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Comprehending Payroll in Philippines

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The Philippines is an archipelago located in the Pacific Ocean. With the country taking measures for businesses to thrive, many organizations are finding it lucrative to begin business here. Some of the most important factors include:

  • Ease of Doing Business Act: This act offers many benefits for companies setting up in the country.
  • Revised Corporation Code: From making it possible for executives to remotely partake in elections and meetings, to providing provisions to protect minority stockholders, these reforms offer new companies various advantages.
  • Availability of Skilled Workforce: With rates of literacy and higher education being quite high in the Philippines, the country has one of the most skilled workforces amongst all the ASEAN nations.

With the opportunities available to establish the business, also comes the responsibility to be compliant with the government regulations. Some of those regulations include: 

1. Employment regulations

As per the Labor Code of Philippines (referred hereafter as Code), the employer needs to ensure the compliance as stated below:

  • Overtime
    Working hours defined as per the above Code cannot exceed 8 hours. If any employee, other than an employee at managerial position, field personnel, and workers who are paid by results, works for more than 8 hours, then the employers are under an obligation to pay the overtime to such employees. The minimum overtime rate should be 125% of the normal hourly rate and it shall increase further depending on whether the employee is working overtime on a regular day, holiday, special day, rest day or working in a night shift.

    Further, the House of Committee on Labor and Employment recently proposed the Compressed Shift Agreement. As per the Agreement, the normal work week is reduced to less than six days but the total number of work hours per week remains 48 hours.
  • Minimum Wages
    No standard minimum wages are applicable across the Philippines and it varies upon different factors like region, size, and industry in which a company operates.
  • Retirement Pay
    The employer is also under an obligation to make either the minimum retirement pay or pay as defined under the retirement plan, for those employees who have reached the age of sixty (60) years or more, but not beyond sixty-five (65) years, and who has served at least five years in the said establishment at the time of retirement.

    The minimum retirement pay for which the employees are eligible is at least one-half (1/2) month salary for every year of service. Also, any fraction of at least six months shall be considered as one whole year. Such retirement payments made to its employees shall be tax-exempt.
  • 13th Month Pay
    All rank-and-file employees who have worked for at least 1 month during the calendar year, are entitled to receive 13th-month payout not later than December 24 of every year, regardless of the nature of their employment and irrespective of the methods by which their wages are paid.

2. Income Tax

As per the Bureau of Internal Revenue (BIR), the employers are under an obligation to withhold taxes from the employment income at the time of payment. The tax slabs to withhold taxes depends on the frequency of payout. If the salary is paid weekly, then a weekly withholding tax table needs to be used and similarly relevant tables to be used for daily, monthly, and semi-monthly payouts. For any other frequency used for payouts, one needs to refer to the monthly table by appropriately deriving the monthly salary. Further, at the year-end or at the time of termination of the employee, the employer needs to follow Annualisation method and refund any excess taxes recovered from the employee.

The employer needs to withhold the taxes at progressive rates for Resident employees varying from 0 percent to 35 percent depending on an employee’s annual income; however, the employment income of Non-Resident employees, not engaged in trade or business (NRINETB), is taxable at a flat rate of 25 percent. Further the employer needs to withhold a fixed rate of 15, 25 or 35 percent on the taxable value of the benefits paid in kind to its employees other than ‘Rank & File’ employees depending upon the residential status of the employee.

The employer is required to make the payment of taxes withheld to the authorities by 10th of the following month except for the withholding tax for December, which must be paid not later than 15 January of the following year and should ensure the reporting of the same in prescribed forms.

3. Social Security Law

The country’s social law requires both employees and employers to contribute towards the Social Security System (SSS), National Health Insurance Programme (PhilHealth) and Home Development Mutual Fund (HDMF).

The SSS, also known as Paseguruhan ng Kapanatagang Panlipunan, is a state-run social insurance program managed by the Philippines authorities. Currently the SSS contribution rate is 11% of each staff member’s monthly salary.

Philhealth is a tax-exempt, government-owned and controlled corporation of the Philippines. Currently the contribution rate is 3% of each staff member’s salary, divided equally between employer and employee.

The HDMF is a Philippine government-owned and controlled corporation under the Department of Human Settlements and Urban Development. For all employees, HDMF contribution starts immediately after getting hired and is deducted from their pay. Currently, the contribution rate is 2% for the employer and 1% / 2% for the employee depending upon the salary of staff member.

Apart from the above contribution amount, the employer is obliged to deduct and remit the employee’s loan amortization amount to respective Fund until the separation of employee or full repayment of the loan whichever is earlier. 

4. Leave entitlement and payouts

Here are the different types of paid leave employees are entitled to, after providing the required information to their employers, as may be prescribed:

  • Paid Sick Leave: Employer shall pay 90% of average daily salary credit for 120 days, to a member who has paid at least three (3) monthly contributions to Social Security in the twelve-month period immediately preceding the semester of sickness or injury.
  • Paid Maternity Leave: Any woman who has worked for at least 6 months in the past 12 months, is eligible for claiming Maternity Leave. The employer shall pay 100% of average daily salary credit for 60 days or 78 days (in case of caesarian), to the pregnant woman employee, within 30 days from filing of maternity leave application.
  • Paid Paternity Leave: An employer shall provide all legally married male employees paternity leave with full pay, of 7 working days, for up to 4 child births or miscarriages, which is to be availed within 60 days from delivery/miscarriage.
  • Paid Parental Leave: The benefit of this leave can be availed by any solo parent or individual who is left alone with the responsibility of parenthood. The employer shall provide paid leave of 7 working days every year to solo parent employee, who has rendered at least 1 year of service.
  • Yearly Service Incentive leaves: Employees who have completed 1 year of service are entitled to Yearly Service Incentive Leaves (SIL) i.e. 5 days paid leaves every year. The unused SIL at the end of the year can be encashed as per the salary paid on the date of conversion.
  • Also, female employees who are victims of domestic violence are entitled to a maximum of 10-day paid leave, subject to meeting the prescribed conditions.

Ensuring payroll compliance can be challenging for any company, especially if it is manually managed as it is prone to human errors. Also, the bigger challenge is to interpret the statutory updates and apply the same in calculations and reporting.

Ramco's Global Payroll Services covering 45+ countries on a single platform using powerful automation, equipped with AI and Machine learning capabilities resolves such challenges. Backed by automation, Ramco's payroll solutions help facilitate accurate and effortless payroll processing for organizations that are keen on ensuring complete compliance with the relevant regulations.

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About Author

Manju Shetija

Manju Shetija heads Payroll Bureau in Ramco and takes care of the Statutory Compliance in the product. She comes with a decade of experience in tax & social security advisory, compliance assignments in PwC

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