base pay rate. The rate increases to 30% if the overtime work is performed on the employee’s rest day or during a holiday.

Paid Time Off

Paid time off (PTO) is a leave benefit paid to regular employees. The minimum number of PTO per year is five days, which can be used either for vacation or sick days.

Parental Leave

Parental leave includes maternity and paternity leaves. In addition, parental leave is an extra paid leave benefit for solo-parent employees. Part of the benefits is granting a 15-day leave for solo mothers, as mandated in the Solo Parents’ Welfare Act of 2000 under Republic Act No. 8972.

Paternity Leave

This counterpart of maternity leave requires employers to grant paid leaves for Filipino male employees to allow them to assist their spouse or partner in caring for their newborn.

Before the Expanded Maternity Leave Act, fathers were only allowed seven days of leave. However, with the new law, the mother can now transfer seven days of her paid maternal leave to the father (or a fourth-degree relative in the absence of the father), bringing the paternity leave period to a maximum of 14 days.

Paycheck

A paycheck or payslip is an official document issued by an employer to an employee, showing the gross pay and net pay details that have been credited to the employee’s payroll account.

Probation Period

Companies use this short duration of employment—ranging from three to six months—to assess the skills and culture fit of newly hired employees. During probation, employees may not receive the full range of compensation benefits, which means they may have fewer leave credits than regular or permanent employees.

Retirement Pay

Retirement pay is part of the benefits that employees can enjoy once they reach the age of 60. In the Philippines, the employer funds the employee’s retirement pay and may assess the latter’s performance in determining the amount to be received by the retiring employee.

As per the Retirement Pay Law or Republic Act 7641, employees eligible for retirement pay must receive at least one-half month’s worth of salary for every year of service or a fraction of at least six months of service.

Severance Pay

Severance or separation pay is the amount due to employees who are terminated from work for any of the following authorized causes: redundancy, pause or closure of business, retrenchment to protect the company from potential losses, and the like. This may range from one-half to a month’s worth of salary for every year of service.

The separation pay for terminated employees is added on top of their final pay.

Sick Leave

This is a type of paid leave that regular employees receive when they miss work due to an illness. Companies may implement policies regarding the sick leave (SL) benefits for their employees. For example, they may or may not allow SLs to be encashed or carried over once the year ends.

SSS Contribution Rate

The SSS contribution rate distinguishes the amount that an employer and employee must pay toward the establishment of a provident fund for the SSS member employee. As of 2021, the SSS contribution rate is 13%—shared by the employer (8.5%) and employee (4.5%).

Timesheet

A timesheet is a record of an employee’s daily attendance within a particular payroll period. It may be in the form of paper timesheets, a computer software, or an online portal. Employees in the Philippines must log and complete eight hours of work, with a one-hour break that may be spread across the day or utilized during lunchtime.

Withholding Tax 

Withholding tax is the amount deducted by employers from their employees’ monthly salaries as tax payments. The withholding tax rate is between 0% and 35%, depending on the employee’s net taxable compensation.

It Pays to Get Your Payroll Right

Processing employees’ payroll entails familiarizing yourself with essential payroll terms and their purpose. Since payroll involves dipping into company finances, there should be little room for confusion as it can lead to costly mistakes in the long run.

If managing your payroll in-house isn’t feasible, you can get expert assistance from CloudCfo, a cloud accounting firm for startups and SMEs in the Philippines. You’ll have access to a fully-integrated payroll service and system in one centralized payroll platform with the support of your payroll provider, CloudCfo.

Contact us for your company’s payroll management needs and other finance functions today!