Philippines 13th Month Pay: Computation & Rules

As the year draws to a close, one of the most anticipated financial events for Filipino employees is the receipt of their 13th Month Pay. Often mistaken for a Christmas bonus, the 13th Month Pay is a mandatory wage supplement required by Philippine law.

This guide provides a comprehensive overview, integrating guidelines from the Department of Labor and Employment (DOLE) and tax regulations from the Bureau of Internal Revenue (BIR), ensuring both employees and employers understand their rights and obligations.

The Legal Basis of 13th Month Pay

The requirement for 13th Month Pay is mandated under Presidential Decree No. 851 (PD 851), signed in 1975. It was further clarified by Memorandum Order No. 28 in 1986. The core principle is to provide an additional monetary benefit to low-income employees to cope with the cost of living, especially during the holiday season.

Who is Entitled to 13th Month Pay?

According to DOLE guidelines, 13th Month Pay is mandatory for all rank-and-file employees, regardless of:

  • Their designation or job title.
  • Their employment status (regular, probationary, casual, or fixed-term).
  • The method by which their wages are paid (daily, weekly, monthly).

The only requirement is that the employee must have worked for the employer for at least one month during the calendar year.

Who is Excluded?

PD 851 specifically excludes managerial employees from this mandatory benefit. A managerial employee is defined as one whose primary duty consists of managing the establishment they work in or a department thereof, and who customarily and regularly directs the work of two or more employees. Crucially, they possess the authority to hire, fire, or discipline other employees.

Employers must assess the actual job function, not merely the job title, to determine if an employee is managerial.

Note: While excluded by law, many companies voluntarily provide 13th Month Pay or an equivalent benefit to managerial staff through company policy or Collective Bargaining Agreements (CBA). If provided, the same tax rules apply.

How to Compute 13th Month Pay

The computation for 13th Month Pay is straightforward. It is equivalent to one-twelfth (1/12) of the total basic salary earned by the employee within the calendar year.

The Formula

13th Month Pay = (Total Basic Salary Earned during the Calendar Year) / 12

Defining Total Basic Salary Earned

Understanding what constitutes Basic Salary is crucial for accurate computation. DOLE defines it as all remunerations or earnings paid by an employer to an employee for services rendered.

It is important to note that Total Basic Salary Earned reflects the actual amount received by the employee. Therefore, deductions due to unpaid time off will lower this total.

Inclusions in Basic Salary

  • Basic monthly salary for actual days worked.
  • Allowances integrated into the basic pay (listed as part of the base salary).
  • Wage-Like Commission (direct remuneration for sales considered part of the basic salary).
  • Maternity Leave Salary Differential (the difference paid by the employer if the SSS benefit is less than the employee's salary).

Exclusions from Basic Salary

Unless company policy or a CBA explicitly states otherwise:

  • Cost-of-living allowances (COLA).
  • Commissions based on incentives or bonuses (unless deemed part of the basic salary via consistent company practice).
  • Profit-sharing payments and all forms of bonuses (e.g., Christmas Bonus).
  • Overtime pay, premium pay, night shift differential, and holiday pay.
  • Maternity Leave benefits from SSS (as this is a government benefit, not payment for services rendered).
  • Allowances and monetary benefits not integrated as part of the regular basic salary (e.g., Transportation or Meal allowances listed separately).
  • Unused vacation and sick leave credits converted to cash.

Sample Computations

Let's illustrate the computation with two scenarios based on a monthly rate of P20,000.

Scenario 1: Full Year Employment, No Unpaid Absences

Monthly Rate: P20,000
Total Basic Salary Earned: P240,000
Computation: P240,000 / 12
13th Month Pay: P20,000

Scenario 2: Full Year Employment, With Unpaid Absences

Monthly Rate: P20,000
Total Basic Salary Earned: P210,000
(after deductions for tardiness, undertime, and leave without pay)
Computation: P210,000 / 12
13th Month Pay: P17,500
Crucial Note: Deductions for unpaid time (Absent, Tardy, LWOP) reduce the Total Basic Salary Earned throughout the year. They are not deducted from the final 13th Month Pay amount.

Taxation Rules: The BIR Perspective

The tax treatment of the 13th Month Pay is governed by Republic Act No. 10963, known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

The P90,000 Non-Taxable Ceiling

Under the TRAIN Law, Section 32(B)(7)(e), a total amount of P90,000 is considered Non-Taxable for specific benefits. This ceiling covers:

  • 13th Month Pay
  • Christmas Bonus
  • Productivity Incentives
  • Loyalty Awards
  • Other similar benefits

The Impact of De Minimis Benefits

De Minimis benefits are small perks provided to employees to promote health, goodwill, or efficiency (e.g., rice subsidy, laundry allowance). These have their own specific tax-exempt limits.

However, any amount provided in excess of these specific De Minimis limits is not exempt. This excess must be pooled into the 13th Month Pay and Other Benefits category and counted against the P90,000 threshold.

Calculating Taxable Excess

If the total of the 13th Month Pay, other bonuses, and excess De Minimis benefits exceeds P90,000, the excess amount is subject to withholding tax. It will be added to the employee's total taxable compensation income and subjected to the graduated personal income tax rates.

Tax Example 1: Straightforward Excess

13th Month Pay Received: P100,000
Other Bonuses Received: P0
Non-Taxable Amount (Ceiling): P90,000
Taxable Amount: P10,000

Tax Example 2: Impact of Excess De Minimis

13th Month Pay Received: P100,000
Excess of De Minimis limits: P10,000
Total Benefits Subject to Ceiling: P110,000
Non-Taxable Amount: P80,000
(P90,000 Ceiling minus P10,000 Excess De Minimis)
Total Taxable Amount: P20,000
In Example 2, the P10,000 excess De Minimis consumes part of the P90,000 tax-exempt threshold, leaving less room for the 13th Month Pay to be tax-exempt.

Deadlines and Compliance

DOLE enforces strict deadlines regarding the 13th Month Pay:

  • Payment Deadline: The 13th Month Pay must be given to employees not later than December 24 of each year. Some employers opt to pay half in the middle of the year and the remaining half in December.
  • Compliance Report Deadline: Employers are required to submit a report of compliance to the nearest DOLE Regional Office not later than January 15 of the following year. Failure to comply can result in administrative penalties.

Scenarios for Resigned or Terminated Employees

Employees who resign, retire, or are terminated before the December 24 deadline are still entitled to a pro-rated 13th Month Pay.

This pro-rated amount is calculated based on the total basic salary earned from the beginning of the calendar year up to their last day of work. This amount must be included in the employee's Final Pay (Back Pay), which should be released within 30 days of separation. It cannot be withheld until December.