For business owners, understanding the intricacies of employee compensation and taxation is crucial to maintain a well-functioning and compliant workforce. It ensures that their employees are fairly compensated while also meeting their legal obligations.
One key aspect of employee compensation in the Philippines is the 13th month pay. In this article, we’ll discuss how to compute 13th month pay, when 13th month pay is given in the Philippines, the 13th month pay law, and other important things employers need to know.
What is 13th Month Pay?
The 13th month pay is an employee monetary benefit mandated by the Philippine government under Presidential Decree No. 851. All private employers are required to provide this benefit to rank-and-file employees at the end of each year — and no later than December 24.
The 13th month pay should not be less than one-twelfth (1/12) of the total basic salary earned by an employee within the calendar year. This is according to the Department of Labor and Employment (DOLE) Labor Advisory No. 25, Series of 2023.
Who is entitled to 13th Month Pay?
Every rank-and-file employee in the private sector has a right to receive a 13th month pay as long as they have worked in the company for at least one (1) month within the calendar year. This benefit applies regardless of position, designation, and employment status, and irrespective of the method by which their salary is paid. Thus, rank-and-file employees paid on a piece-rate basis, fixed or guaranteed wage plus commission, those with multiple employers, resigned employees, terminated employees, and employees on maternity leave shall also receive a 13th month pay.
Who is not eligible for 13th Month Pay?
Not all employees are entitled to the 13th month pay. Government employees, employees in private subsidiaries of the government, and those working in government-owned and controlled corporations (GOCCs) are typically excluded from this benefit. This is due to different compensation structures and bonus schemes that apply to the public sector.
Other exemptions for 13th month pay include:
- commission-based employees
- boundary-based or task-based employees
- freelancers
- contractual workers
- household helpers and persons in personal service,
- other employees who are paid a fixed amount for specific work
While managers are also exempt from 13th month pay, some employers still pay out this benefit.
When is the 13th month pay given?
Employees must receive 13th month pay on or before December 24 of each year. Employers are not allowed to make requests and applications for an exemption or deferment.
How to Compute 13th Month Pay
As per DOLE, the 13th month pay should not be less than one-twelfth (1/12) of the total basic salary earned by an employee within the calendar year. Thus, to get the 13th month pay computation, just follow this basic formula:
13th Month Pay Formula
Total Basic Salary Earned During the Year ÷ 12 months
If an employee receives the same amount of monthly basic salary (excluding allowances, overtime pay, and other benefits), you can compute their total basic salary for the year with this formula:
Monthly basic salary x months worked
Example 1: How to compute 13th Month Pay for 12 months
Employee A, who has been in the company since 2022, earns a monthly basic salary of ₱20,000. To compute their 13th month pay:
₱20,000 x 12 months = ₱240,000
₱240,000 ÷ 12 = ₱20,000
Thus, Employee A's 13th month pay would be ₱20,000.
Example 2. How to compute Prorated 13th Month Pay
In situations where an employee has not worked for the entire year, a pro-rated 13th month pay is computed. This is often the case with employees who joined mid-year or resigned before the year's end. A pro-rated 13th month pay simply means that the computation will be based on the number of months in which they worked.
For example: Employee B earns ₱20,000 monthly. He started in July and worked for 6 months. To compute their 13th month pay:
₱20,000 × 6 months = ₱120,000
₱120,000 ÷ 12 = ₱12,000
Thus, Employee B's 13th month pay would be ₱12,000.
For an automated calculation, you can also use a 13th month pay calculator. This calculator also shows the taxable portion of the 13th month pay.
How does DOLE enforce 13th month pay for employers?
The DOLE Regional/Field/Provincial Office with jurisdiction over the workplace shall monitor all employers’ compliance with the 13th month pay.
More importantly, employers are required to file a compliance report with the DOLE Establishment Report portal at https://reports.dole.gov.ph/. The report must be made no later than January 15, 2024.
The report must also have these details:
- Name of establishment
- Address
- Principal product or business
- Total employment
- Total number of workers benefitted
- Amount granted per employee
- Total amount of benefits granted
- Name, position, and telephone number of the person making the report.
What happens if an employer cannot provide 13th month pay?
Employers that fail to pay 13th month will face administrative action from DOLE. Thus, the department urges employers with difficulties in complying to seek assistance from DOLE.
Another option for employers is to explore other financing sources. For businesses with unpredictable cash flow, or business owners who simply want to be prepared for unexpected cash flow gaps, a credit line can serve as a standby financing option. Alternatively, employers can also get a business loan from DTI or Small Business Corporation, which offer reasonable interest rates and simpler application requirements to better assist small and medium enterprises.
How Employers Can Prepare for the 13th Month Pay
Preparing for the 13th month pay can be a significant financial undertaking. With proper planning and strategic financial management, the annual business cycle can become a manageable and predictable part of operations. Here are some steps employers can take to ensure they are well-prepared:
- Budgeting Throughout the Year: Anticipate and budget throughout the year by setting aside a fixed amount each month — equivalent to one-twelfth of the expected 13th month payout. By doing this, businesses can avoid the financial strain of a lump sum expense at the end of the year.
- Monitoring Payroll Expenses: Keeping a close eye on payroll expenses throughout the year is crucial. This includes being mindful of increases in staff numbers or salary adjustments, as these changes will affect the total 13th month pay liability.
- Utilizing Financial Tools and Services: Consider leveraging financial tools to ensure liquidity and readiness for this payout. A Revolving Credit Line can provide flexible access to funds, allowing businesses to draw on credit as needed to cover short-term expenses like the 13th month pay.
- Employee Communication: Transparent communication with employees about their 13th month pay is important. This involves informing new hires regarding calculation of their pro-rated 13th month pay, and ensuring all employees understand the payment schedule.
- Regular Financial Reviews: Conducting regular financial reviews can help businesses stay on top of their financial health. This includes assessing cash flow, reviewing budget allocations for employee compensation, and making adjustments as needed to ensure availability of funds for the 13th month pay.
- Legal Compliance and Updates: Staying updated with any changes in legislation or guidelines regarding the 13th month pay is vital for compliance. Employers should regularly consult legal resources or financial advisors to keep abreast of any developments in labor laws and tax regulations.
By following these steps, employers can effectively prepare for the 13th month pay, ensuring a smooth end-of-year financial process and maintaining a positive relationship with their workforce.
Other FAQs on how to compute 13th Month Pay
Is 13th Month Pay Taxable?
According to the Bureau of Internal Revenue (BIR) regulations, the 13th month pay is taxable only if it exceeds ₱90,000. This tax exemption cap can influence how employers structure compensation and bonuses.
What is the 13th Month Pay law?
DOLE releases a labor advisory almost every year to set clear guidelines on the payment of 13th month pay. These guidelines outline the eligibility criteria, calculation methods, and payment deadlines, which are critical for employers to understand and adhere to.
Is there 13th month pay for government employees?
No. Government employees receive their own form of bonuses and incentives to compensate.
How to compute 13th month pay for 6 months?
Employees who have worked at at company for less than 12 months will get a pro-rated 13th month pay. This means that the computation of their salary will be based on the number of months in which they worked.
To compute the prorated 13th month pay, use this formula:
(Monthly basic salary x number of months worked) ÷ 12
How to compute 13th month pay with maternity leave?
As a general rule, leaves with pay should NOT be included in the 13th month computation. Thus, maternity leaves are not counted in the 13th month pay computation, as well as other months when the employee missed work due to rehabilitation leaves or other leaves with pay.
For example, if an employee took a maternity leave for 2 months, their 13th month computation will be:
(Monthly basic salary × 10 months) ÷ 12
Are there employers exempted from the 13th month pay?
According to Section 3 of Rules and Regulations implementing P.D. 851, paying 13th month applies to all employers except:
- Distressed employers, such as those currently incurring substantial losses, or non-profit institutions and organizations which income has consistently declined by more than forty (40%) percent of their normal income for the last two (2) years
- The government, its political subdivisions and government-owned and controlled corporations (GOCCs), except for private subsidiaries
- Employers of household helpers and persons in personal service
- Employers of people paid on commission, boundary, or task basis and people paid a fixed amount for performing a specific work
- Employees of people who are not eligible to receive the benefit
When should an employee receive their 13th month pay after resignation?
If an employee resigns or is terminated, their 13th month pay must be given along with their final pay. As an employer, your HR or finance team can be proactive by advising resigned or terminated employees when their final pay will be released.
Understanding and correctly computing the 13th month pay is essential for employers in the Philippines. By adhering to the guidelines, utilizing online calculators, and being aware of tax implications, employers can ensure compliance and foster a positive work environment. Moreover, by exploring various financial resources like a Revolving Credit Line , businesses can maintain the financial health necessary to meet these obligations, contributing to a thriving and equitable economic environment.
