How to Compute 13th Month Pay Philippines

Understanding 13th Month Pay

The 13th-month pay is a mandatory benefit for eligible employees in the Philippines, providing additional financial support as the year concludes. This benefit is a significant aspect of employee compensation, especially during the holiday season, helping with increased living expenses.

This annual entitlement finds its legal basis in Presidential Decree No. 851, which was issued in 1975. The decree mandates that private sector employers provide this payment to their rank-and-file employees, ensuring they receive additional income.

All rank-and-file employees in the private sector are covered by this mandate, regardless of their employment status, such as permanent, probationary, or contractual. An employee becomes eligible if they have worked for at least one month within the calendar year. This also includes foreign employees working in the Philippines, provided they meet the same criteria.

Employers in the private sector are generally obligated to provide the 13th-month pay. However, some specific exemptions exist, such as government entities and their political subdivisions, as government employees typically receive other year-end bonuses. Employers already providing equivalent benefits that meet or exceed the value of the 13th-month pay are also exempt.

Calculating the 13th Month Pay

The calculation of the 13th-month pay follows a straightforward formula designed to reflect an employee’s annual basic earnings. The standard computation involves taking the total basic salary earned by an employee during the calendar year and dividing it by twelve months. This ensures the employee receives an amount equivalent to one-twelfth of their annual basic pay.

For this calculation, “basic salary” includes all fixed remuneration and earnings paid by the employer for services rendered. It generally excludes allowances and monetary benefits not integrated into the regular or basic salary. Examples of typically excluded items are the cash equivalent of unused leave credits, overtime pay, premium pay, night differential, holiday pay, and cost-of-living allowances, unless these are explicitly treated as part of the basic salary through individual or collective agreements or company policy.

To illustrate, consider an employee with a consistent basic monthly salary of PHP 25,000 who worked for the entire calendar year. The total basic salary earned would be PHP 25,000 multiplied by 12 months, equaling PHP 300,000. Dividing this total by 12 would result in a 13th-month pay of PHP 25,000.

If an employee’s basic salary changes during the year, all basic salaries earned throughout the year are summed up. For instance, if an employee earned PHP 20,000 per month from January to June and PHP 25,000 per month from July to December, the total basic salary would be (PHP 20,000 x 6) + (PHP 25,000 x 6) = PHP 120,000 + PHP 150,000 = PHP 270,000. The 13th-month pay would then be PHP 270,000 divided by 12, resulting in PHP 22,500.

Special Scenarios for Calculation

Variations in employment duration or circumstances necessitate adjustments to the standard 13th-month pay calculation. Employees who have not rendered a full year of service are entitled to a pro-rata computation. This applies to new hires, employees who have resigned, or those whose employment was terminated during the year.

The pro-rata calculation is based on the total basic salary earned by the employee from the start of the calendar year up to the time of their resignation or termination. For example, if an employee worked for eight months and earned a total basic salary of PHP 160,000 during that period, their pro-rated 13th-month pay would be PHP 160,000 divided by 12, which amounts to approximately PHP 13,333.33. This ensures the benefit is proportional to the actual length of service within the year.

Unpaid leaves or absences also impact the computation, as only the actual basic salary earned is included. If an employee takes an unpaid leave, the period of absence reduces the total basic salary accumulated for the year, consequently affecting the 13th-month pay calculation. The total basic salary earned is adjusted by deducting any amounts corresponding to unpaid leave.

While certain benefits like commissions, overtime pay, and holiday pay are generally excluded from the basic salary for 13th-month pay purposes, they may be included if they are consistently treated as part of the basic wage through company practice or agreement. This distinction is important to accurately determine the total basic salary base for all employees, regardless of their specific work arrangements or partial year service.

Payment Requirements and Exemptions

Employers are legally required to disburse the 13th-month pay on or before December 24 of each year. This deadline is set to provide employees with financial resources for the holiday season. While some companies may opt to pay earlier or in two installments (e.g., half in June and the remaining half in December), the final payment must be completed by the December deadline.

The 13th-month pay is generally exempt from income tax up to a certain threshold. Currently, the combined total of the 13th-month pay and other equivalent benefits is tax-exempt up to PHP 90,000. Any amount exceeding this threshold becomes subject to income tax. For instance, if an employee receives PHP 85,000 in 13th-month pay and PHP 20,000 in other bonuses, the combined total of PHP 105,000 would mean PHP 15,000 is taxable.

Certain types of employers are exempt from the mandatory 13th-month pay. This includes government entities and their political subdivisions, including government-owned and controlled corporations, unless they operate essentially as private subsidiaries. Employers who already provide their employees with similar benefits that are equal to or exceed the 13th-month pay are also not required to provide an additional payment. Employers of household workers are likewise exempt, as domestic workers fall under different compensation regulations.