Have you checked recently to make sure that all payroll deductions and contributions are being applied correctly for your staff?
There are many different kinds of payroll deductions and contributions for employers in the Philippines to consider. There is much more required than just applying withholding taxes on salaries!
Successfully applying payroll deductions and contributions can result in happier employees, better staff retention rates and will result in a higher level of overall compliance for the company.
It will also help a business stay out of trouble with the BIR or the Department of Labor and Employment, commonly known as DOLE.
To help, we have outlined below the various types of deductions and contributions that employers in the Philippines must make and how to apply them accurately.
So read on and remember – payroll is an ongoing activity that must be monitored!
For every payroll period, employers must withhold (i.e. deduct) taxes from the payroll of their employees. Withholding tax is a mandatory tax on the gross value of an employee’s salary. “Gross” means the value before any payroll deductions have been made.
Withheld taxes must be reported to the BIR every month by the employer, using BIR Form 1601C. Withholding taxes are then paid by the employer to the BIR the following month. Check out our Tax Calendar, which is updated and published every month, to see when withholding tax must be paid each month.
As a result of the Tax Reform Acceleration and Inclusion Act, commonly known as TRAIN, effective January 1, 2018, taxpayers earning P250,000 gross and below annually are exempt from withholding tax.
Here is what ‘P250,000 gross and below’ looks like:
a. Daily Rate of P685 and below
b. Weekly rate of P4,808 and below
c. Semi-monthly rate of P10,417 and below
d. Monthly rate of P20,833 and below
To help employers and employees understand withholding tax calculations, the BIR released a new list of prescribed withholding rates, as outlined below. While withholding tax computation is generally based on annualised income, the example below uses monthly computations for ease of reference:
a. P20,833 and below – no withholding taxes
b. P20,833 to below P33,333 – 20% in excess of P20,833
c. P33,333 to below P66,667 – P2,500 plus 25% in excess P33,333
d. P66,667 to below P166,667 – P10,833 plus 30% in excess of P66,667
e. P166,667 to below P666,667 – P40,833.33 plus 32% in excess over P166,667
f. P666,667 and above – P200,833.33 plus 35% in excess of P666,667
The Social Security System, or SSS, is the government-mandated program for employees working for private institutions in the Philippines. It is a social insurance scheme that provides for various benefits during the lifetime of an SSS member. Its counterpart, the Government Security Insurance System, or GSIS, is designed for government and public sector employees.
It is mandatory for companies in the Philippines to deduct SSS or GSIS contributions from the salaries of their employees.
In order to extend the life of SSS, Republic Act No. 11199 made some changes to the SSS contributions schedule. The SSS contribution rate was increased from 11% to 12%, Monthly Salary Credits were increased to P2,000 and the maximum MSC was increased from P16,000 to P20,000. MSCs are based on payroll values before any deductions are made.
Our recent article explains all you need to know about the increase in the SSS contribution rate which took effect in April 2019 (payable in May 2019).
For those earning P2,250 and below monthly, employees contribute P80 while employers pay P160, for a total of P240. Those earning P19,750 and above will have to pay P800 and their employers will contribute P1,600 for a total of P2,400.
GSIS contributions are simpler to compute. An employee’s share is equivalent to 9% of their actual compensation while the employer pays 12%. Constitutional commissioners and judiciary officers, on the other hand, will pay 3% of their monthly compensation, while their employer pays 3%.
To ensure affordable health insurance coverage for working Filipinos, the government requires that all employees are insured through the Philippine Health Insurance System, commonly known as PhilHealth.
It is therefore mandatory for employers to deduct part of each employee’s salary and remit the equivalent payment to PhilHealth.
PhilHealth Circular No. 2017-2004, set new PhilHealth contribution rates, effective January 2018. The total monthly premium is now 2.75% of an employee’s monthly basic salary. This amount is divided 50%-50% between employee and employer.
As such, those with a gross monthly salary of P10,000 and below will pay P137.50 (minimum contribution floor) as their personal share. The current maximum total share payable is P1,100, which is P550 for an employee and P550 for their employer. Therefore, those earning P40,000 (gross) and above will have a maximum 100% contribution capped at P1,100.
When calculating payments, remember that PhilHealth requires that contribution values (Basic salary x 2.75%) be rounded off to the nearest hundredths – i.e. no more than 2 decimal places. The employee share and employer share are then matched equally.
The Pag-ibig Fund or Home Development Mutual Fund (HDMF) is a national savings program of the Philippines which aims to provide affordable house financing for workers across the country.
Employers in the Philippines are required to deduct contributions from employee salaries and remit to the Pag-ibig Fund on behalf of their employees.
For those earning a gross income of P1,500 and below monthly, Pag-ibig contributions are 1% of basic salary for employees and 2% for the employer. For employees whose gross monthly salary is more than P1,500, the employee and employer must each pay 2%. Monthly contributions are capped at P100 each for the employee and employer.
However, the HDMF advertise that employees can choose to save more with Pag-IBIG fund if they wish.
13th Month Pay
While not a payroll deduction or an ongoing monthly contribution, employers should be fully aware of the 13th month pay mandatory requirement for payroll in the Philippines under Presidential Decree 851. Payment for the 13th month must be paid to all rank and file employees, who have worked more than one month of the relevant calendar year, no later than December 24 of the relevant working year.
“Rank and file” refers to an employee that is not considered a managerial employee.
13th month pay is equivalent to one-twelfth (1/12) of the employee’s gross basic annual salary. When computing 13th month pay, all leaves without pay are excluded from computing an employee’s basic annual salary.
It is important for employers to be aware that the 13th month pay is subject to tax. However, under TRAIN Law, if the total of the 13th month pay combined with other benefits does not exceed P90,000, no tax deductions need to be made. Otherwise, the excess over P90,000 will form part of the employee’s taxable payroll. “Other benefits” include profit shares, excess over de minimis benefits and bonuses.
Outsourced payroll in the Philippines
CloudCfo are experts in providing all forms 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.
On a day-to-day basis, we can handle and coordinate your attendance sheets, compute the correct mandatory contributions and withholding taxes and ensure the proper generation of payslips.
In addition to payroll services, CloudCfo also provides outsourced accounting and bookkeeping services for businesses in the Philippines – all enabled through cloud accounting software, online solutions and smart technology.
Visit us at cloudcfo.ph or contact us at email@example.com for more information on how we can support your business here in the Philippines.