How Payroll Works In The Philippines

One of the most essential HR functions is payroll management. Its time sensitivity requires companies to allocate time and resources to carry out such a task. 

Companies often experience common pain points in payroll management. Compliance with the taxation systems is one of the most common ones they face. 

The ever-changing labor laws make it challenging for companies to follow. Other challenges include keeping up with market rates pay equity and transparency, and complex compensation structures. 

For that, read through today’s guide on salaries and taxation in the Philippines to learn about the relevant laws and regulations for compliance. This also covers the processes necessary to build an internal payroll system and ensure the proper remittance of both corporate and individual income taxes to the authorities.

How Much Do Average Filipinos Earn?

As per a reliable offshoring calculator, a data entry specialist in the Philippines earns an average of USD 9,800 annually, which is 74% less than what an American hire receives. This makes the monthly salary in the Philippines at an average of US$ 816.64.

However, this rate is also dependent on the industry in which one works. In 2023, workers in the following roles were paid the highest rates:

If you want to know and compare the salaries in the Philippines, you may use this transparent and reliable salary calculator.

This covers incentives but is not limited to 13th-month pay and mid-year bonuses. The 13th-month bonus pay is a mandatory incentive paid to employees before the 24th of December or before the end of the contract date. This is equivalent to a month’s salary. 

When Do People Get Paid, and Are Taxes Withheld Automatically? 

Unlike other countries where payday comes only once a month, Filipino employees typically get their pay on the 15th and 30th of every month. 

The schedule of withholding taxes from salaries depends on the payroll structure of the company. Employers must act as withholding agents by deducting income taxes from their employees’ monthly salaries. 

The Philippine government has six income brackets depending on the employees’ annual salaries: 

• ₱0 to ₱250,000: 0%
• ₱250,001 to ₱400,000: 15%
• ₱400,001 to ₱800,000: 20%
• ₱800,001 to ₱2,000,000: 25%
• ₱2,000,001 to ₱8,000,00: 30%
• Over ₱8,000,000: 35%

Why Pay Income Taxes in the Philippines?

Foreign companies are encouraged to comply with Philippine taxation laws, as it boosts their credibility. This is crucial if they wish to operate within the country. 

As per Republic Act No 9337, foreign companies operating in the Philippines are subject to an income tax equal to around 30% of their taxable income from the preceding fiscal year. 

The minimum gross income tax the Philippine Bureau of Internal Revenue (BIR) can charge foreign companies is 2%. It also depends on both annual total income and the industry of affiliation.

How Much is the Withholding Tax from an Employee’s Paycheck?

As of January 2023, the mandatory amount withheld for taxes from an employee’s monthly income ranges between 15% to 35% of one’s gross pay. 

The National Tax Research Center provides a general overview of taxes withheld and other necessary deductions such as contributions to the Social Security System (SSS) and PhilHealth, the public health fund. 

You may also compare figures using the BIR Philippines income tax calculator, which shows the amount taxed from either one’s monthly or annual income.

Tip: Check out the BIR’s standardized salary tax table online.

There are, however, several compensatory measures that are exempt from taxes. These include:

• The mandatory 13th-month pay (usually equivalent to a month’s gross salary) is given at the end of the year;
• Cost of any remuneration paid to an employee in the event of work-related incidents and/or illness and hospitalization;
• Life and/or group insurance; and
• Any bonuses awarded to an employee in recognition of exceptional performance, the attainment of specific corporate goals or targets, commencement of employment with a company, and promotions.

Important Notes for Foreign Workers In the Philippines 

Note that this does not apply to foreign workers assigned to the Philippines. In general, around 25% of the total amount earned monthly is withheld from an employee’s wages. 

However, this may also change depending on a foreign employee’s country of origin or the country where the company was incorporated and/or serves as its primary base of operations.

The Benefits of Withholding Taxes

Most Filipino employees rely on their employers to automatically deduct their taxes and subsequently file them with the BIR. This ensures that they don’t miss out on paying their taxes on time. 

On the employers’ end, automatically withholding taxes ensures that they steer clear of delinquencies and it reduces the cost of collection efforts. 

This applies to corporations in different industries, both domestic and foreign which operate in the  Philippines, regardless of whether these are involved in offshoring or outsourcing.

How to Set Up Your Payroll in the Philippines

For foreign companies who wish to operate in the Philippines, this is how you set up your payroll system. 

For any company—foreign or domestic—the following process is mandatory to ensure compliance and reinforce a firm’s credibility.

1. Establish the Business with the Relevant Philippine Authorities 

To be recognized as a legitimate business conducting business in the Philippines, both foreign and domestic firms are required to register with both the BIR and the Securities and Exchange Commission (SEC.) 

This allows companies to pay tax online in the Philippines via ePay, or through any recognized online channels.

2. Internally Set Your Standard Payment Policy and Process

This involves more than just establishing a pay schedule and a scale of fees. A standard process requires the following:

1. Pay schedule;
2. Employee classification (Part-time, full-time, contractual, consultatory, etc.);
3. Employee benefits;
4. Taxation and government-mandated deductions;
5. Payroll automation (whether or not you should use Excel to compute and process your payroll or use other digital automation tools such as a payroll tax calculator attuned to the Philippines); and
6. Pay disbursement method (whether you should distribute physical pay packets, checks, or directly deposit an employee’s wages into an assigned account in the company’s bank of choice.)
7. Set Your Standard Pay and Taxation Scales

On top of standard compensation and deductions, considerations should also be made for compensation in the following events:

• Illness or parenthood
• Paid sick leave
• Vacation leave
• Mandatory thirteenth-month pay 
• Night differentials
• Retirement pensions
• Social security
• Health insurance 
• Holiday allowance
• Non-taxable benefits
• Holiday pay 
• Overtime pay

4. Distribute the Necessary Forms to Compile Employee Information

Employers are required to file electronically for tax exemption of their new employees using the BIR form 2305. This ensures timely deduction and remittance of their taxes to the Bureau.

5. Check the Records for Time at Work to Compute Compensation

Keeping a standard record of employee time at work through either digital attendance systems or analog Bundy clocks and logbooks is necessary for the computation of their wages.

6. Disburse Payment

This may be done through physical disbursement or direct deposit to individual accounts. A payslip must be provided either physically or through email. 

7. Retain Records of All Compensatory Actions

Employers must keep track of the following compensatory actions as complied by local governing laws: 

• Direct Deposit Details
• Employee Information
• Deductions
• Time Sheets 
• Leave Records 
• Reimbursement forms
• Tax documents 
• Incentives 

Keeping track of this list of information will help you gauge if your chosen offshoring partner treats your offshore team fairly, and if they are indeed compliant with local governing labor laws. 

Find a Compliant Offshoring Partner

The intricacy of the payroll and taxation processes in the Philippines can be tasking and overwhelming. That is why, finding the right offshoring partner is a sustainable direction to go, should they wish to expand their operations here. 

Choosing a trusted offshore partner will cover all your bases in payroll, taxation, and compliance. They will manage payroll and compliance for you so that you can focus on the revenue-generating side of your business.