The complete guide to payroll in the Philippines

Managing payroll in the Philippines can be complex due to the country’s strict labour laws, tax regulations, and social security requirements. Employers must ensure they comply with government-mandated benefits and deductions while processing employee salaries accurately and on time.

This guide will walk you through everything you need to know about paying employees in the Philippines, from minimum salary requirements to payroll compliance and digital payment solutions.

Key Takeaways

• Payroll in the Philippines is highly regulated, requiring employers to comply with labour laws, tax policies, and mandatory government contributions.
• Minimum wage varies by region, so employers must stay updated on the latest rates to ensure compliance.
• Employers and employees contribute to mandatory benefits like SSS, PhilHealth, and Pag-IBIG, which are deducted from salaries.
• All employees who have worked for at least one month are legally entitled to 13th-month pay.
• Payroll processing includes salary calculations, deductions, and tax compliance, with employers required to remit payments on time to avoid penalties.

To better understand how these requirements apply in real scenarios, let’s consider the following example:

Lisa had always dreamed of running her design agency. After years of freelancing, she finally built Creative Ink, a small but thriving business in Manila. With a team of five talented graphic designers, things were looking up—clients were rolling in, projects were getting bigger, and the team was excited about the future.

However, there was one problem Lisa hadn’t prepared for: payroll.

At first, paying her employees seemed simple—transfer their salaries at the end of the month. But reality hit when she hired her first full-time employee. Suddenly, there were government-mandated benefits to deduct, like SSS, PhilHealth, and Pag-IBIG. She had to calculate income tax and ensure she followed the minimum wage laws for Metro Manila.

Then came the 13th-month pay, which she hadn’t accounted for in her budgeting. On top of that, deadlines for tax filing and remitting contributions kept coming up, and she found herself overwhelmed with paperwork. One month later, Lisa missed the deadline for filing her employees’ SSS contributions due to an oversight. The penalty wasn’t massive, but it was enough to make her realise she couldn’t afford to make another mistake.

Determined to get things right, Lisa did what she did best—researched and strategised. She learned about the latest minimum wage updates, how to correctly compute overtime pay and deductions, and set up a structured payroll schedule.

She also consulted an accountant to ensure she was remitting taxes and contributions promptly and keeping records properly. Slowly but surely, payroll became less of a nightmare.

After months of trial and error, Lisa finally found her rhythm. She created a payroll system that worked, ensuring her employees were paid accurately and on time while fully compliant with Philippine labour laws.

Now, Lisa spends less time stressing over payroll and more time growing Creative Ink. She knows that payroll mistakes can affect employee morale and even lead to legal trouble, so she prioritises keeping everything in order. For any new business owner, Lisa has one piece of advice: don’t underestimate payroll—it’s more than just paying salaries, and getting it right is crucial for your business’s success.

Understanding Payroll in the Philippines

Payroll in the Philippines follows strict legal and tax structures, ensuring employees receive fair wages, benefits, and statutory deductions. To legally employ and pay employees in the Philippines, businesses must comply with the following:

Key Payroll Components

A standard payroll in the Philippines consists of several critical elements, each requiring careful consideration. Below are the key components that make up an employee’s compensation package:

1. Basic Salary

The basic salary is the agreed-upon wage that employees receive before any deductions. It forms the foundation of the salary package and is typically paid on a monthly or semi-monthly basis. This is the baseline amount employees are guaranteed for the work they do.

2. Allowances

In addition to the basic salary, employers often provide allowances. These are additional payments that help cover specific expenses incurred during employment. Common types of allowances include:

• Transport allowances: To cover the cost of commuting to work.
• Meal allowances: Employees must work through meal times or require meals as part of their role.
• Housing allowances: Typically given to senior employees or expatriates.

3. Government-Mandated Benefits

Employers are required to deduct and contribute to government-mandated benefits, which include the following:

• Social Security System (SSS): Provides pension, disability, and maternity benefits for employees.
• PhilHealth: A healthcare system that offers medical insurance to all employees.
• Pag-IBIG Fund: A savings and housing program that allows employees to save for future needs, particularly home ownership.

These deductions are typically shared between the employer and employee, with the employer responsible for remitting the payments to the relevant agencies.

4. Tax Deductions

Employees in the Philippines are subject to income tax based on their salary levels. The Philippines uses a progressive tax system, where employees in higher salary brackets pay a higher percentage in taxes. 

These rates range from 0% to 35%, depending on the individual’s salary and filing status. Employers are responsible for withholding the correct amount of tax from each employee’s paycheck.

5. Bonuses and 13th-Month Pay

• 13th-month pay is a government-mandated benefit that requires employers to provide one additional month of salary to employees who have worked at least one month within the calendar year. This payment is typically made by December.
• Performance bonuses may also be offered, but these are discretionary and based on company or individual performance.

Minimum Wage and Salary Standards

The National Wages and Productivity Commission (NWPC) determines the minimum wage in the Philippines, which varies by region and industry. This ensures that employees in different parts of the country receive wages that align with the local cost of living. Employers must stay updated on the minimum wage rates to ensure they comply with local laws.

Minimum Daily Wage Rates (2024)

Here are the minimum daily wages in key regions of the Philippines, adequate as of 2024:

• Metro Manila (NCR): PHP 610
• Calabarzon: PHP 470 – PHP 520
• Central Visayas: PHP 435
• Davao Region: PHP 460

Other Salary Considerations

In addition to the base salary, there are several other salary-related elements that businesses must account for:

• Overtime Pay: Employees working beyond the standard work hours are entitled to overtime pay. This is calculated as:
  • 125% of the hourly rate for regular weekdays.
  • 130% for work on rest days and holidays.
• Night Shift Differential: Employees between 10 PM and 6 AM are entitled to an additional 10% of their hourly wage.
• 13th-Month Pay: As mentioned earlier, this is a mandatory annual bonus equivalent to one month’s salary, payable to all employees who have worked for at least one month in the calendar year.

Employers must strictly follow these wage laws to avoid legal penalties and ensure their employees are compensated fairly.

Payroll Processing: Steps and Best Practices

Successfully managing payroll requires a structured process. Employers should follow procedures to ensure compliance with labour laws, avoid payroll errors, and process salaries promptly.

Step 1: Business Registration and Compliance

Before hiring employees, businesses must register with key government agencies:

• Bureau of Internal Revenue (BIR): To obtain a Tax Identification Number (TIN) and comply with tax laws.
• Social Security System (SSS): To ensure employees contribute to their pension and social security benefits.
• PhilHealth: For health insurance coverage.
• Pag-IBIG Fund: For savings and housing benefits.

Step 2: Setting Up Payroll

When setting up payroll, businesses should:

• Determine the salary structure (e.g., monthly, semi-monthly, or daily).
• Establish a reliable timekeeping and attendance system.
• Choose between manual and automated payroll processing to reduce errors and save time.

Step 3: Calculating Salaries and Deductions

After determining the salary structure, employers must calculate the gross salary and account for the following deductions:

• SSS contributions: 4.5% of the employee’s salary.
• PhilHealth contributions: 2.75% of salary, split between employer and employee.
• Pag-IBIG contributions: 1% (employee share) and 2% (employer share).
• Income tax: Varies based on salary, using progressive tax rates.

Step 4: Processing Salary Payments

Payroll is typically processed on the 15th and 30th of each month. Employers can issue salary payments via bank transfers, cheques, or through payroll service providers.

Step 5: Filing and Reporting

Employers must file reports and remit the following:

• BIR Form 2316: The annual income tax return for employees.
• SSS, PhilHealth, and Pag-IBIG remittances are typically monthly or quarterly contributions.
• Employers should also maintain payroll records for at least five years in case of an audit.

Challenges in Payroll Management

Managing payroll in the Philippines presents several challenges. Here are some of the most common issues that businesses encounter:

• Compliance with Labour Laws: The frequent updates to minimum wage laws, tax regulations, and statutory benefits can be challenging to keep up with. Non-compliance may result in penalties and legal consequences.
• Handling Expats and Foreign Employees: Foreign employees often face different tax treatments than local workers, complicating the payroll process.
• Payroll Errors: Miscalculations, late payments, and incorrect deductions can lead to employee dissatisfaction and potential legal issues.
• Managing Remote Teams: For businesses employing freelancers or remote workers, ensuring compliance with payroll laws becomes more complicated, especially when managing international payroll or working across different time zones.

Many businesses are now turning to payroll automation and digital payment solutions to simplify payroll management and mitigate these challenges.

How to Streamline Payroll with Digital Solutions

Managing payroll manually can be both time-consuming and error-prone. With the rise of digital payroll systems, businesses can ensure compliance while simplifying payroll management. Digital solutions offer several advantages:

Benefits of Payroll Automation

• Reduces Errors: Automated payroll systems help eliminate manual mistakes, ensuring accurate salary calculations and deductions.
• Ensures Compliance: Payroll software automatically updates tax rates and contribution percentages, keeping businesses compliant with the latest regulations.
• Faster Transactions: Digital payroll systems enable faster salary disbursement, ensuring employees are paid on time without delays.

Final Thoughts

Payroll in the Philippines involves a detailed system of calculations, mandatory contributions, and tax deductions, which businesses must follow to remain compliant with the law. Employers must pay attention to minimum wage updates, required benefits, and tax obligations to avoid penalties and ensure fair employee compensation.

Finding the right business money transfer solution is crucial for companies managing cross-border payments. Whether handling payroll for international employees or managing invoice payments for contractors and suppliers, choosing a reliable system can simplify operations and reduce costs.

Setting up international payroll is a tedious process in the Philippines, but Instarem makes it easy with secure, cost-effective solutions. Businesses choose Instarem for a variety of reasons when handling cross-border payroll transactions, including:

• Competitive exchange rates help companies to reduce payroll costs.
• Fast and secure transfers that ensure employees receive their salary payments on time.
• Multi-currency support allows businesses to pay employees in their preferred currency, no matter where they are.
• Seamless integration with payroll systems, simplifying payroll processing.
• Regulatory compliance keeps aligned companies with global tax laws, reducing risks.
• Transparent pricing with no hidden fees, offering clarity and confidence.

See how Instarem can help businesses with international payroll, paying overseas suppliers, and managing intra-company transfers. Sign up today and simplify your salary payments worldwide.

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