What is 13th month pay? Should you be taxed for it?
The month of December brings excitement, with Christmas, family gatherings, and bonuses like 13th month pay adding to the festive cheer—it's no wonder it's everybody's favorite time of the year! But what exactly is 13th month pay, and how does it work?
The 13th month pay is a mandatory benefit for all employees in the Philippines, legally entitling them to an additional month’s worth of salary.
DOLE on Sunday reminded private-sector employers to release the 13th-month pay of workers no later than December 24, 2023.
Who is entitled to this benefit?
All rank-and-file employees in the private sector "regardless of their position, designation, or employment status, and irrespective of the method by which their wages are paid, provided that they have worked for at least one month during the calendar year," are entitled to receive this bonus, as noted by the Department of Labor and Employment.
The minimum 13th-month pay shall not be less than one-twelfth (1/12) of the total basic salary earned by an employee within the calendar year.
Is it taxable?
You may be wondering, are bonuses also taxable like the regular salary?
Bureau of Internal Revenue (BIR) told PhilSTAR L!fe that the 13th month pay is generally exempted from withholding tax "provided that the amount of exemption shall not exceed ninety thousand pesos (P90,000.00)."
"Aside from the 13th month pay, there are other non-taxable benefits that are included in the computation of the 90,000 thresholds. The combined amounts of these other benefits shall not exceed the threshold, otherwise, any excess will be subject to corresponding withholding tax," the bureau added.
Meaning to say, anything in excess will be subject to an income tax. For instance, your 13th month pay is P120,000, the P90,000 is tax-free while the excess P30,000 is taxable. If you are in the 20% income tax bracket, that's less P6,000 from the P30,000 excess. This will leave you with P114,000 total 13th month pay.
In a conversation with L!fe, Atty. John Angel Bautista also clarified that other benefits are included in the threshold amount received by the employee, not just the 13th month's pay.
"If he or she received other benefits within the year which, when totaled, exceeds the P90,000 threshold, her/his 13th month pay may be taxed," he told L!fe, adding that the computation of the threshold amount does not include holiday pay, overtime pay, night shift differential pay, and hazard pay "since these are all tax-exempt."
Marcelino Gemino Jr, an account analyst, also said L!fe the same thing, while noting that tax deduction varies and depends on the company. This can be daily, weekly, monthly, semi-monthly, quarterly, semi-annually, or annually.
"It depends on the company," he said.
What if the employee notices a discrepancy in their bonus?
If an employee encounters an issue with their bonus or withholdings, he or she may claim for tax refund or tax credit said Atty. Bautista.
"But if the issue can be remedied at the level of the withholding agent (i.e. employer), that would be the best course of action. This may be a good time for the employee to pay their office’s accountant or lawyer a visit to seek advice and/or clarification," he told L!fe.
Gemino, on his part, also said that an employee can always consult their payroll master if there are issues with their 13th month pay.
"If it does not exceed, then he should consult his payroll master about it baka meron mga surrounding circumstances why meron tax yung kaniyang 13th month [pay]," he said.
"Now, if hindi siya satisfied sa reason ng kaniyang payroll master, the last option is to report it to BIR or the Bureau of Internal Revenue," he continued.
Mandatory compliance
Meanwhile, DOLE clarified that employers shall not be allowed to request for exemption or deferment from paying the 13-month pay of their workers.
If in case, DOLE said, "employers are directed to submit a report through the DOLE Establishment Report System no later than January 15, 2024."
It added that the the report shall contain the name of the establishment, address, principal product or business, total employment, the total number of workers benefitted, the amount granted per employee, and the total amount of benefits granted.