Running payroll in the Philippines

Payroll processing in the Philippines mainly involves the same employer obligations with regard to income tax and social security contributions as in Europe. A particularity of the local payroll process is the variation in remittance and filing dates. Employers should thus make sure to draft up a detailed compliance and payroll calendar. 

Setting up payroll in the Philippines involves registration with the national tax authority and the social security bodies. The national tax authority is the Bureau of Internal Revenue (BIR) and registration is necessary in order to receive a Tax Identification Number (TIN) needed for tax payments and reporting. New employees have to be registered separately. 

Employers further have to get registered with the three main social security institutions, which are the Social Security System (SSS), the Home Development Fund (HDMF) and the Philippine Health Corporation (PhilHealth). Employees also have to be registered with each of these institutions.

Foreign companies wishing to hire in the Philippines should establish a local entity, which entails further registration requirements. A local bank account must be set up in the process and be used for payments to employees and employers.

Income tax rates in the Philippines have undergone several major changes in the past few years and new changes are on the horizon for 2023. Deductible items for income tax calculation are very limited but include social security contributions. 

Tax considerations

Income tax in the Philippines is progressive, the top rate being 35%. From January 2023, the tax rates for the second, third, fourth and fifth tax band will be reduced. For more information refer to the tax tables below.  

An employee’s taxable income is calculated by applying the available deductions. The latter mainly include statutory social security contributions (PhilHealth, SSS and HDMF) - personal or employment expenses are not deductible. Fringe benefits (e.g. housing and company vehicles) are taxed separately and under a different system. Benefits provided to employees which are of small value are generally classified as “de minimis benefits” and are exempt from income tax. Minimum wage earners are exempt from paying income tax.

Residents pay income tax on their worldwide income. Non-residents are taxed on income sourced in the Philippines only. Citizens of the Philippines are usually considered as tax residents. Foreign employees may be considered as tax residents if they spend more than 180 days in the Philippines in any given calendar year. However, they might also be classified as non-resident aliens engaged in trade or business (NRA-ETB), depending on the length of their assignment in the Philippines.

Tax withholding and reporting 

It is the employer's obligation to withhold income tax from employee salaries and wages on a monthly basis and remit them to the tax authorities together with a monthly tax return. The due date for both return and payment is the same, but varies depending on whether the employer is registered for electronic filing or not. 

For employers remitting their taxes manually, the filing and payment deadline is the 10th of the month following the pay period - except for the payments for December which are due by 15 January. For employers filing and paying electronically, the payment is due by the 15th of the following month. The payroll report is due between the 11th and the 15th of the following month, depending on the industry sector. 

At the end of each year, employers have to check an employee’s income tax balance and withhold any outstanding amounts or refund income tax paid in excess. In addition, an annual payroll tax report (Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes) must be submitted to the tax authorities by 31 January of the following year. Employees must receive an annual earnings certificate (Certificate of Compensation Payment or Income Tax Withheld) the same day. A copy of this certificate must be sent to the tax authorities until 28 February. 

The tax year is the calendar year. Employees need to file an individual tax return if they have additional sources of income other than employment. Joint filing is permitted. The deadline for tax returns is 15 April of the following year. 

Social security contributions

Social security contributions in the Philippines are borne by both employee and employer and payments are made towards three main bodies which are the Social Security System (SSS), the Philippine Health Insurance Corporation (PhilHealth) and the Home Development Mutual Fund (HDMF). Employers are responsible for withholding the statutory contributions from employee wages and salaries and for remitting them together with their own contributions on a monthly basis. 

However, deadlines vary between the different administrative bodies and are partly determined by the digits in the respective employer contributor number. In general, payments are due in the month following the payment to the employee. 

For employees, the monthly contributions to the SSS range between PHP 135 and PHP 1,125, depending on their salary bracket. This includes a maximum share of PHP 225 towards the mandatory provident fund. The maximum employer contribution to the Social Security System is PHP 2,155 - including up to PHP 425 as contribution to the provident fund. 

Contributions to PhilHealth and HDMF are shared equally between employees and employers, i.e. up to PHP 900 for PhilHealth and PHP 100 towards the HDMF (only payable if monthly compensation exceeds PHP 5,000). Foreign nationals do not have to pay contributions to the HDMF. 

Employers can contribute to a separate pension scheme for their employees, but must register it with the tax authorities to make sure the payments can be exempt from income tax. 

* Only payable on income exceeding PHP 5,000.

Employees in the Philippines are entitled to various benefits. These include:

• Annual leave and public holidays: 5 days of paid annual leave after 12 months of service, plus 10 regular public holidays

• Maternity leave: 105 days (plus 15 additional days for single parents)

• Paternity leave: 7 days

• Parental leave: there are no legal provisions for parental leave except for 7 days of solo parent leave

• Sick leave: no paid sick leave

For more information on employee benefits and other employment requirements in the Philippines (including severance pay and termination procedures), check out our Global Hiring Guide.

Minimum wages in the Philippines are fixed on two different levels. While there is a national minimum wage, there are also regional daily minimum wages which are determined by the Regional Tripartite Wages and Productivity Board. Since 2019, the national minimum wage has been fixed at PHP 537 per day. In 2023, the minimum wage is expected to rise to 547 PHP per day.

Every working hour exceeding the standard 8-hour working day counts as overtime and must be paid at a rate of 125%. Work on rest days or regular holidays is subject to a 30% wage supplement. According to the local Labor Code, employees are entitled to a 13th salarywhich should be equal to one twelfth of the employee’s annual earnings and be paid out by 24 December.

Employees in the Philippines should be paid either biweekly or semimonthly. In no case should there be more than 16 days between two pay days. There are several restrictions on payment methods for wages and salaries. At the end of each pay period, employees should receive a payslip containing information on:

• Pay period

• Wages 

• Regular pay

• Overtime pay

• Deductions

• Total pay

Both paper and digital payslips are legally valid. Payroll records should be kept for at least 5 years.