Chapter 10: Discussion Questions

1. In determining the existence of an employer-employee relationship, the following elements are

considered: (1) the selection and engagement of the workers; (2) the power to control the worker’s
conduct; (3) the payment of wages by whatever means; and (4) the power of dismissal. The agreement
binding both the employer and the employee is known as an employment contract. However, the
absence of an employment contract does not indicate an absence of an employer employee
relationship. When the existence of the employer employee relationship is in question, the court has
generally applied the four fold test. If the employer employee relationship can be established, the
employer may not terminate the service of the employee without a just or authorized cause.

2. Part-time employees - Part-time employees are individuals who work less than 40 hours a week and
are typically paid by the hour rather than salaried. These employees are still considered legitimate
employees of a company but may not be eligible for benefits. Full-time employees- Full-time employees
are those that work an average of 40 hours a week and are eligible for benefits. Because the Fair Labor
Standards Act does not provide a definition for part-time or full-time employees, employers are given
the liberty to decide how they classify full-time employment within their organizations. Employers with
50 or more full-time employees must offer health care coverage to their full-time employees and their
dependents. Seasonal employees- Seasonal employees are those who are hired based on the seasonal
needs of a company. For example, a retail company may hire 10 seasonal employees to cover the
increase in business during peak seasons such as the summer months and holidays. This type of
employee is eligible for Social Security and unemployment benefits as they are not considered
permanent employees.

Temporary employees- Temporary employees are those that are hired on a temporary basis, often for a
set period of time such as six months. They may also be hired to work on a specific project and stop
working for the company when the project is complete. Employers can hire temporary employees
directly or can go through a staffing agency to find employees that fit their needs. Leased employees- A
leased employee is an individual who is hired by a staffing agency and then "leased" out to an
organization to complete a specific job. Leased employees typically work with the company they are
leased to for a year or longer. While still considered an employee, leased workers are on the payroll of
the staffing agency and also receive any benefits through the employment agency rather than the
organization they are working for.

3. The IRS employment taxes are the taxes that you, your business, and your employees must pay to
federal agencies. Self-employment tax, which includes Social Security and Medicare tax for self-
employed business owners, is also considered an employment tax. You also may be responsible for
paying various state taxes, including on income and for unemployment. Federal Insurance Contributions
Act (FICA) taxes must be taken from employee pay and also paid by the employer. Unemployment taxes
and workers' compensation are the employer's responsibility.

4. For minimum wage earners (MWE), holiday pay, overtime pay, night differential pay, and hazard pay
earned by an MWE shall, likewise, be exempt from withholding tax. Additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the mandatory non-taxable amount of
P90, 000, taxable allowances, and other taxable income given to an MWE by the employer other than
those which are expressly exempt from income tax, however, shall be subject to withholding tax using
the revised withholding tax table In addition to the basic pay of the MWE, their exemption covers even
holiday pay, overtime pay, night differential pay, and hazard pay. An MWE will only be taxed on the
amount of the additional compensation which is not covered by the exemption. The inclusion of this
categorical guideline in RR No. 11-2018 is a welcome development for MWEs. It can be recalled that
there was a 2008 BIR regulation suggesting that an MWE who receives additional taxable compensation
and benefits shall no longer be entitled to the privilege of being an MWE and, therefore, their entire
income is subject to tax. For example, if a MWE receives, in addition to his minimum salary, a P1
commission for selling his employer’s inventory, not only would this commission be subject to tax but
also his entire salary. One would think that it is better to not receive additional taxable benefits than to
receive less take-home pay, because of withholding tax.

5. There are no tax estimates/prepayments in the Philippines. Generally, the employer withholds taxes
upon payment of the compensation to the employee based on a graduated withholding tax table with
rates from 0 percent to 35 percent on net taxable compensation.

Gross compensation income is defined as taxable income arising from an employer/employee

relationship and includes the following:

Salaries, wages, compensation, commissions, emoluments, and honoraria

Bonuses and other benefits exceeding PHP90,000

Allowances for transportation, representation, entertainment, and other similar items

Fees (including director’s fees paid to a director who is at the same time an employee of the payer)

Taxable pensions and taxable retirement pay

Other income of a similar nature, including compensation paid in-kind.

6. Wages, whether hourly or salary, are what make up base compensation. Hourly wages are more
traditionally assigned to unskilled or semi-skilled labor while salary employees are usually the more well-
educated employees or employees who occupy management positions. Hourly wages are also used to
compensate temporary, part-time or contract workers while salaries are more common for employees
that the company has invested in for the long haul. Of course, this is not universally true. There are
many examples of highly educated, highly skilled, highly valued workers who are paid hourly, and these
employees can often benefit from non-exempt status eligible for overtime pay. There are also many
examples of salaried employees who are not in management positions and/or who are non- exempt.
The rules for compensating these employees for overtime or minimum wage provisions are governed by
the Fair Labor Standards Act (FLSA). Commission and bonuses are the other major type of direct
compensation. Commission-based pay is most common in sales and is paid out as a percentage of goals
met (or quota).
7. Non-taxable benefits are not taxed or only partially taxed. Benefits that are completely tax free
include health insurance, retirement services (like a deferred compensation plan), and de minimis
benefits.

8. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the
year; Monetized value of vacation and sick leave credits paid to government officials and employees;
Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or
P125 per month; Rice subsidy of P1, 500 or one (1) sack of 50 kg. rice per month amounting to not more
that P1,500; Uniform and clothing allowance not exceeding P5,000 per annum; (last amended by RR No.
8, 2012) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding
P10,000 per annum; Laundry allowance not exceeding P300 per month; Employees achievement
awards, e.g., for length of service or safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an annual monetary value not exceeding
P10,000 received by the employee under an established written plan which does not discriminate in
favor of highly paid employees; Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum; Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per
region basis; Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive scheme provided that the total annual monetary value received from both CBA
and productivity incentive scheme combined do not exceed ten thousand pesos (P10,000) per
employee, per taxable year.

9. The “convenience of the employer rule” (convenience rule) is a rule some states use for sourcing
income earned by nonresidents who work for in-state employers at a location outside the state. Under
the convenience rule, the sourcing of this income depends on whether the nonresident taxpayer was
working remotely for convenience or the employer’ necessity. Five states (Arkansas, Delaware,
Nebraska, New York, and Pennsylvania) apply the convenience rule; Connecticut applies it only if the
taxpayer’s resident state applies a similar rule for work performed for a Connecticut employer.

10. Compensation received exclusively as wages by an employee for services performed in the course of
employment for his employer. Supplementary Compensation – this includes commission, overtime pay,
fees, profit sharing, monetized vacation leave in excess of ten days, sick leave pay, hazard pay, taxable
13th month pay and other benefits, and other remuneration received within the employer-employer
relationship

11. Under the current employee stock option rules in the Income Tax Act, employees who exercise stock
options must pay tax on the difference between the value of the stock and the exercise price paid.
Provided certain conditions are met, the employee can claim an offsetting deduction equal to 50% of the
taxable benefit. This effectively reduces by half the tax payable by the employee, which is a significant
tax savings. There is currently no dollar limit on this favorable treatment.
12. The amount of 13th month pay shall at least be 1/12 of the total basic salary earned for the year
which shall n include all earnings paid by his/her employer for services rendered but does not include
allowances and other monetary benefits such as the cash equivalent of unused vacation and sick leave
credits, overtime. Note that 13th-month pay is computed as the number of months rendered by the
employee which means additional holiday pays and premiums will not be included in the computation.

13. Fringe Tax Benefit-Under labor laws, fringe benefits pertain to all other benefits or incentives of
employees other than the basic pay. The basic pay is the fixed regular salary or wages of employees
every payroll period. - Under the NIRC, the term "fringe benefit” was defined to pertain to goods,
services or other benefits furnished by the employer to the employees. Other fringe benefits-Other
fringe benefits not included or classifiable as item of compensation income and which are not exempted
under the law are treated as follows:

1.For rank and file employees – included as "other benefits" under "13thmonth pay and other benefits"

2.For managerial and supervisory employees – excluded in compensation income and are subjected to
final fringe benefit tax. Managerial Employee is one who is vested with powers or prerogatives to lay
down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer,
effectively recommended such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent judgment. All employees not falling
within any of the above definitions are considered rank-and-file employees for purposes of this Book."
The test of "managerial" or "supervisory" status depends on whether a person possesses authority to
act in the interest of his employer and whether such authority is not routinary or clerical in nature but
requires the use of independent judgment.1 the rank-and-file employee performs work that is routinary
and clerical in nature. The distinction between these employees is significant because supervisory and
rank-and-file employees may form, join or assist labor organizations. Managerial employees cannot.

14. The 13th month pay is exempt from tax, up to a limit of PHP 82,000 (US$1600). However, in January
2018, the government issued the Tax Reform for Acceleration and Inclusion (TRAIN) law which raised
this limit to PHP 90,000 (US$1,778). If the 13th month pay exceeds this limit, the excess will be added to
the salary of the employee and included in the income tax calculation. Other benefits’ fall into the same
category as the 13th month pay and are subject to the same PHP 90,000 limit (US$1,778). In other
words, if ‘other benefits’ and the 13th month pay combine to a total of less than PHP 90,000 (US$1,778),
no tax is to be paid. If the combination of ‘other benefits’ and the 13th month pay exceeds the limit, the
excess will be subject to income tax.