1. Alemar A. Allecer BSMT 2A March 19 2013
Mo- Tuesday 1:00pm- 2:30 pm Health Economics
How to compute withholding tax on compensation?
Methods of computing tax withheld on compensation
1. Use of withholding tax table. In general, every employer making payment of
compensation shall deduct and withhold from such compensation a tax determined in
accordance with the prescribed Revised Withholding Tax Tables (Annex C) which shall
be used starting January 1, 2009. Below are the four withholding tax tables prescribed
in these regulations:
2. Cumulative average method. This method is used if (a) in respect of a particular
employee, the regular compensation is exempt from withholding tax because the
amount thereof is below the compensation level, but supplementary compensation is
paid during the calendar year or the supplementary compensation is equal to or more
than the regular compensation to be paid; or (b) the employee was newly hired and had
a previous employer/s within the calendar year, other than the present employer doing
this cumulative computation.
3. Annualized withholding tax method. This method is used (a) when the employer-
employee relationship is terminated before the end of the calendar year; and (b) when
computing for the year-end adjustment (the employer shall determine the amount to be
withheld from the compensation on the last month of employment or in December of the
current calendar year).
How to compute 13th month pay
Under the Presidential Decree No. 851, the 13th Month Pay is required by law and will
be entitled to every employee working in the Philippines, with the computation of the
13th Month Pay equivalent to the number of months the employee has worked. This is
regardless of the amount of the basic salary (See: Memorandum Order No. 28,
regarding the removal of the salary ceiling, 13 August 1986), regardless of the
employee's designation and employment status, and regardless of the method by which
the employee collects his/her compensation.
The Presidential Decree No. 851 otherwise known as the 13th Month Pay is
fundamentally a Government implementation of monetary assistance equivalent to the
monthly basic salary received by an employee. The 13th Month Pay computation is pro

2. rata, it is based on how many months within the calendar year that the employee has
worked for the employer(s). To compute the 13th Month Pay:
(Basic Monthly Pay) ÷ 12 * (Number of Months worked within the Calendar Year)
The term '13th Month Pay' denotes the one twelfth (1/12) of the employee's basic salary
within a calendar year. The 13th Month Pay computation is derived from the 12 months
of one calendar year.
How to compute over-time pay
Overtime Pay.
Overtime pay is the additional compensation payable to employee for services or work
rendered beyond the normal eight hours of work. It is computed by multiplying the
overtime rate with the number of hours in excess of the regular eight hours of work.
How to compute separation pay
Separation pay may be computed based on the terms provided in the employment
contract, company policy, or collective bargaining agreement. Company practice may
likewise be used as basis for computation, if such practice has been established for
years and has already ripened into a demandable right.
In the absence of contract or agreement, or when the existing agreement or policy
provides for a lower benefit, separation pay shall be computed based on the provision of
the Labor Code.
The amount of separation pay under the Labor Code depends on the following factors:
1. The employee’s last salary;
2. The employee’s length of service;
3. The reason for employee’s separation from service.
Minimum Separation Pay
Take a quick look at the examples given above. You will notice that the minimum
separation pay that may be given to an employee is one month salary. This is actually
consistent with the phrase “at least one month salary”, which simply means that the
separation must not be less than the employee’s one month salary.