The payroll framework in the Philippines can be complex!
Withholding tax on salaries. Mandatory government contributions. Employee tax annualization. 13th Month Pay. There’s a lot to consider every month (or even twice every month..!).
Below, we have outlined 5 key items that anyone starting or running a business must consider when it comes to employee payroll and compliance in the Philippines.
1. Bi-Monthly Payroll Periods
New businesses or new entrants to the Philippines market may not be fully aware of the standard practice in the Philippines regarding payroll cycles.
In the Philippines, it’s standard practice (but not a requirement) across most industries to process payroll on a bi-monthly basis (i.e. two times a month). While not a mandatory requirement, many companies will opt for payroll processing on the 15th and 30th of each month.
What does this mean? There is an increased workload on HR or payroll providers in the Philippines as there are two payroll cycles each month. Things become more complex when businesses pay employees based on hours or days worked or shifts completed. Leave or sick days also need to be considered as well as overtime payments! New hires during the month can also add an extra level of administrative complexity.
In short – the standard two payroll cycles a month in the Philippines increases the administrative burden on employers, their HR teams and/or their outsourced payroll provider.
So make sure you have adequate processes, controls and support in place for payroll – it’s not as simple as just once a month!
2. Withholding Taxes on Compensation – Monthly and Annually!
Every month, employers in the Philippines are required to withhold a certain value of an employee’s compensation before it is paid to employees. The withheld amount must then be remitted by the employer to the BIR.
BIR Form 1601-C is the appropriate form for this filing and must include the compensation tax withheld from all employees during the previous month.
For further information on how withholding tax is computed and filed, check out our recent article – Withholding Tax on Compensation Explained!
That’s not all! In addition to the monthly tax filings for employee compensation, employers must also file an annual tax return which outlines and confirms the total tax on compensation that the employer withheld from employees during the previous tax year. This is submitted via BIR Form 1604-C.
Importantly, the annual filing and the monthly filings for compensation tax withheld should align!
For more information on the annualization of withholding taxes, check out our recent article – Annual Information Return of Income Taxes Withheld on Compensation in the Philippines – BIR Form 1604-C
3. Mandatory Government Contributions
In addition to the taxes that employers are required to withhold and pay to the BIR on behalf of its employees during each calendar year, there are also mandatory government contributions that need to be considered!
In short, employers must deduct and remit certain amounts of money each month on behalf of each of its covered employees to various Government agencies. These contributions provide for a type of social security system to support employees when they retire, fall ill, require a loan or are seeking to purchase a home.
These are the 3 main government agencies to which employers must contribute on behalf of its employees:
- Social Security System, or the SSS (a social insurance scheme for workers in the Philippines);
- The Home Development Mutual Fund, more commonly known in the Philippines as the Pag-IBIG Fund (fund to provide adequate housing through an effective savings scheme); and
- The Philippine Health Insurance Corporation, more commonly known as PhilHealth (government-run health insurance scheme).
While the onus is always on the employer to make sure that these contributions are actually prepared and submitted to each government agency, both employer and employee contribute to the payments.
For more detailed information on the contributions required to each government agency, check out our explainer on mandatory government contributions in the Philippines.
Finally, employers should take notice that the SSS Contribution Rate is increasing in 2021 (assuming). Here’s all you need to know about the most recent update on the SSS Contribution Rate Increase in 2021.
4. 13th Month Pay
A regularly discussed feature of the payroll framework in the Philippines is the concept of 13th Month Pay.
In summary, employers in the Philippines are required to pay all “covered” employees an additional payment, based on their monthly salary, each year. If an employee has been working for the full calendar year, they would be entitled to a full month of extra pay.
While employers are obliged to make this payment before 24 December each year, it is something that needs to be considered throughout the year – not just around Christmas time.
Why? When recruiting a new employee, you need to consider the total cost of that employee to the overall business. In the Philippines, total salary cost per annum should not, therefore, be considered the equivalent of Total Monthly Salary x 12 months…. It should, in fact be considered as: Total Monthly Salary x 13 months!
Finally – a key piece to consider is the requirement to pro-rate 13th Month Pay for employees that have not worked the entire calendar year.
That’s right! If an employee leaves employment at any time during the year, or if an employee joins any time during the year, they are still entitled to receive 13th Month Pay. However, it would be pro-rated based on the amount of time the employee actually worked during the year.
Here’s a full explainer on how 13th Month Pay should be computed and applied in the Philippines – 13th Month Pay in the Philippines – Obligations for Employers!
5. Final Pay
There are quite specific rules in the Philippines when it comes to payroll for employees that are leaving a company.
Employers must process the “final pay” within 30 days of the employee’s last day of work (or earlier if there is a company policy or agreement in place).
Final pay will include more than just regular salary. It must also include 13th Month Pay (pro-rated – see above) as well as other forms of compensation or benefits that the company might offer (e.g. unused leave, bonuses, de-minimis benefits, etc).
Employee’s can also request an employment certificate which confirms the details of the employment (start date, end date, employer, employee name, etc). This certificate should be provided by the employer within 3 days from receipt of the employee’s request.
For further details on paying final pay to employees in the Philippines, check out DOLE’s Labor Advisory No. 06-20 – Guidelines on the Payment of Final Pay and Issuance of Certificate of Employment.
CloudCfo – Process-Driven Outsourced Payroll Services in Metro Manila and the Philippines
CloudCfo is the provider of online accounting, bookkeeping, tax and finance services for startups and SMEs in Manila and the Philippines.
Don’t hesitate to Contact Us if you are seeking payroll support for your startup or SME business.
Our Specialist Payroll Team would be happy to explain how our outsourced payroll service can add real value for your PH business!