Tax-exempt compensation, you like it?

Let us try to explore when a compensation would be exempted from income tax. In general, allowances and other form of compensation income, are taxable, irregardless of how they are called. However, there are noted exceptions on this rule by virtue of a law or a regulations. For sure, they will make employees happier because no withholding tax on compensation will be deducted from their salaries.

Last year, a new law was passed giving exemptions to certain compensation income with the end view of uplifting the economic standing of some class of compensation income earners. Republic Act No. 9504 had became effective on July 6, 2008 and provides a tax-free salaries for minimum wage income earners with respect to their basic minimum wage salaries, holiday pays, hazard pays, overtime pays, and night shift differentials (this I commonly term as B-HON). Minimum wage is the lowest salary that an employer can pay its employee and is set by the Regional Tripartite Wages and Productivity Board (RTWPB) of the Department of labor and Employment(DOLE) on a per region basis. Holiday pays are those required by the Labor Code of the Philippines to be paid on certain holidays (e.g. Labor day, Araw ng Kagitingan, etc.), overtime pay is compensation for worked performed beyond the regular 8-hour work, night shift differentials is a 10% on top of the regular rate for work done from 10:00 p.m. to 6:00a.m., while hazard pay is one required by law for hazardous industries. Thus, it may mean a lot to bargain for a minimum wage (P382 in Metro Manila now) plus allowances and benefits than for a straight basic salary higher than the minimum wage but with the same total amount.

Another exempt compensation are de minimis benefits enumerated under the Bureau of Internal Revenue (BIR) Revenue Regulations. De minimis benefits are those of relatively small values furnished by the employees to uplift the welfare and economic standing of its employees. They are specifically enumerated in the regulations (RR 8-00, as amended) like rice allowance of P1,500 a month, uniform allowance of P4,000 a year, cash gift of P5,000 a year under certain condition, medical allowances, laundry allowance, etc. Taken individually, they seem to be small amounts, but if all are applied and maximized, then, it may mean much to the employees take home pay.

Another is the P30,000 13th month pay, other bonuses and other benefits provided under the Tax Code. This covers the statutory 13th month pay to the extent of P30,000 a year. Other bonuses and those de minimis benefits exceeding the limitations are considered, in case the 13th month pay is less than P30,000.

As to managerial and supervisory employees, fringe benefits is also an exemption as to them, but taxable under the employer at the rate of 32% based on the grossed-up monetary value. Fringe benefits refer to those benefits granted by the employer to the managerial or supervisory employees other than de minimis benefits like housing benefits, car plans, grocery and personal items, personal foreign travels and the likes, on top of their basic pay.

Its a good thing also on RA No. 9504 that personal exemptions deductible in computing the individual income tax are being increased from P20,000/P25,000/P32,000 basic personal exemption (BPE) based on personal status, to a uniform amount of P50,000. Likewise, the P8,000 per qualified dependent child had become P25,000 per qualified dependent child. By implication, a Filipino with four qualified dependent child with a taxable income of at least P150,000 a year is not taxable.

While the above seemed to be great for employees, they must be applied properly and with observance of the requirements and conditions for their applicability. BIR is vigilant in those items as it had been greatly abused in the past. Please consult your tax lawyer or professional on how the same will properly be applied so you won’t have any problems in the future.

Related posts:
a. Withholding tax on compensation, how it works?

Tags: 13th month pay, 30000, allowances, compensation, de minimis benefits, fringe benefits, P30, personal exemption, withholding tax