RIT: Compensation Income

Features of Employer-Employee Relationship

1. Selection and engagement of employees

2. Payment of Wages

3. Power of Dismissal

4. Power of Control

Comparison of Employee Benefits:

	Compensation Income	Fringe Benefits
Nature
Scope

	Compensation Income	Fringe Benefits
Nature	Remuneration Performance-based	Incentive Discretionary
Scope	Given to all (committed)	Given to few/selected

Non-Taxable Compensation

1. Exempt retirement benefits

2. Exempt separation benefits

3. De minimis benefits - within limits

4. Mandatory contribution to SSS, PhilHealth, HDMF and union dues

5. Exempt benefits of minimum wage earners (HHON)

6. Fringe benefits subject to fringe benefits tax

7. Employee benefits exempt under treaty or international agreements

8. Employee benefits required by the nature of or necessary to, the trade, business or conduct of profession or business of the employer

9. Employee benefits for the convenience or advantage of the employer

Composition of Compensation Income

1. Regular Compensation Income - fixed benefits every payday

2. Supplemental Compensation Income

   a. Variable performance-based pay

   b. Excess 13th month pay and other benefits above P90K

Composition of Fringe Benefits

1. De Minimis

2. Other Fringe Benefits

Treatment of Fringe Benefits:

	Rank and File	Managerial / Supervisory
Excess de minimis benefits
Other Fringe Benefits

	Rank and File	Managerial / Supervisory
Excess de minimis benefits	13th month pay and other benefits subject to 90k limit	13th month pay and other benefits subject to 90k limit
Other Fringe Benefits	Supplemental Compensation	Subject to Fringe Benefits Tax

Threshold of De Minimis

Vacation Leave (private employees) Sick Leave
Vacation Leave and Sick Leave (government officials and employees)
Medical Cash Allowance (Dependents)
Rice Subsidy
Uniform and Clothing Allowance
Actual Medical Assistance
Laundry Allowance
Employee Achievement award (non-cash)
Gifts
Daily Meal Allowance for OT and Night Differential
Productivity Incentive Bonus and Benefits

Vacation Leave (private employees) Sick Leave	10 days Taxable
Vacation Leave and Sick Leave (government officials and employees)	unlimited
Medical Cash Allowance (Dependents)	3K annually
Rice Subsidy	24K annually
Uniform and Clothing Allowance	6K - 7K annually
Actual Medical Assistance	10K annually
Laundry Allowance	3,600 annually
Employee Achievement award (non-cash)	10K annually
Gifts	5K annually
Daily Meal Allowance for OT and Night Differential	25% of Basic Minimum Wage
Productivity Incentive Bonus and Benefits	10K annually, if exceeds 10K all are taxable

Regular Compensation Income

1. Basic Pay

2. Fixed Allowance (COLA, fixed housing, RATA, etc.)

Examples of Supplemental Compensation

1. Overtime pay

2. Commission

3. Hazard pay

4. Holiday pay

5. Night shift differential

6. Fees, including director’s fees

7. Emoluments and honoraria

8. Taxable retirement/separation pay

9. Profit sharing and taxable bonuses

10. Value of living quarters/meals and stock options

Non-Compensation Income Items that are Not Taxable:

1. Remuneration for agricultural labor paid entirely in production of the farm (paid using produce)

2. Remuneration for domestic services (kasambahay)

3. Damages paid by the employer to employees

4. Remuneration received as incidents of employment

Non-Compensation Items that are Taxable as Oher Income:

1. Tips from customer

2. Remuneration for casual labor not in the course of the employer’s trade or business

Steps in Computing Withholding Tax on Compensation

1. Compute for Regular Compensation Income

2. Deduct the lower limit

3. Add the Supplemental Compensation Income

4. Multiple the sum to the tax rate using the withholding tax table

5. Add the fixed amount per bracket

An employee salary for the second half of the month is shown below:

Salary	18,000
Overtime	2,400
Less: Mandatory Contributions SSS Contributions HDMF Contributions PhilHealth Contributions Union Dues	400 360 248 250
Net Pay Before Withholding Tax	19,142

Compute for the withholding tax on compensation and the net payroll

Regular CI (18K - 400 - 360 - 248 - 250)	16,742
Lower Limit (withholding tax table)	(16,667)	1,250
Total	75
Supplemental CI	2,400
Total	2,475
x Tax Rate	25%	618.75
Withholding Tax		1,868.75

Regular CI (18K - 400 - 360 - 248 - 250)	16,742
Withholding Tax	(1,868.75)
Supplemental CI	2,400
Net Payroll	17,273.25

ABC Company pays Employee Zandro weekly. Zandro has a weekly salary of P10,000, before P500 mandatory contributions and P1,000 non-taxable benefits.

Compute for the withholding tax on compensation and the net payroll.

Regular CI (10K - 500 - 1k)	8,500
Lower Limit (withholding tax table)	(7,692)
Total	808
x Tax Rate	25%
Add: Fixed Amount per bracket	576.92
Withholding Tax	778.92

Regular CI	8,500
Withholding Tax	(778.92)
Non-taxable Income	1,000
Net Payroll	8,721.08

ABC Company employs Mr. Penoy with a basic monthly salary of 70K which is paid semi-monthly every 15th and 30th day of the month. For the second half of the month, Penoy earned total overtime pay of 12K. Total contributions for SSS, PhilHealth, HDMF and union dues were 4,100.

Compute for the withholding tax on compensation.

Regular CI (35K - 4,100)	30,900
Lower Limit (withholding tax table)	(16,667)	1,250
Total	14,233
Supplemental CI	12,000
Total	26,233
x Tax Rate	25%	6,558.24
Withholding Tax		7,808.25

The following data for the year 2023 of a resident rank-and-file employee who has four dependent children are made available:

Salary, net of 30K withholding tax, 7,200 SSS contributions, 6K PhilHealth contributions and 4.5K union dues	618,000
Commission Income	32,000
Profit sharing bonus	10,000
Productivity incentive bonus	14,000
13th month pay	54,000
Rice subsidy (2,500 × 12)	30,000
Uniform and clothing allowance	10,000
Monetized unused vacation leave credits (12 days)	18,000
Actual medical benefits	35,000
Christmas gift	15,000
Laundry allowance (1K x 12)	12,000
Separation pay from a previous employer (terminated due to redundancy)	250,000
Interest income from long-term bank deposit	40,000

Compute for:

1. Mandatory Deductions

2. Exempt Benefits

3. Taxable Compensation Income

Regular CI (618K + 30K)	648,000
Supplemental CI (32K + 10K + 34.4K)	76,400
Taxable Compensation Income	724,400

De Minimis	Amount	Limit	Excess
Productivity incentive bonus	14,000	0	14,000
Rice subsidy (2,500 × 12)	30,000	24,000	6,000
Uniform and clothing allowance	10,000	6,000	4,000
Monetized unused vacation leave credits (12 days)	18,000	15,000	3,000
Actual medical benefits	35,000	10,000	25,000
Christmas gift	15,000	5,000	10,000
Laundry allowance (1K x 12)	12,000	3,600	8,400
Total	134,000	63,600 (exempt)	70,400

13th Month and Other Benefits (54K + 70.4K)	124,400
Exemption	(90,000)
Taxable	34,400

Mandatory Deduction (7.2K + 6K + 4.5K)	17,700
Exempt Benefits (250K + 63.6K + 90K)	403,600

Mr. Sisiw, a married resident citizen with 4 dependent children had the following income and expense in 2020:

Gross Compensation Income	1,140,000
13th Month Pay and Other Benefits	104,000
Overtime pay	60,000
Night shift differential pay	20,000
Expenses related to his employment	220,000
Salary deduction for loan advances	50,000
SSS premium contributions	6,200
PhilHealth Contributions	4,800
Pag-ibig Contributions	4,000
Union Dues	2,000
Premium on health insurance	5,000
Withholding tax on compensation	197,500

Compute the income tax payable

Regular CI (1.14M - 6.2K - 4.8K - 4K - 2K)	1,123,000
Supplementary CI (60K + 20K + 14K)	94,000
Taxable CI	1,217,000
Income Tax Due (Tax table 2020) [(1,217K - 800K) * 30% + 130K]	255,100
Withholding Tax on Compensation	(197,500)
Income Tax Payable	57,600

13th Month and Other Benefits (104K - 90K)

14,000

Jon, a minimum wage earner, received the following during the year:

Compensation Income	120,000
Fixed Allowances	24,000
Honoria	20,000
Tips from customers	30,000
13th month pay	10,000
Overtime pay	12,000
Night shift differential pay	4,000

Compute the taxable compensation income

Regular CI	24,000
Supplemental CI	20,000
Taxable Compensation Income	44,000

Hector was a clerk receiving minimum wage. He was promoted during the year to a supervisory position for his outstanding job performance:

	As MW clerk	As Supervisor	Total
Salary	52,500	105,000	157,500
Commission	60,000	180,000	240,000
Overtime pay	10,000	30,000	40,000
Fringe Benefits	13,000	26,000	39,000
13th Month Pay		13,000	13,000

Compute the taxable compensation income for the year

Regular CI	105,000
Supplemental CI (60 + 180 + 30)	270,000
TCI	375,000

13th MP & OB (13 + 13) - 90K = exempt

26K = Fringe Benefit Tax (final tax)