An Employer’s Guide to Payroll in the Philippines

Currently, the Philippines is the fastest-growing economy in the ASEAN region, making it an emerging market for both local and international companies. However, setting up a business in the country requires a close understanding of its unique laws, such as recognised paid holidays, 13th-month pay, and mandatory deductions. Learn more about payroll in the Philippines here. 

What is Payroll, and Who is Responsible for It?

Payroll encompasses the entire process of managing the payment of wages by a company to its employees, which includes the calculation of employee earnings and the withholding of applicable taxes and other deductions. 

This process is typically the responsibility of the finance and human resources department, depending on the size and structure of the business. 

Additionally, companies may opt to use specialised payroll software or outsource this function to third-party payroll service providers to ensure compliance with legal and tax obligations efficiently.

How is Payroll Calculated in the Philippines 

In the Philippines, payroll calculation generally looks like this:

Gross Pay - Deductions = Net Pay. 

As simple as this equation is, each element has further components under them. For example, gross pay includes the basic salary, overtime pay, etc. The country also has compulsory payroll taxes, namely income tax, SSS, PhilHealth, and PAG-IBIG. As an employer, it’s your legal responsibility to ensure that your payroll process is in compliance with the existing legislation. 

Aspects of Work Structure in the Philippines and How They Affect Payroll

Some aspects of the country’s work structure has a significant impact on the employee’s payroll. If you plan on setting up payroll in the country, it’s best to know the following things inside out.

Probation Period

In the Philippines, it’s common for companies to hire employees on a probationary basis initially. This period typically lasts for 6 months from the date of an employee's start. During this time, performance is closely monitored to determine suitability for regular employment where they will have security of tenure. 

Probationary employment directly impacts payroll, primarily in two ways. First, while regular and probationary employees may have the same pay rate, their benefits may be different. Often, probationary workers don’t have de minimis benefits, like rice and transportation allowances. Secondly, if the employer chooses not to extend their contract, then payroll has to account for termination and severance. 

Normal Working Hours

The standard workweek in the Philippines is 40 hours, divided over five days. Any work beyond eight hours a day is considered overtime and must be compensated accordingly, which is a crucial aspect of payroll calculations.

Recognized Regular Holidays

The Philippines observes several regular and special holidays. Employees working on these days are entitled to additional pay, which must be accurately calculated and reflected in the payroll system. For example, working on a regular holiday entitles an employee to 200% of their daily rate. 

Termination and Severance

Termination policies in the Philippines are strict, regardless of the status of the employee but more so when they are under regular employment. Their security of tenure underscores that they cannot be terminated without just cause, the types of which are enumerated in the Labor Code.  

Severance pay is likewise mandatory for certain types of terminations, such as redundancy. Under the law, the termination of an employee due to labour-saving devices entitles them to a severance pay of at least 1 month their salary OR 1 month of their salary for every year of service, whichever is higher. 

These factors must be carefully managed within the payroll system to ensure compliance and fairness.

Payroll Cycle

In the Philippines, employers have to pay their employees once every two weeks (bi-weekly) or twice a month, at intervals not exceeding 16 days. 

By law, companies are prohibited from only paying their employees once a  month. There is, however, no law prohibiting them from paying their employees once a week.

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Important Components of Salary in the Philippines

To accurately calculate an employee’s payroll, companies must take into account the key elements of salary structure, which are as follows:

Minimum Wage in the Philippines

Employers MUST pay their employees at least the minimum wage, which in Metro Manila are:

• P610 per day for non-agriculture role
• P573 per day for agriculture, service and retail companies with 15 employees or less, and manufacturing companies with 10 employees or less. 

Note that the minimum wage varies across regions and industries. 

Cost of Living Allowance (COLA)

In addition to the basic salary, employees may receive a Cost of Living Allowance (COLA), which is a fixed amount designed to offset living expenses. The COLA is a mandatory component of the minimum wage earners.

Overtime Pay

Overtime pay is required for hours worked beyond the standard work hours, with rates varying depending on whether the overtime is on a regular day, a holiday, or a rest day. Below are the computations for overtime rate:

• Overtime hours, beyond 8 hours daily
  • Overtime rate = Regular hourly wage x 125%
• Overtime hours, beyond 8 hours during a holiday
  • Overtime rate = Rate of the first eight hours on a holiday or rest day x 130%

Holiday Pay

As mentioned earlier, the Philippines observes a number of paid holidays. Employers must still pay their workers 100% of their salary even if they don’t report to work. If they report, they are entitled to additional pay. 

13th Month Pay

The 13th-month pay is a mandatory benefit in the Philippines, usually equivalent to one month's basic salary, payable on or before the 24th of December. All employees are entitled to 13th-month, regardless of their position or whether they are regular or probationary. 

To compute the 13th month, employers simply need to take the total basic salary earned by the employee throughout the year and divide it by 12. The amount should not be less than 1/12th of that total basic salary. For regular employees, 13th month pay is usually equivalent to 1 month salary. 

Non-taxable Benefits

Certain benefits, such as de minimis benefits, are non-taxable. These include small-value benefits provided to employees on top of their basic salary and allowances. Some of the de minimis benefits employers can give include:

• Uniform or clothing allowance of up to P5,000 a year
• Unused leave credits converted to cash (maximum of 10 per year)
• Gifts with value of no more than P5,000 per year

Income Tax

Income tax is calculated based on an employee's taxable income, which includes the basic salary, allowances, and other taxable benefits minus deductions. Note that while it is the employees who are paying the income tax, employers are to be the withholding agency. 

Here’s the updated tax table from the Bureau of Internal Revenue:

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SSS, PhilHealth, PAG-IBIG Contributions

Employers and employees must make monthly contributions to the:

Social Security System (SSS) - this serves as the retirement plan for private employees. In general, the employer and employee contribute 14% of the monthly salary credit to the agency: 9.5% by the employer and 4.5% by the employee. Find the more detailed tables here. 

For government employees, the equivalent of this contribution is Government Service Insurance Service (GSIS). 

Philippine Health Insurance Corporation (PhilHealth) - this is the health insurance program by the government. Contributions depend on the income of the employee:

• P10,000 and below = P400, equally split between the employer and employee 
• Above P10,000 t0 P79,999.99 = 4%, 2% each by the employer and employee 
• P80,000 and above = P3200, equally split between the employer and employee 

You can find the expected increase in contributions here. 

Home Development Mutual Fund (PAG-IBIG) - contributions for PAG-IBIG serves as an investment and also gives employees access to low-interest housing loans. 

• Employees who earn P1,500 or less only need to contribute 1% of their monthly salary, whereas their employer has to contribute 2%. 
• Employees earning above P1,500 contribute 2%, with their employer matching it. 

Learn more about the contributions here.

How To Set Up Payroll in the Philippines

Setting up payroll in the Philippines requires careful planning and adherence to legal requirements, particularly the PH Employment Laws and the Tax Reform for Acceleration and Inclusion (TRAIN) Act. There are also various circulars and issuances from the BIR, SSS, PhilHealth, and PAG-IBIG that you should comply with. 

Below are the general steps in setting up payroll in the Philippines: 

1. Register with the Bureau of Internal Revenue (BIR) to obtain your employer identification number (EIN). 
2. Establish your payroll policies and process along with your compensation structure. Make sure that all these are in compliance with the laws. 
3. Collect employee data. Ensure that you secure the necessary documents to process payroll, such as forms from the BIR, PhilHealth, SSS, and PAG-IBIG. 
4. Proceed with payroll calculations. With the timesheets or attendance records, make the accurate computation of the compensation. 
5. Pay the employee. 
6. Document accordingly and keep records as necessary. 

In processing your employees’ information, remember to comply with the Data Privacy Act of 2012. 

Payroll Options for Companies in the Philippines

Choosing a suitable payroll system that can handle the complexities of Philippine payroll, including tax calculations, contributions, and benefits management, is crucial.

Companies in the Philippines can manage payroll in-house, outsource to a local payroll provider, or use payroll software solutions. Each option has its pros and cons, and the choice depends on the company's size, budget, and specific needs.

For instance, in-house payroll requires more resources and an in-depth knowledge on the laws and regulations. Outsourcing it to the experts may be beneficial, but remember that at the end of the day, companies will still be held liable for any non-compliance. 

Ensuring Integrity: Hiring Trustworthy Employees for HR and Payroll Operations

Common payroll challenges in the Philippines include staying updated with legal changes, managing employee data accurately, and ensuring timely and correct payroll processing. 

To address these concerns, certain practices have to be taken. These include regular audits, continuous learning and training for payroll staff, and leveraging technology for efficient payroll management.

Remember to hire only knowledgeable and trustworthy employees for your HR and finance  department. Keep in mind that they are to handle not only company finances but also sensitive employee information. It’s best to vet their skills and character through criminal records check and adverse financial history check. Conducting employment history and education verifications, along with reference checks, also help gauge their knowledge and skills when it comes to payroll processing. 

Veremark can help you protect your company assets and ensure workplace safety. Learn more about our background checks here.

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