Payroll in the Philippines - Payroll Process and Payroll Tax in the Philippines

The Pacific Ocean nation of the Philippines is a part of the WTO, UN, ASEAN, and APEC. As the government takes steps to ensure that businesses prosper, it is quickly becoming one of the top internal marketplaces for consumers. For this reason, investing and establishing enterprises in the Philippines appeals to many organizations.

With all the business opportunities offered in the Philippines, there is a lot of responsibility associated with managing the company in a manner that is fully compliant with local labor laws. After the business is set up, knowing how to handle payroll—that is, how to accurately compute the employee's compensation and required benefits—is one of the most crucial things you can do.

You must comprehend the fundamentals of Philippines payroll compliance whether you plan to start payroll operations in the Philippines or join an existing team already there.

Payroll Calculation in the Philippines

Each employee in the Philippines is issued a Tax Identification Number (TIN), which must be registered in the local government office of their employer and updated each time they change positions.

The formula used to calculate salary is as follows:

Gross Salary – Deductions = Net Salary

The deductions made in the Philippine payroll structure are Social Security System, Home Development Mutual Fund (Pag-IBIG), and Philippine Health Insurance Corporation (PhilHealth).

Days and Hours of Work in the Philippines

Here, Monday through Friday is the workweek. Commercial office days typically last eight hours, without including breaks for meals. Some services demand that certain personnel work six or 48-hour shifts. Employees in the Philippines are paid on a monthly basis, depending on the company and industry. Salaries must be paid by employers at intervals of no more than 16 days, once every two weeks.

Philippine Payroll Process

For a simplified calculation of payroll in the Philippines, these 5 steps are generally followed:

Employee Information: The first step in securing accurate employee information for simpler coding and tracking is employee data collecting.
Calculating Net Pay: After determining the employee's salary, the employer must determine the employee's withholdings and deductions to determine the employee's net pay.
Payroll Release: This is the portion that employees look forward to the most. The salary of each employee must now be deposited or transferred to that employee's bank account.
Tax Reporting: For proper compliance with the government agency, the payroll manager must now report the taxes to the Bureau of Internal Revenue (BIR).
Employer Filling: To prevent future disputes, the employer must now ensure that the benefits, taxes, and deductions are filed accurately.

Payroll Tax in the Philippines

Employers are required to take into account these payroll compliance regulations when paying the salary to employees in the Philippines, including the monthly withholding obligations, irrespective of the number of employees. These provisions are regulated by the Department of Labor and Employment (DOLE) and must be included in the Philippines payroll computation. The four primary payroll contributions that must be deducted each month from employee payroll in the Philippines are as follows:

Social Security System (SSS): SSS is a privatized social insurance program designed to safeguard participants and their families from the risks of disability, illness, maternity, old age, death, and other unforeseen circumstances that could cause financial hardship or loss of income. Depending on the employee's monthly wage range, both the employee's and employer's Social Security contributions will change. For a maximum income of Php20,000, the SSS contributions are 12% of the monthly wage. The employer's share in SSS is 10% and the employee's is 4%.

Philippines Health Insurance Corporation (PhilHealth): A government-funded healthcare system in the Philippines, called PhilHealth, or Philippine Health Insurance Corporation was established to put the needs of the sick, old, crippled, women, and children at the front of the list. Based on the employees' monthly earnings, both employers and employees are expected to contribute equally to the PHIC. PhilHealth receives 4% of an employee's monthly salary, split equally between the employer and the employee, with premium caps of Php400 per month for those making Php10,000 or less per month; Php3,200 per month for those making Php80,000 or more per month.

Home Development Mutual Fund (Pag-IBIG): It is a national savings housing scheme that was created to assist in giving all Filipino employees access to short-term loans. This national fund offers house loan options for employees in the Philippines who need affordable housing. The salary determines the contribution rates. The employer’s share is 2% of the employee’s monthly salary. The employee share is 1% if they make less than Php1,500 every month & 2% of monthly compensation if they make Php1,500 or more.

Mandatory Provident Fund (MPF): All SSS-covered employees earning more than Php20,000 per month are automatically enrolled in the MPF. The Employer contributions range from Php 42.50 to 425 per month, while employee contributions range from Php 22.50 to 225 per month.

Philippines Employee Benefits:

Minimum Wage: There is no uniform minimum wage in the Philippines; instead, it depends on the region, size, and industry in which a company works.
Pay for Retirement: For employees who have reached the age of sixty (60) years or more, but not beyond sixty-five (65) years, and who have served at least five years in the said establishment at the time of retirement, the employer is also required to provide either the minimum retirement pay or pay as defined under the retirement plan. Employees must receive at least one-half (1/2) month's salary in retirement benefits for each year of service. In addition, every fraction of a year that is at least six months long will be taken into account. Such retirement benefits paid to its employees shall be exempt from taxation.
Overtime Pay: In the Philippines payroll, eight hours a day is the maximum permissible amount of work time. The employer must pay additional fees for the additional hours worked if workers are obliged to work beyond those hours. Here, the standard overtime rate is 30% of the hourly rate if working on holidays and 25% of the hourly rate on ordinary workdays. Cost of Living Allowance: No matter their position or state of employment, every minimum wage earner in Region III is entitled to this mandated benefit. The daily COLA is fixed at Php20.
13th Month Pay: This payment, which is necessary for businesses with Philippine registrations, must be made on or before December 24 of each year and represents one-twelfth of the employee's yearly wage. You may prorate the amount if an employee works a part-time schedule. This is in addition to any year-end or holiday bonuses that a business may offer workers.
Night Shift Difference: From 10 p.m. to 6 a.m., all Philippine employees must receive a night shift differential equal to no less than 10% of their usual pay. This also holds for all overtime work performed between the hours of 10 p.m. and 6 a.m. (i.e., an extra 10% of the overtime hourly rate for work performed during that period on rest days, ordinary holidays, and special non-working holidays). This rule would not apply to management individuals, staff members of governmental organizations, domestic workers, or non-agricultural field personnel whose actual hours worked cannot be ascertained with reasonable certainty.
Paid Leave: According to Philippine law, businesses must grant employees five days of paid time off per circumstance. The time must be paid for even if an employee doesn't use it in their final paycheck of the year.
Parental Leave:
- Maternity: 105 days of fully compensated leave (120 days for a single mother)
- Miscarriage: 60 days of fully paid vacation for a miscarriage or an unplanned pregnancy termination
- Paternity: 7 days of fully compensated leave
If the employee had worked for at least a full year before the leave, they would be eligible for seven days of fully paid leave as a sole parent.
Holiday Pay: Employees must receive holiday pay under the Philippine Labor Code as follows:
- Regular Holidays: These are recurrent holidays, such as Christmas and New Year's. You must pay a Filipino employee twice their regular hourly rate for the first eight hours of any regular holiday shift if you need them to work.
- Special Holidays: These days off from work are flexible and typically based on local celebrations. For the first eight hours of work, employers are required to compensate employees required to work on these days 1.3 times their hourly wage.
Gynecological Leave: Any woman who worked at least six months in the previous year is eligible for two months of paid leave following gynecological surgery.

Income Tax in the Philippines

Employers are required by the Bureau of Internal Revenue (BIR) to withhold taxes from employment income at the time of payment. The tax slabs used to withhold taxes are determined by the frequency of payout. If the salary is paid weekly, a weekly withholding tax table must be used, as well as tables for daily, monthly, and semi-monthly payouts.

Income Tax Slab in the Philippines

Every worker's personal income tax was reduced as a result of the TRAIN Law's approval in the beginning of 2018 in the Philippines. Employees earning less than the national poverty line, or up to PHP 250,000, are exempted from paying taxes.

The table above shows the income tax in Philippines that should be deducted from an employee's salary at the end of the fiscal year. As a result, the employer must ensure that the appropriate amount is deducted from each paycheck based on the employee's salary.