There’s no doubt about it …. Payroll in the Philippines can be complex!
Here at CloudCfo, we perform payroll services for a significant majority of our 120+ clients here in the Philippines. So we are well aware of the challenges that PH companies can often experience when it comes to managing payroll in the Philippines from start to finish!
Withholding tax on salaries! Mandatory government contributions! Employee tax annualization! 13th Month Pay! DOLE, SSS, Pag-IBIG, PhilHealth!
Just that is a lot to consider every month for PH employers (or even twice every month for some items..!).
That’s why we have outlined below 5 key items that a PH small business, startup or SME must consider when hiring employees in the Philippines!
Bi-Monthly Payroll Cycles Are Standard in PH!
New businesses or new entrants to the Philippine market may not be fully aware of the standard practice in the Philippines regarding the frequency of payroll cycles.
For many companies around the world, it can be be quite common for employees to be paid their salary once every month.
In the Philippines, however, it’s standard practice across most industries to process payroll on a bi-monthly basis (i.e. two times a month). While the specific dates for each payroll cycle are not governed by a mandatory requirement, many companies will opt for payroll to be paid on the 15th and 30th of each month.
An alternative schedule that PH employers might chose would be to pay out on the 5th and 20th of each month. Sometimes it just depends on the employer’s preference!
So, what does two payroll cycles mean for an employer in the Philippines?
Ultimately, it creates an increased level of work for the HR Team or payroll services provider as there are two payroll cycles that have to be managed, processed and completed each month – instead of one. Things can then become more complex when businesses pay employees based on hours or days worked or shifts completed. Leave or sick days must also be considered as well as overtime payments! New hires or leavers during a month can also add an extra level of administrative complexity for computation of salaries during each payroll cycle.
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 PH payroll provider!
That’s why it is particularly important, for payroll in the Philippines, to have robust processes, controls and support in place – it’s much more than just once a month when PH employers have to consider payroll!
Withholding Taxes on Compensation: BIR Filings Monthly & Annually!
For every payroll cycle, employers in the Philippines are required to deduct and withhold a certain value of an employee’s compensation before payroll is disbursed to employees.
The value of the amount withheld from all employees, accumulated across all payroll cycles during the month, must then be remitted by the employer to the BIR the following month.
BIR Form 1601-C is the appropriate form for this recurring BIR tax filing and, as mentioned above, it must include the compensation tax withheld from all employees during the previous month.
For further information on how withholding tax is computed and filed in the Philippines, check out our recent article – Withholding Tax on Compensation Explained!
However, that’s not the end of the mandatory filing requirement from the perspective of withholding tax on compensation!
In addition to the monthly BIR filings for employee withholding tax on 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 article – Filing BIR Form 1604-C in the Philippines.
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 month, there are also mandatory government contributions that need to be considered!
In short, employers must deduct and remit certain amounts of an employee’s salary 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 may be seeking to purchase a home.
These are the three primary government agencies to which employers must make contributions 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 will contribute to the value of the payments.
For more detailed information on the contributions required for each government agency, check out our Explainer on Mandatory Government Contributions in the Philippines.
13th Month Pay
A key feature of the payroll framework in the Philippines is the concept of 13th Month Pay.
Don’t worry – PH employees will be sure to remind their employers each year when 13th Month Pay comes around!
Outlined below is a short summary on 13th Month Pay. However, you will find a more comprehensive Explainer on how 13th Month Pay should be computed and applied in the Philippines here – 13th Month Pay in the Philippines – Obligations for Employers!.
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 does it have to be considered all year round?
When recruiting a new employee, it is good commercial and financial practice to consider the total cost of that employee to the overall business – not just the gross salary!
In the Philippines, total salary 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 apply 13th Month Pay on a pro-rated basis for employees that have not worked the entire calendar year. This applies to new joiners and leavers!
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, the value of the benefit due would be pro-rated based on the amount of time the employee actually worked during the particular calendar year.
Back Pay for Employees
There are quite specific rules in the Philippines when it comes to the last payroll and the delivery of the final payment to employees that are ending their employment and leaving an employer.
Employers must process “back pay”, also often referred to as “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 – as mentioned 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.
Here’s a full Explainer on computing and delivering back pay or final pay to employees in the Philippines – Understanding Back Pay in the Philippines!
For further details on paying final pay to employees in the Philippines, you can also check out DOLE’s Labor Advisory No. 06-20 – Guidelines on the Payment of Final Pay and Issuance of Certificate of Employment.
CloudCfo – Payroll in the Philippines for Small Businesses and Startups
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 businesses across the Philippines!