Updated March 15, 2024 by Sharlyn Lao
In the Philippines, the 13th Month Pay is a significant and eagerly anticipated benefit for many employees. This additional compensation, mandated by law, serves as a welcome financial boost during the holiday season. However, understanding how the 13th Month Pay is calculated is crucial to ensure that employees receive the correct amount they are entitled to. In this blog post, we will delve into the intricacies of 13th Month Pay calculation in the Philippines, covering its legal basis, who is eligible to receive it, how to calculate it accurately, as well as the tax implications associated with this extra income.
Explore the nuances of 13th Month Pay calculation to empower both employers and employees with the knowledge needed to navigate this essential aspect of compensation in the Philippine setting.
Understanding the Basics: What is the 13th Month Pay
The 13th Month Pay is a mandatory benefit provided to employees in the Philippines. It is an additional form of compensation that is given annually, usually during the holiday season. This benefit aims to help workers meet their increased expenses during this festive period, such as gifts, celebrations, and other financial obligations.
The concept of the 13th Month Pay originated from the belief that employees should receive a fair share of the company's profits or income, particularly during the holiday season. It serves as a way to promote employee welfare and boost morale.
This benefit is separate from the employee's regular monthly salary and is calculated based on specific criteria. It is important to note that the 13th Month Pay is not a bonus or incentive, but rather a mandatory payment that employers are required to provide to their eligible employees.
Legal Basis for the 13th Month Pay in the Philippines
The 13th Month Pay in the Philippines is firmly grounded in legal provisions that protect the rights of employees and ensure fair compensation practices. The following laws serve as the legal basis for the implementation of the 13th Month Pay.
Presidential Decree No. 851
The primary law governing the 13th Month Pay is Presidential Decree No. 851, also known as the "13th Month Pay Law." This decree was signed into law on December 16, 1975, by former President Ferdinand Marcos. It mandates the payment of the 13th Month Pay to covered employees in the private sector.
Under Presidential Decree No. 851, employers are required to pay their employees a 13th Month Pay equivalent to one-twelfth (1/12) of their basic salary earned within a calendar year.
Who are Entitled to Receive the 13th Month Pay
The law specifies that all rank-and-file employees in the private sector that have worked for at least (1) one month within the calendar year are entitled to receive the 13th Month Pay. This includes employees who are not managerial or supervisory in nature and are not part of the employer's policymaking or decision-making process.
Exceptions to the Rule
In certain circumstances, the 13th Month Pay may not be applicable to certain employers. The following exceptions are provided to ensure fair compensation practices.
- Distressed employers with prior authorization from the Secretary of Labor to be qualified for exemption
- The government and its political subdivisions, including government-owned and controlled corporations (GOCC), except those corporations operating essentially as private subsidiaries of the Government
- Employers who are already paying their employees 13th Month Pay or equivalent
- Employers of persons in the personal service of another in relation to such workers
- Employers of those who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing specific work, except those workers who are paid on piece-rate basis, in which case the employer shall grant such workers the required 13th Month Pay
How to Calculate the 13th Month Pay
To calculate the 13th Month Pay, first you must know your total basic salary. Note that allowances and benefits that are not integrated as part of the basic salary such as the Cost of Living Allowance (COLA), profit-sharing payments, cash equivalent of unused vacation and sick leave credits, overtime, premium and holiday pay are excluded from the computation.
Then use this formula to compute for your 13th Month Pay.
Total Basic Salary earned during the year ÷ 12 months
For example, John Doe of XYZ Company, receives a monthly basic salary of P 10,000.00. Assuming he has no basic salary deductions (e.g. leave without pay) throughout the year, his earnings for the current year are as follows.
10,000.00 x 12 months = 120,000.00 (Total Basic Salary)
120,000.00 / 12 months = 10,000.00
Therefore, John Doe's 13th Month Pay is P 10,000.00.
Prorated 13th Month Pay
In some cases, an employee may not have worked for the entire calendar year, either due to joining the company mid-year or leaving before the year's end. In such situations, a prorated 13th Month Pay calculation is necessary.
The prorated calculation involves determining the employee's basic salary and calculating the 13th Month Pay using this formula.
Total Basic Salary earned based on the number of months the employee worked ÷ 12 months
For example, Jane Doe of XYZ Company who has a monthly basic salary of P 15,000.00 only worked for 5 months in the year, the 13th Month Pay would be calculated based on (5/12) five-twelfths of her basic salary. This calculation is once again assuming she has no basic salary deductions (e.g. leave without pay) throughout the months.
15,000.00 x 5 months = 75,000.00 (Total Basic Salary)
75,000.00 / 12 months = 6,250.00
Therefore, Jane Doe's 13th Month Pay is P 6,250.00.
Tax Exemption for the 13th Month Pay
The good news is that the 13th Month Pay is tax-exempt for a certain threshold. Any amount exceeding ₱90,000 however is subject to income tax and other mandatory contributions, such as the Employee's Share of Social Security System (SSS), Medicare, and Pag-IBIG Fund contributions.
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