Baguio City National High School
Senior High School
Tax on
Compensation Income
ACTIVI
in TY Fundamentals of
Accountancy and
SHEET Business Management
2
Quarter 2 ● Week 5
DENVER G. ALIWANA
NAME:__________________________________ GRADE AND SECTION: ____________
TEACHER: _______________________________ SCORE: ________________________
TAX ON COMPENSATION INCOME
Learning Competency/Code : explain the procedure in the computation of gross taxable
income and tax due (ABM_FABM12-IIh-j-17)
Introduction
In 2014, as part of its tax advertising campaign, the Bureau of Internal Revenue (BIR)
released this poster. Study this poster then answer the questions that follow.
Source: https://dzrhnews.com.ph/teachers-support-doctors-hit-bir-inefficiency/
Answer these questions.
1. What is the message of this poster? ________________________________
__________________________________________________________________________
__________________________________________________
2. How did you feel after studying the poster? ____________________________
__________________________________________________________________________
__________________________________________________
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What is Compensation Income?
Compensation income arises from services rendered from an employee-employer
relationship. This is not limited to the regular wage or salary that an employee receives but includes
other types of wages and benefits received by virtue of his employment.
What are the Types of Compensation Income?
1. Salaries and This is usually expressed in fixed hourly, daily or monthly rate depending on the
wages type of employment contract. This is often referred to as the basic pay or regular
wage.
2. Commissions This is earned by agents or brokers when a sale is made, or a deal is closed.
3. Fees This is the payment received by an employee for holding another position within
the company. This includes director’s fees paid to a director who is at the same
time an employee of the company
4. Honoraria This is a voluntary payment given to an employee for services for which fees
have no fixed amount and are not legally or traditionally required. An example of
this is when an employee served as a speaker in a seminar.
5. Overtime This is the additional compensation received by an employee by working in
Pay excess of 8 hours per day. The minimum overtime premium prescribed by law is
25% of the hourly rate for work performed in excess of 8 hours on ordinary day
and 30% of the hourly rate for work performed in excess of 8 hours on rest day,
special day or regular holiday.
6. Night Shift Under Philippine labor laws, an employee who works between 10 p.m. to 6:00
Differential a.m. should be paid a night shift differential of not less than 10% of his regular
wage.
7. Holiday Pay This is the additional pay an employee receives for working on holiday. You
have learned the rules on holiday pay in Business Mathematics.
8. Hazard Pay This is additional compensation paid to employees who are working under
hazardous conditions or in extreme physical discomfort or distress such as
doctors, nurses, electrical linemen and miners to name a few.
9. Allowances These are the additional cash or non-cash incentives provided to employees
over and above their salary compensation. They may be fixed or variable in
amount. Some like Cost of Living Allowance (COLA) are mandatory while some
are given at the option of the employer. This may include housing, transportation
and meals.
Non-taxable allowances:
Allowances given to employees that are ordinary and necessary in the
pursuit of trade or business for which an employee is required to
account/liquidate for.
Allowances given for the sole benefit of the employer.
RATA (Representation and Transportation Allowance) and PERA
(Personal Economic Relief Allowance) of government personnel are
considered reimbursement for expenses incurred while performing
government duties and are therefore income tax-exempt.
De minimis benefits. See discussion below.
Note: Allowances given to managerial and supervisory employees are subject to
Fringe Benefit Tax. This is beyond the scope of this module.
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10. 13th Month A. 13th Month Pay
Pay and This is a mandatory compensation given to all rank-and-file employees in
Other the private sector who have worked for at least one (1) month during the
Benefits calendar year regardless of employment status.
This is equivalent to 1/12 of the employee’s total basic salary for the year
and is to be paid on or before December 24 of the taxable year.
B. Other Benefits
Unlike 13th month pay, these are given at the discretion of the employer to
show appreciation and gratitude for the services rendered by employees.
1. Non-performance-based bonus (e.g. Christmas bonus and 14 th
month pay)
2. Performance-based bonus or those benefits received under
Collective Bargaining Agreement (CBA) or performance incentive
scheme exceeding P10,000. This means that if the amount is
10,000 or less, it is tax-exempt. Meanwhile if the amount is more
than 10,000 (e.g. 12,000), the whole amount of 12,000 (not just the
excess) is taxable.
3. Gifts in cash or in kind
4. Excess de minimis benefits
11. De minimis These are benefits of relatively small value given by an employer merely as a
Benefits means of promoting the health, goodwill, contentment, or efficiency of its
employees.
De minimis benefits are not subject to income tax as well as to withholding tax
on compensation income of both managerial and rank-and-file employees.
13th Month Pay and Other Benefits
The combined amount of 13th month pay and other benefits is subject to a non-taxable threshold of
P90,000. Any excess is already taxable.
12. Separation The amount given to an employee who is separated voluntarily (e.g. resignation)
Pay or involuntarily (e.g. terminated due to installation of labor-saving devices,
redundancy, retrenchment, closure or cessation of business or incurable
disease).
Benefits received from involuntary separation is non-taxable.
13. Retirement This is the amount given to qualified employees upon retirement. Amount is non-
Pay taxable if it meets the following requirements:
a. The benefits received must be in accordance with a reasonable private
benefit plan maintained by the employer;
b. The employee must have been in the service of the same employer for at
least 10 years and the employee should be at least 50 years old at the
time of his retirement; and
c. The retirement benefit is being availed for the first time
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List of De Minimis
Benefits
1) Monetized unused Gross Compensation Income
vacation leave credits
to employees not The total gross compensation income is the amount an
exceeding ten (10)
employee receives before any deductions or adjustments. This
days during the year;
2) Monetized value of basically includes all the types of compensation mentioned above
vacation and sick except those expressly identified to be non-taxable.
leave credits paid to
government officials Deductions from Gross Income
and employees; 1. Premiums contributed (employee’s share) to these
3) Medical cash government agencies:
allowance to
a. Social Security System (SSS)/ Government Service
dependents of
employees, not Insurance System (GSIS)
exceeding P1,500 per b. Philippine Health Insurance Company (PHIC)
employee per c. Home Development Mutual Fund (HDMF)/ PAG-IBIG
semester of P250 per 2. Premium payments on health and/or hospitalization not
month; exceeding PhP2,400 a year provided that taxpayer has an
4) Rice subsidy of annual family income of not more than 250,000 pesos.
P2,000 or one sack of
3. Union Dues
50kg rice per month
amounting to not more
than P2,000; Taxable Income
5) Uniform and clothing This is the portion of the Gross Compensation Income subject to
allowance not tax after deductions.
exceeding P6,000 per
annum; Tax Due
6) Actual medical
The amount of tax to be paid by an employee. In most cases,
assistance, e.g.
medical allowance to the tax due has been estimated and withheld monthly by the
cover medical and employer who has the responsibility of remitting the same to the
healthcare needs, Bureau of Internal Revenue.
annual
medical/executive The Annual Tax Table below will be used in computing for the
check-up, maternity tax due. The first column of the tax table shows the taxable income
assistance, and
bracket while the second column shows the tax rates.
routine consultations,
not exceeding
P10,000.00 per Bureau of Internal Revenue
annum; ANNUAL TAX TABLE
7) Laundry allowanceEffective
not Date January 1, 2018 to December 31, 2022
exceeding
Not overP300 per
P250,000 0%
month; P0 + 20% of the excess over
Over P250,000 but not over P400,000
8) Employees P250,000
achievement awards, P30,000 + 25% of the excess over
e.g.Over P400,000
for length of but not over P800,000 P400,000
service or safety P130,000 + 30% of the excess over
Over P800,000
achievement, whichbut
in not over P2,000,000 P800,000
the form of a tangible P490,000 + 32% of the excess over
Over P2,000,000
personal property but not over P8,000,000
P2,000,000
other than cash or gift P2,410,000 + 35% of the excess over
Over P8,000,000
certificate, with an P8,000,000
annual monetary value
not exceeding
P10,000 received by 6
the employee under
an established written
plan which does not
Procedures in Computing Tax Due
Step 1: Determine excess de minimis benefits. The list of de minimis benefits
explained above also presents the limit of each benefit.
Step 2: Determine taxable 13th month pay and other benefits by adding the
amount in step 1 to 13th month pay and other benefits. This amount will
be subject to a threshold of P90,000.
Step 3: Determine the Gross Compensation Income by adding the amount in step
2 to all the other forms of compensation payments and benefits received
during the taxable year, except those identified in steps 1 and 2.
Step 4: Determine the Taxable Income by subtracting the allowed deductions
from the Gross Compensation Income.
Step 5: Determine the Tax Due using the Tax Table
To illustrate, let’s solve this sample exercise.
Sample Exercise 1: Mr. John Mateo is a private employee. He received the following compensation
income for the taxable year 2020.
Compensation:
Basic Salary (P39,125/ month = P1,500/day) 469,500
Overtime Pay 6,000
Holiday Pay 3,500
13th Month pay 39,125
14th Month pay 38,000
Rice Subsidy (P2,200 per month) 26,400
Uniform Allowance 5,000
Monetized unused vacation leaves (15 days x 1,500/day) 22,500
Medical Allowance 15,000
Deductions:
SSS Premium Contributions 9,600
PHIC Premium Contributions 7,050
HDMF Contributions 9,390
Total Deductions 26,040
Step 1: Determine the excess de minimis benefits
Actual Amount
Benefits Limit Excess
Received
Rice Subsidy
24,000 26,400 2,400
(P2,000 per month = P24,000 per year)
Uniform Allowance 6,000 5,000 -
Monetized unused vacation leave
15,000 22,500 7,500
(P1,500/day x 10 days)
Medical Allowance 10,000 15,000 5,000
Total 68,900 14,900
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Step 2: Determine taxable 13th month pay and other benefits
Total excess de minimis benefits (from Step 1) P 14,900
Add: 13th month pay 39,125
Add: 14th month pay 38,000
Total 13th month pay and other benefits P 92,025
Less: non-taxable threshold 90,000
Taxable 13th month pay and other benefits P 2,025
Note: The P90,000 threshold is fixed by tax laws. Excess benefits cannot be a negative number. If
the total 13th month pay and other benefits does not exceed P90,000, then the whole amount is non-
taxable.
Step 3: Determine the Gross Compensation Income
Basic Salary 469,500
Overtime Pay 6,000
Holiday Pay 3,500
Excess 13th month pay and other benefits (from Step 2) 2,025
Total Gross Compensation Income 481,025
Step 4: Determine the Taxable Income
Total Gross Compensation Income 481,025
Less: Deductions 26,040
Taxable Income 454,985
Step 5: Determine the Tax Due
In this step, we will use the annual tax table corresponding to the taxable year.
So, in our example, the taxable income is P454,985. This is under the third bracket – over
P400,000 but not over P800,000. Hence tax due is computed as:
Tax on P400,000 30,000.00
Add: Tax on Excess [(454,985 – 400,000) x 25%] 13,746.25
Tax Due 43,746.25
Not over P250,000 0%
P0 + 20% of the excess over
Over P250,000 but not over P400,000
P250,000
P30,000 + 25% of the excess
Over P400,000 but not over P800,000
over P400,000
P130,000 + 30% of the excess
Over P800,000 but not over P2,000,000
over P800,000
Filing of Return
BIR Form No. 1700 Annual Income Tax Return for Individuals Earning Purely Compensation
Income (Including Non-Business/Non-Profession Related Income)
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This return shall be filed by every resident citizen deriving compensation income from
all sources, or resident alien and non-resident citizen with respect to compensation income
from within the Philippines, except the following:
1. An individual earning purely compensation income from one employer derived
from sources within the Philippines, the income tax on which has been correctly
withheld. BIR Form 2316 is issued by the employer for this purpose.
An individual deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return.
2. An individual whose income has been subjected to final withholding tax.
3. A minimum wage earner or an individual who is exempt from income tax.
This return is filed on or before April 15 of each year covering income for the preceding
taxable year.
BIR Form No. 2316 Certificate of Compensation Payment / Tax Withheld for Compensation
Payment with or without Tax Withheld
A Certificate to be accomplished and issued to each employee receiving salaries,
wages and other forms or remuneration by each employer indicating therein the total amount
paid and the taxes withheld therefrom during the calendar year.
You have reached the end of the discussion part of the lesson. You may now proceed to doing the
activities to enrich your understanding of the lesson.
Activity 1: Finding the limits!
Directions: Match the benefit with the corresponding limit. Write the letter of your answer on the
blanks provided. The limits may be applicable to more than one benefit. If the benefit is NOT de
minimis, write X. The first one has been done for you.
Answer Benefit Limit
X 1. Housing allowance A. 10 days/ year
2. Gifts given during Christmas and major anniversary B. P300/ month
celebrations C. 25% of the basic
3. Actual medical assistance to employee minimum wage
4. Medical cash allowance to dependents of employees D. P1,500 per
5. Transportation Allowance employee per
6. Monetized unused vacation leave credits of private semester or P250
employees per month
7. Rice subsidy E. P2,000 or one
8. Uniform and clothing allowance sack of 50kg per
9. Daily meal allowance for overtime work month
10. Benefits received by an employee by virtue of a F. P5,000/ year
collective bargaining agreement (CBA) and productivity G. P6,000/ year
incentive schemes H. P10,000/ year
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11. Laundry allowance
12. Employees achievement awards
13. Cash prize in a raffle draw during company Christmas
Party
Assessment 1:
Directions: Identify the allowed non-taxable limits and the excess of the following de minimis
benefits received by a private employee for one taxable year.
Actual
Non-taxable limit
De minimis Benefit amount Excess
per year
received
Medical Assistance 17,000
Anniversary Bonus 6,000
Laundry Allowance 6,000
Employee Achievement Award 10,000
Rice Allowance 25,800
Medical Cash Allowance to dependents 5,000
Uniform Allowance 10,000
Great job! You may now proceed to the next activity.
Activity 2: Let’s Compute
Directions: Given the annual taxable income, solve for the tax due using the tax table. Show your
solutions using the given template. The first one has been done for you.
Not over P250,000 0%
P0 + 20% of the excess over
Over P250,000 but not over P400,000
P250,000
P30,000 + 25% of the excess over
Over P400,000 but not over P800,000
P400,000
P130,000 + 30% of the excess over
Over P800,000 but not over P2,000,000
P800,000
P490,000 + 32% of the excess over
Over P2,000,000 but not over P8,000,000
P2,000,000
P2,410,000 + 35% of the excess over
Over P8,000,000
P8,000,000
1. Taxable Income = P 325,000
Tax on 325,000 -
Add: Tax on Excess [( 400,000 – 325,000) x 20%] 15,000
Tax Due 15,000
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2. Taxable Income = P 782,184
Tax on __________________
Add: Tax on Excess [(________- _________) x ____%]
Tax Due
3. Taxable Income = P 400,000
Tax on __________________
Add: Tax on Excess [(________- _________) x ____%]
Tax Due
4. Taxable Income = P 1,368,220
Tax on ___________________
Add: Tax on Excess [(________- _________) x ____%]
Tax Due
5. Taxable Income = P 230,000
Tax on ___________________
Add: Tax on Excess [(________- _________) x ____%]
Tax Due
Activity 3: It’s Tax Season Again
Directions: Given the data on the annual compensation income of an employee, solve for the annual
tax due by performing the necessary steps. Use the templates given.
Annual Basic Salary 276,000
Overtime Pay 18,000
Night Differential 8,400
Meal Allowance 31,300
13th Month pay 23,000
Christmas Bonus (non-performance-based) 15,000
Rice Subsidy (P2,500 per month) 30,000
Clothing Allowance 8,000
Service Award (10 years in service) 10,000
Total Deductions (SSS, HDMF and PHIC): 21,000
Step 1: Determine the excess de minimis benefits.
Actual
Benefits Limit Amount Excess
Received
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Total
Step 2: Determine excess 13th month pay and other benefits
Step 3: Determine the Gross Compensation Income
Step 4: Determine the Taxable Income
Step 5: Determine the Tax Due
Tax on
Add: Tax on Excess
Tax Due
Activity 4: Multiple-Choice
Direction: Choose the letter of the correct answer. Write your answers on the spaces provided
before each number.
_____ 1. What is the basic form of compensation income?
A. Allowances
B. Fees
C. Honoraria
D. Regular Wage
_____ 2. Due to heavy workload, an employee was authorized to work for 10 hours on a
particular day. How many overtime hours will be paid?
A. 2
B. 4
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C. 8
D. 12
_____ 3. Night shift differential is an additional compensation paid to employees for work
performed on a night shift. What are considered night shift differential hours?
A. 10:00 PM – 6:00 AM
B. 11:00 PM – 7:00 AM
C. 12:00 MN – 8:00 AM
D. 1:00 AM – 9:00 AM
_____ 4. Which of these is a taxable allowance?
A. Rice allowance that is considered de minimis
B. Laptop allowance for employee’s personal use
C. PERA and RATA received by a government employee
D. Transportation allowance for which an employee is required to liquidate
_____ 5. How much is the non-taxable threshold for the combined 13 th month pay and other
benefits?
A. 80,000
B. 82,000
C. 85,000
D. 90,000
_____ 6. An employee regularly received a laundry allowance of P350 per month. How much
is the excess of this de minimis benefits in a year?
A. P0
B. P300
C. P600
D. P1,200
_____ 7. Retirement pay is non-taxable when certain criteria are met. Which of these is NOT
one of those criteria?
A. The benefits received must be in accordance with a reasonable private benefit
plan maintained by the employer
B. The employee must have been in the service of the same employer for at
least 15 years
C. The employee should be at least 50 years old at the time of his retirement
D. The retirement benefit is being availed for the first time
_____ 8. How much is maximum amount of clothing allowance considered de minimis?
A. 5,000
B. 6,000
C. 7,000
D. 10,000
_____ 9. What level of taxable income is tax-exempt?
A. more than P250,000
B. less than P250,000
C. greater than equal to P250,000
D. less than or equal to P250,000
_____ 10. How is taxable income computed?
A. Gross Compensation Income – Allowable Deductions
B. Gross Compensation Income + Allowable Deductions
C. Gross Compensation Income – excess 13th month pay and other benefits
D. Gross Compensation Income + excess 13th month pay and other benefits
_____ 11. Which of these is NOT an allowable deduction?
A. Union Dues
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B. PHIC premium payment
C. GSIS/SSS premium payment
D. Life Insurance premium payment
_____ 12. Which of these is the first step in computing for tax due on compensation income?
A. Determine the taxable income
B. Determine the excess de minimis benefits
C. Determine the Gross Compensation Income
D. Determine the excess 13th month pay and other benefits
_____ 13. Employee A has a taxable income of P 270,000. The tax rate is “P0 + 20% of the
excess over P250,000.” How much is the tax due?
A. P0
B. P2,000
C. P4,000
D. P5,000
_____ 14. Employee B has a taxable income of P 600,000. The tax table says the tax rate is
“P30,000 + 25% of the excess over P400,000.” How much is the tax due?
A. P30,000
B. P50,000
C. P80,000
D. P100,000
_____ 15. Employee C received a uniform amount of P18,000 monthly salary. He also received
a 13th month pay of P18,000 and a Christmas bonus of P10,000. How much is his
taxable income assuming the allowable deductions is P7,000.
A. 209,000
B. 216,000
C. 219,000
D. 227,000
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