13th Month Pay in the Philippines: Mandatory
Under Presidential Decree No. 851, employers from the private sector in the Philippines are required to pay their rank-and-file employees a Thirteenth 13th Month Pay not later than December 24 every year. The 13th month pay is equivalent to one twelfth (1/12) of an employee’s basic annual salary.
It is prescribed by Philippine labor laws as a mandatory benefit and should not be confused with the “Christmas bonus” commonly practiced in the local business setting. The Christmas bonus is not a demandable and enforceable obligation, and can only be released upon an employer’s voluntary discretion. It is usually granted by employers to show appreciation and gratitude for the service rendered by their employees within a year. The 13th month pay, on the other hand, is required by law and employers who fail to provide them by the end of the year are subject to legal scrutiny by the Department of Labor and Employment (DOLE).
13th Month Pay Coverage, Computation, and New Tax Obligation Rate for 2018 Onwards
All rank-and-file employees in the private sector who have worked for at least one (1) month during the calendar year are entitled to receive 13th month pay regardless of their position, designation or employment status. Monetary compensations such as the following may not be regarded as part of the computation for this mandatory benefit:
- cost-of-living allowances;
- profit-sharing payments;
- cash equivalent of unused vacation and sick leave credits;
- overtime pay;
- premium pay;
- night shift differential;
- holiday pay; and
- other allowances and monetary benefits not considered part of an employee’s basic salary.
However, if some or all of the items enumerated in the list above are treated as part of the basic salary, then they shall be included in the final computation.
Although not stipulated by PD 851, by accepted practice, managerial employees are also provided with an equivalent of the 13th month pay.
Computation of the 13th month pay primarily consists of the total basic monthly salary of an employee for the whole year, divided by twelve (12) months. Those who have worked for less than a year, however, are only entitled to receive the amount due to them on the number of months they were employed.
Moreover, an employer is given the prerogative to release the 13th month pay in installments of two (2) to whichever number that is convenient to satisfy the condition that the mandatory benefit be given before December 24 every year. By practice, many companies maintain two installments, first in May and then in December, where the first fifty percent (50%) is given as an aid for employees to prepare for the opening of the regular school year in June.
New Tax Obligation Rate under TRAIN Law for 2018 Onwards
The 13th month pay is generally exempt from taxation. However, there is a prescribed limit to this exemption provided under Section 32 (B)(7)(e) of the National Internal Revenue Code (NIRC) – which was amended by Republic Act No. 10963 or the TRAIN law on January 2018. The amendment stipulates that the 13th month pay and other equivalent benefits shall not be subject to tax for a maximum of P90,000. This new amount is a relative increase from the previous tax exclusion rate of P82,000.
Anything beyond the maximum exclusion rate of P90,000 must be included in the computation of the employee’s gross income for the applicable taxable year.