The 13th-month pay is one of the most anticipated benefits for Filipino workers, serving as a mandatory, much-needed boost before the holidays. Understanding how it’s calculated and its tax implications is key to ensure employees are informed and can plan effectively for the season.

How to compute your 13th-month pay

The 13th-month pay is a mandatory benefit for all rank-and-file employees in the private sector who have worked for at least one month during the calendar year, as mandated by Presidential Decree No. 851.

The computation is straightforward: it is equivalent to one-twelfth (1/12) of the total basic salary an employee earned during the calendar year.

Pro-Rated Computation: If you have not worked for the full 12 months (e.g., you started mid-year, resigned, or were terminated), you are still entitled to a pro-rated 13th-month pay based on the total basic salary earned from your start date up to the date of computation or separation.

What is ‘basic salary’?

The basic salary includes all remuneration or earnings paid by an employer to an employee for services rendered. It is the regular or fixed compensation for services, but generally excludes supplementary benefits.

The tax advantage: Understanding the exemption

A significant benefit of the 13th-month pay in the Philippines is its non-taxable status up to a certain limit under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, or Republic Act 10963.

Currently, the 13th-month pay and other benefits (like Christmas bonuses, productivity incentives, and other benefits not considered “de minimis”) are exempt from income tax up to a maximum aggregate amount of P90,000.

• If your total benefits (13th-month pay + other bonuses) are P90,000 or less, the entire amount is tax-free.
• If your total benefits exceed P90,000, only the amount in excess of P90,000 is subject to regular income tax.

This tax shield ensures that the majority of working Filipinos receive their full 13th-month pay, putting more cash directly into their pockets for year-end expenses.

What the future holds: Sen. Win Gatchalian’s GINHAWA Bill

While the current law provides some relief, a proposed legislative measure aims to provide even greater financial comfort to Filipino workers. Senator Win Gatchalian’s GINHAWA Act (Granting Increase in Take-Home Pay for All Working Filipinos Act) is a bill seeking to expand tax exemptions for working Filipinos and is currently being deliberated in Congress.

It is important to note that the GINHAWA Bill is a proposal, and its provisions are not yet law, nor are they enforceable.  

Key provisions of the GINHAWA Bill

If the GINHAWA Bill were passed into law, it would bring about the following major changes that directly impact an employee’s take-home pay:

1. Higher Tax-Exempt Annual Income: The bill proposes raising the income tax exemption threshold from the current P250,000 to P400,000 annual net taxable income, which could translate to zero income tax for many low- and middle-income earners.

1. Increased Bonus Exemption: It seeks to raise the tax-free ceiling for the 13th-month pay and other bonuses from P90,000 to an increased limit, such as P150,000 (as previously proposed).

1. Tax Exemption on Specific Compensation: The bill also seeks to exempt other forms of compensation from income tax, including:

• Overtime Pay – Only the portion of overtime earnings up to ₱100,000 is exempt from income tax; any amount beyond this is included in gross taxable income.
• Night Differential
• Holiday Pay
• Hazard Pay
• Service Charges

The GINHAWA Bill, therefore, complements the existing 13th-month pay law by aiming to make not just the mandatory year-end benefit but also other earnings, especially those compensating for risky or extended work hours, substantially or fully tax-exempt.

For all Filipino employees, staying informed about these benefits and proposed reforms is essential to secure the maximum benefit from their hard-earned income. The 13th-month pay, coupled with potential reforms like the GINHAWA Act, truly embodies the spirit of giving back to the country’s workforce. – Rappler.com

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