How to Compute Your 13th Month Pay With Examples

The 13th-month pay is a mandatory benefit in the Philippines, providing employees with additional compensation near the end of the year. This benefit aims to offer financial relief and support, particularly during the holiday season. Understanding how this pay is calculated is important for both employees to anticipate their earnings and for employers to ensure compliance with labor laws.

Understanding Eligibility and Coverage

The 13th-month pay is mandated for all private sector rank-and-file employees, regardless of their position, designation, employment status, or the method by which their wages are paid. An employee becomes eligible for this benefit provided they have worked for at least one month during the calendar year.

Certain employees are generally excluded from this mandate. Managerial employees, defined as those who can hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees, or effectively recommend such actions, are typically not covered. Additionally, government employees are usually not covered by Presidential Decree No. 851, as they receive year-end bonuses through different schemes. Employers who already provide benefits equivalent to or exceeding the 13th-month pay are also exempt from this specific requirement.

The legal basis for the 13th-month pay is Presidential Decree No. 851. This decree was established to protect the real wages of workers and provide supplementary benefits, especially given the economic conditions at the time. Over the years, the core framework of this law has remained, entitling covered employees to a payment equivalent to one-twelfth of their annual basic salary.

Basic Calculation of 13th Month Pay

The fundamental formula for computing the 13th-month pay is straightforward: the total basic salary an employee earned during the calendar year, divided by 12 months. This calculation determines the minimum amount an eligible employee should receive.

“Basic salary” for this computation includes all remuneration or earnings paid by an employer for services rendered. However, it specifically excludes certain allowances and monetary benefits. These exclusions typically include cost-of-living allowances (unless integrated into basic pay), profit-sharing payments, cash equivalents of unused vacation and sick leave credits, overtime pay, premium pay, night shift differential, and holiday pay. These items are not considered part of the regular or basic salary for 13th-month pay purposes.

For example, consider an employee who has a consistent basic monthly salary of PHP 25,000 throughout the entire calendar year. To calculate their 13th-month pay, the total basic salary earned for the year would be PHP 25,000 multiplied by 12 months, which equals PHP 300,000. Dividing this total by 12 results in a 13th-month pay of PHP 25,000.

Adjustments for Specific Employment Scenarios

The computation of 13th-month pay requires adjustments for employees who do not render a full year of service. For new hires, or employees who have resigned or been terminated before the end of the year, the pay is calculated on a pro-rata basis. This means the benefit is proportional to the number of months the employee actually worked within the calendar year. The total basic salary earned during their period of employment is summed and then divided by 12.

For instance, if an employee with a basic monthly salary of PHP 25,000 worked for only eight months before resigning, their total basic salary earned would be PHP 25,000 multiplied by 8, resulting in PHP 200,000. Dividing this by 12 yields a pro-rata 13th-month pay of approximately PHP 16,666.67. This amount is typically settled with the employee’s final pay.

Periods of leave without pay (LWOP) also affect the computation. When an employee is on LWOP, their basic salary for those months is not earned, thereby reducing the total basic salary figure used in the calculation. The computation remains based on the aggregate basic salaries actually received throughout the year. Similarly, if an employee’s basic salary changed during the year, the calculation still relies on the sum of all actual basic salaries paid over the 12-month period. For example, if an employee’s basic salary increased mid-year, the higher salary would only count for the months it was earned, reflecting the actual total basic salary received.

Tax Exemptions and Payment Deadlines

The 13th-month pay, along with other benefits such as Christmas bonuses, is subject to a tax exemption threshold. Under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the combined total of these benefits is exempt from income tax up to a maximum of PHP 90,000. This threshold means that if an employee’s total 13th-month pay and other equivalent benefits do not exceed PHP 90,000, the entire amount is tax-free.

Any amount exceeding this PHP 90,000 threshold is subject to income tax and will be included in the employee’s taxable income for the year. Employers are responsible for ensuring that any taxable excess is properly withheld. The mandatory deadline for employers to pay the 13th-month pay is on or before December 24 of each calendar year. This ensures that employees receive the benefit in time for the holiday season.