Non-Taxable Compensation

The general rule is that the more compensation you earn, the more taxes you pay. Hence, most companies provide what they call as the “tax shield” to minimize effect of taxes on the compensation of their employees. To hide the “tax shield”, they work around some expenses to make it appear as allowable deduction. The problem with this is that the accountant and HR have to work closely to monitor and hide this taxable compensation from the books.

Why do all the hassle and headache when you can actually provide non-taxable benefits without violating BIR regulations?

Here is a list of some non-taxable compensation companies can maximize:

1. Mandatory SSS, Philhealth and Pag-Ibig contributions, and union dues of individual employees;
2. Premium payments on health and/or hospitalization insurance not to exceed 2,400/annum, provided that annual combined gross income of the family does not exceed 250,000;
3. Thirteenth (13) month pay & other benefits not exceeding P30,000.00

There is also what we call as deminimis benefits. These are the benefits of relatively small value and are qualified for tax exemption. Very few companies maximize the tax advantage of deminimis benefits. Providing this additional non-taxable compensation is legally allowable. It is compliant with DOLE and BIR regulations.

As provided under Revenue Regulations No. 10-2008, 5-2011, 8-2012; the following are the non-taxable deminimis benefits allowed under the tax code:

1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;
2. Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month per employee;
3. Rice subsidy of P1,500 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500;
4. Laundry allowance not exceeding P300 per month;
5. Uniforms and clothing allowance not exceeding P5,000 per annum;
6. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
7. Daily meal allowance for overtime/night shift work not exceeding twenty-five percent (25%) of the basic minimum wage;
8. Actual medical assistance, e.g. medical allowance to cover medical and health care needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum; and,
9. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees.

All other benefits given by the employers which are not included in the above enumeration are subject to income tax as well as withholding tax on compensation or fringe benefits tax.

“Deminimis” type of benefits, given in excess of the ceiling prescribed in regulations, shall be taxable to the recipient-employee only if such excess is beyond the P30,000.00 threshold.

Every person can also claim personal and additional exemptions from taxes. Personal exemption of Php50,000 and additional exemption of Php25,000 per dependent for a maximum of four (4) dependents. This will lower the taxable income.

Transportation, communication and meals liquidated and supported with receipts are treated as ordinary expenses of the company. If not liquidated, nor supported with receipts, these allowances become part of taxable compensation.

The BIR also allows a reasonable Entertainment, Amusement and Recreation Expense, also called representation expense, not to exceed 1% of revenue for companies engaged in sale of services or 0.5% of the revenue for companies engaged in sale of goods.

Every company should hire an excellent tax consultant and plan out their taxes before the beginning and end of each fiscal year.

To know more on how to save taxes legally, you may send an email to jesteban@aims.com.ph or visit our website www.aims.com.ph.

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