Labor and Employment

13th Month Pay in the Philippines:

Mandatory
Under Presidential Decree No. 851, employers from the private sector in the Philippines are required to pay
their rank-and-file employees a Thirteenth 13th Month Pay not later than December 24 every year. The
13th month pay is equivalent to one twelfth (1/12) of an employee’s basic annual salary.

It is prescribed by Philippine labor laws as a mandatory benefit and should not be confused with the “Christmas
bonus” commonly practiced in the local business setting. The Christmas bonus is not a demandable and
enforceable obligation, and can only be released upon an employer’s voluntary discretion. It is usually granted
by employers to show appreciation and gratitude for the service rendered by their employees within a year. The
13th month pay, on the other hand, is required by law and employers who fail to provide them by the end of the
year are subject to legal scrutiny by the Department of Labor and Employment (DOLE).

13th Month Pay Coverage, Computation, and

New Tax Obligation Rate for 2018 Onwards
Coverage
All rank-and-file employees in the private sector who have worked for at least one (1) month during the
calendar year are entitled to receive 13th month pay regardless of their position, designation or employment
status. Monetary compensations such as the following may not be regarded as part of the computation for this
mandatory benefit:

 cost-of-living allowances;
 profit-sharing payments;
 cash equivalent of unused vacation and sick leave credits;
 overtime pay;
 premium pay;
 night shift differential;
 holiday pay; and
 other allowances and monetary benefits not considered part of an employee’s basic salary.
However, if some or all of the items enumerated in the list above are treated as part of the basic salary, then they
shall be included in the final computation.

Although not stipulated by PD 851, by accepted practice, managerial employees are also provided with an
equivalent of the 13th month pay.
 Computation
Computation of the 13th month pay primarily consists of the total basic monthly salary of an employee for the
whole year, divided by twelve (12) months. Those who have worked for less than a year, however, are only
entitled to receive the amount due to them on the number of months they were employed.

Moreover, an employer is given the prerogative to release the 13th month pay in installments of two (2) to
whichever number that is convenient to satisfy the condition that the mandatory benefit be given before
December 24 every year. By practice, many companies maintain two installments, first in May and then in
December, where the first fifty percent (50%) is given as an aid for employees to prepare for the opening of the
regular school year in June.

New Tax Obligation Rate under TRAIN Law for 2018

Onwards
The 13th month pay is generally exempt from taxation. However, there is a prescribed limit to this exemption
provided under Section 32 (B)(7)(e) of the National Internal Revenue Code (NIRC) – which was amended by
Republic Act No. 10963 or the TRAIN law on January 2018. The amendment stipulates that the 13th month pay
and other equivalent benefits shall not be subject to tax for a maximum of P90,000. This new amount is a
relative increase from the previous tax exclusion rate of P82,000.

Anything beyond the maximum exclusion rate of P90,000 must be included in the computation of the
employee’s gross income for the applicable taxable year.