How to Properly Compute Your 13th Month Pay

The concept of “13th Month Pay” is a mandatory annual benefit provided to employees in some countries, notably the Philippines. It is a specific financial provision designed to offer additional support, typically during the holiday season. Understanding this benefit involves grasping its defined purpose, who is entitled to receive it, how its components are determined, and the precise method for its calculation.

Eligibility for 13th Month Pay

The 13th month pay is a legally mandated benefit for most employees in the private sector in the Philippines. All rank-and-file employees, regardless of their employment status or the method by which their wages are paid, are entitled to this benefit. An employee must have worked for at least one month during the calendar year to qualify for a pro-rated amount.

This benefit, established under Presidential Decree No. 851, does not cover managerial employees, defined as those vested with the authority to formulate or execute management policies, or to hire, transfer, suspend, or dismiss employees. Government employees are also exempt from the 13th month pay law, as they are covered by different compensation schemes, such as separate year-end bonuses. Employers who already provide benefits equivalent to or exceeding the value of the mandated 13th month pay may be exempt from providing an additional payment.

Components of the Calculation Base

The calculation of the 13th month pay primarily hinges on the “basic salary” earned by an employee. Basic salary, for this purpose, includes all remunerations or earnings paid by an employer for services rendered.

Certain allowances and monetary benefits are excluded from the basic salary calculation if they are not integrated into the regular or basic salary. These exclusions include cost of living allowances (COLA), profit-sharing payments, cash equivalents of unused vacation and sick leave credits, overtime pay, premium pay, night differential pay, and holiday pay. These items are excluded as they are supplementary to the regular wage and not part of base compensation. However, if such benefits are, by individual or collective agreement or company practice, treated as part of the basic salary, they would then be included in the computation.

Calculating the 13th Month Pay

The computation of the 13th month pay follows a straightforward formula. The formula is derived by dividing the total basic salary earned during the calendar year by twelve months.

To determine the “Total Basic Salary Earned during the year,” one must sum up all the qualifying basic salaries received by the employee from January to December. For instance, if an employee has a consistent monthly basic salary of PHP 20,000 and works the entire year, their total basic salary would be PHP 240,000 (PHP 20,000 x 12). Dividing this total by 12 yields a 13th month pay of PHP 20,000. In cases where an employee’s salary changes during the year, all basic salaries received in each month are added together before dividing by 12.

Specific Scenarios and Payment Guidelines

The 13th month pay calculation adjusts for employees not working a full calendar year. For those who have not worked for the entire year, such as newly hired, resigned, or terminated employees, the 13th month pay is computed on a pro-rata basis. The same formula applies, but the “total basic salary earned” only includes the months or periods the employee actually worked. For example, an employee earning PHP 15,000 monthly who worked for six months would have a total basic salary of PHP 90,000 (PHP 15,000 x 6), resulting in a pro-rated 13th month pay of PHP 7,500 (PHP 90,000 / 12).

Employees who resign or are terminated before the payment of the 13th month pay are still entitled to their pro-rata share, which should be included in their final settlement. Employers are legally mandated to disburse the 13th month pay on or before December 24 of each year. The 13th month pay, along with other benefits, is tax-exempt up to a certain threshold, which is PHP 90,000. Any amount exceeding this combined threshold may be subject to income tax.