Tax Implications for 13th Month Pay and Christmas Bonuses in the Philippines

Posted by Written by Ayman Falak Medina Reading Time: 2 minutes

In the Philippines, employees look forward to receiving their 13th-month pay and, in some cases, additional Christmas bonuses. These year-end benefits provide a financial boost during the holiday season. However, understanding the tax implications of these payouts is crucial for both employees and employers to maximize benefits and ensure compliance with tax regulations.

13th Month Pay: Tax-exempt threshold and rules

Understanding the PHP90,000 tax-exempt ceiling

The 13th Month Pay and other benefits are tax-exempt up to a total of PHP90,000 (US$1,526). This threshold applies to combined benefits, including bonuses, incentives, and other non-taxable income. Any amount exceeding will be subject to income tax based on the employee’s tax bracket.

Examples of tax-exempt and taxable 13th-month pay

For instance, if an employee receives PHP60,000 as 13th-month pay and PHP20,000 in other bonuses, the total of PHP80,000 is below the PHP90,000 threshold, making the entire amount tax-exempt. However, if the combined benefits total PHP110,000, the first PHP90,000 is tax-exempt, while the excess PHP20,000 will be subject to income tax.

Christmas Bonuses: When are they taxable?

Unlike the mandatory 13th month pay, Christmas bonuses are not required by law and vary by employer. These bonuses fall under the same PHP90,000 tax-exempt cap for benefits. If the total amount of the 13th-month pay and Christmas bonus combined exceeds PHP90,000, the surplus becomes taxable.

For example, if an employee receives PHP85,000 as 13th-month pay and PHP20,000 as a Christmas bonus, the combined total of PHP105,000 exceeds the PHP90,000 cap, making PHP15,000 taxable.

Combining 13th-month pay with other benefits

What counts toward the ₱90,000 exemption limit?

The ₱90,000 exemption covers not just 13th-month pay and Christmas bonuses but also other benefits like performance bonuses, productivity incentives, and anniversary bonuses. When calculating potential tax liabilities, employees need to consider the total sum of all these benefits.

Impact of exceeding the cap

Once the combined benefits exceed PHP90,000, the surplus is added to the employee’s taxable income. This can affect the overall tax bracket, leading to higher deductions.

Tax deductions for employers

Deductibility of 13th-month pay and bonuses

Employers can deduct 13th-month pay and Christmas bonuses as legitimate business expenses. To ensure these deductions are recognized by the Bureau of Internal Revenue (BIR), businesses should maintain accurate records, document all payouts, and file the necessary tax forms on time. Compliance with labor and tax laws ensures smooth year-end financial reporting.

Staying informed about year-end benefits

Understanding the tax rules for 13th-month pay and Christmas bonuses helps employees maximize their take-home pay and ensures employers comply with BIR regulations. By being aware of the ₱90,000 tax-exempt cap and how various benefits contribute to this limit, parties can avoid surprises and enjoy a smoother year-end payout process.

About Us

ASEAN Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Jakarta, Indonesia; Singapore; Hanoi, Ho Chi Minh City, and Da Nang in Vietnam; besides our practices in China, Hong Kong SAR, India, Italy, Germany, and USA. We also have partner firms in Malaysia, Bangladesh, the Philippines, Thailand, and Australia.

Please contact us at asean@dezshira.com or visit our website at www.dezshira.com and for a complimentary subscription to ASEAN Briefing’s content products, please click here.