Mastering 13th Month Pay Computation in the Philippines

In the Philippines, 13th month pay is a crucial government-mandated benefit. For payroll professionals, ensuring accurate computation, timely disbursement, and strict compliance with tax regulations is essential. This guide explores the formula, legal requirements, and advanced strategies for handling 13th month pay effectively.

The Legal Basis

Mandated by Presidential Decree No. 851 and clarified by Memorandum Order No. 28, 13th month pay must be given to employees not later than December 24 every year.

The Basic Computation Formula

The calculation for 13th month pay is fundamentally straightforward:

13th Month Pay = (Total Basic Salary Earned for the last 12 months in the company) / 12

Total Basic Salary Earned includes the employee's regular wage. It is important to note that deductions such as Tardy, Absent, Undertime, Halfday, and Leave Without Pay will reduce the Total Basic Salary Earned.

Computation Scenarios

Scenario 1:
Monthly Rate: 20,000
Total Basic Salary Earned for the last 12 months: 240,000
13th Month Pay: 20,000

Scenario 2:
Monthly Rate: 20,000
Total Basic Salary Earned (less deductions): 210,000
13th Month Pay: 17,500

Managing the Cut-off Period

Because the payment deadline is December 24, using a calculation period that ends on December 31 is impractical. If the Total Basic Salary Earned starts in January, it will not complete the 12 months before the deadline.

To address this, companies adjust the cut-off for getting the Total Basic Salary. Common strategies include:

• Move 1 Period: The cut-off starts at the December 2nd Period of the Previous Year to the December 1st Period of the Current Year.

• Move 1 Month: The cut-off starts at December 1st Period of the Previous Year to the November 2nd Period of the Current Year.

These adjustments ensure timely processing before the legal deadline.

The 90,000 Non-Taxable Limit (TRAIN Law)

Taxation is a critical component of 13th month pay. As indicated by Republic Act No. 10963 (Tax Reform for Acceleration and Inclusion or TRAIN Law), only 90,000 will be considered as Non-Taxable.

Any amount in excess of 90,000 will be subjected to Withholding Tax.

Example:
13th Month Pay: 100,000
Non-Taxable: 90,000
Taxable: 10,000 (subject to Withholding Tax)

The Withholding Tax Challenge

A significant issue arises because companies often separate the payroll for 13th Month Pay from the Regular Payroll.

Most companies and payroll software providers apply the standard Withholding Tax computation provided by BIR to the taxable excess. However, by separating the payrolls, there is a big chance that the excess of 90,000 will be too small to be taxed using the regular withholding tax formula.

The Problem Scenario:
Monthly Rate: 95,000
13th Month Pay: 95,000
Taxable: 5,000

If we plot the 5,000 taxable amount in the withholding tax table (both Semi-Monthly and Monthly), it is below the minimum. No Withholding Tax will be computed.

This creates a problem during Annualization or Annualized Tax Computation. That 5,000 taxable amount will be seen again, and the computation will show that there is still a tax payable. This will surprise the employee not in a nice way.

The NBS Solution

To prevent this discrepancy and ensure accurate tax withholding, a minor adjustment in computing the Taxable 13th Month Pay is necessary. This is the NBS Solution.

Instead of applying the regular withholding tax formula, we just get the tax rate based on the monthly rate and use it to compute for the tax of the Taxable 13th Month Pay.

The NBS Solution Applied:
Monthly Rate: 95,000
13th Month Pay: 95,000
Taxable: 5,000 Tax Rate (based from Monthly Rate): 30%

Formula:
Taxable 13th Month Pay * Tax Rate
Withholding Tax for 13th Month Pay: 1,500

This approach ensures appropriate tax is withheld when the benefit is paid, leading to accurate net pay and preventing surprises during year-end annualization.

Accurate payroll processing is vital for compliance and employee satisfaction. At Northeast Business Solutions, Inc., we implement optimized strategies to ensure your payroll is precise and compliant with Philippine regulations.