Minimum Wage and Tax Exemptions in The Philippines

Last March 18, 2015, the National Capital Region wage board approved a salary hike of P15, bringing the statutory minimum daily wage for non-agricultural workers up to P481. The change took effect on April 4, 2015.

Republic Act No. 9504 states that minimum wage workers are exempted from income and withholding taxes. Employers have the duty to determine if any of their employees falls under this category.

Determining Tax Exemption

How would you know if an employee is exempt from income tax? Below are some simple rules to follow:

1. If the employee is earning P481 a day, then he is income tax-exempt. The employee’s rate is the sum of his daily basic wage, plus the following:

  • Holiday pay
  • Hazard pay
  • Overtime pay
  • Night differential

2. If the employee earns more than P481, he is subject to income tax.

3. If the employee is paid monthly, you need to determine if his corresponding daily income is equivalent to the statutory daily minimum wage.

Monthly Paid Employees

For monthly-paid employees, you can either compare their monthly rates to the monthly equivalent of the statutory minimum daily wage, or you can determine the employee’s daily wage equivalent and compare this against the minimum wage.

Either way, you will need to pick a denominator, which is basically the employee’s monthly wage coverage. The choices are as follows:

  • 261 days – for employees who don’t work and receive compensation for Saturdays, Sundays or other rest days
  • 313 days – for employees who don’t work and receive compensation for Sundays or other rest days
  • 365 days – for employees who don’t work but receive compensation for Saturdays and Sundays or other rest days, as well as regular and special holidays
  • 392.5 days – for employees who work every day including Sundays

To compare the employee’s monthly wage against the monthly equivalent of the statutory minimum daily wage:

  1. Pick the appropriate denominator
  2. Multiply the minimum daily wage of P481 by the denominator and divide by 12 months
  3. Compare the result against the employee’s monthly rate

To compare the employee’s equivalent daily wage against the statutory minimum daily wage:

  1. Pick the appropriate denominator
  2. Multiply the employee’s monthly rate by 12 months, and divide the result by the denominator
  3. Compare the result to the statutory minimum daily wage

Failure to Withhold Taxes

It is important to accurately determine if an employee is tax-exempt or not. If BIR authorities assess that you failed to withhold the necessary income taxes, you may be charged with tax deficiency and required to pay the taxes that should have been withheld plus penalties. Your expense for the salaries in question may also be disallowed.

If you are unsure about the proper steps to take, do not hesitate to consult with a professional such as a CPA. If you need help or representation with BIR authorities, give our lawyers at Duran & Duran-Schulze Law a call.

Click the PDF link below to view WAGE ORDER NO. NCR-19 from the Department of Labor and Employment:

DOLE Minimum Wage – Wage Order No. NCR-19