The Philippines is an emerging market for international companies. The country has an advantage of a skilled workforce, a steady open economy, and a strategic location with access to Asian and Western markets. There are numerous opportunities for foreign companies to establish their business here.
However, setting up a business in a foreign country involves multiple factors, such as compliance with the country’s laws and regulations. Plus, the Philippines has unique employee rights such as 13th-month pay, fully-paid maternity leaves, and double holidays, to name a few.
So, if you rely on their workforce, you must also know how to do payroll in the Philippines.
How is Payroll Calculated in the Philippines?
The Philippines payroll requirements mandate registering the company with appropriate government agencies. You must decide on a payroll process and learn about the statutory deductions for calculating your employees’ salaries.
The standard formula for calculating salaries is -
Net Salary = Gross Salary - Deductions.
The standard payroll deductions in the Philippines are
- ~Social Security System,
- ~Philippine Health Insurance Corporation (PhilHealth), and
- ~Home Development Mutual Fund (Pag-IBIG).
Important Elements of Salary Structure in The Philippines
Companies must know the essential components of a salary structure per the payroll policies and procedures in the Philippines. Also, it is essential to remember that standard allowances are rare in the Philippines. However, some organizations must provide special remuneration for housing, transport, medicine, and childcare.
The important elements of payroll in the Philippines are -
Minimum wage: There is no fixed minimum wage requirement in the Philippines - it varies across the country. A tripartite regional wage board decides the minimum wages depending on the region, size, and industry.
Cost of living allowance (COLA): This is a mandatory benefit covering all minimum wage-earning employees in Region III regardless of their position or status of employment. The COLA is set at P20 per day.
Overtime: Every employee in the private sector - except domestic workers and workers paid by results - is entitled to overtime for working beyond eight hours a day.
- ~The overtime rate is 25% of the hourly rate on a regular workday
- ~The overtime rate is 30% of the hourly rate for working on a holiday
Holiday pay: The Philippine Labor Code mandates holiday pay to compensate employees working on a holiday. An employee working on a regular holiday gets compensated with 200% of their salary for that day.
Social security system (SSS): This is a government-mandated program offering several benefits to private-sector employees for sickness, disability, or maternity purposes. It acts as a state-run pension fund for lifetime SSS members. Employers and employees both pay a share in employee SSS contributions.
The Schedule of Contribution rates differs according to the pay scale. The revised SSS contributions are 12% of the monthly salary for a maximum salary of P20,000. It is divided into -
- ~Employer share: 8%
- ~Employee share: 4%
Philippine health insurance corporation: Commonly known as PhilHealth, this affordable health insurance covers all employees. 3% of the employee’s monthly salary (1.75% by employer and employee each) is contributed towards PhilHealth.
Home development mutual fund (Pag-IBIG): This is a national fund with home loan provisions for affordable housing for employees in the Philippines. The contribution rates depend on the salary. The monthly contribution is capped at P100 each for the employer and the employee -
- ~Employer share: 2%
- ~Employee share: 2% (if gross monthly salary is more than P1,500).
How to Set Up a Payroll in the Philippines?
Companies must follow these steps to set up payroll in the Philippines:
Company registration: You must register your company’s subsidiary with the Bureau of Internal Revenue to set up employee payroll. After the formalities are complete, you will receive an Employer Identification Number (EIN), a must for payroll processing.
For the standard employee deductions, you must also register your company with -
- ~Social Security System,
- ~Philippine Health Insurance Corporation,
- ~Home Development, and Mutual Fund.
You will get a unique number for each institution that you can use for employee contributions.
Create a database: Maintain an employee database including their basic personal information and their IDs. You must update it regularly to reflect changes, such as new hires or additional information about an existing employee.
Design a payroll policy: Study the Philippine Labor Code and frame your company payroll policies. Address the following things when designing an HR payroll in the Philippines:
- ~Working hours,
- ~Leave benefits,
- ~Salary cycle.
Approve the policy from the company’s senior management to avoid any conflicts later. Also, pass it on to the employees so that they know their rights and benefits.
Keep records: Once you start payroll processing, maintain detailed records for each employee. This helps during taxation and provides data on payroll compliance.
A Step-by-step Process of Payroll Processing in The Philippines
Payroll rules and regulations in the Philippines can be a tad complicated for beginners. Hence, most companies outsource their payroll process to third-party service providers.
If you wish to do the payroll processing manually, look at the Philippine payroll process flow chart:
Gathering employee data: You must collect complete information about your employees, including their Tax IDs, bank account details, designation, address, etc.
Decide on remuneration: You must decide on employee remuneration for different positions in the company. Calculate the gross pay and taxable benefits applicable for each salary range.
Decide payment cycle: Employers can adopt weekly, bimonthly, or monthly payments for their employees. Determine the correct method for your company.
Calculate deductions: Consider the statutory deductions per the Philippine Labor Code and compute the salaries. You must also factor in leaves, absences, holiday pay, and overtime.
Payout and accounting: Ensure the main company account has sufficient funds to disburse salaries of all employees on the payday. You must keep records of this accounting.
Maintain compliance record: The payroll process also requires the maintenance of proper records. For example, generating salaries for every employee. The company must ensure the tax deductions are filed with the respective government organizations.
The below table will help you understand both employer and employee contributions to government-mandated benefits:
The Philippines payroll tax rate is calculated at 30% of the total income for corporates. For non-resident employees, the tax rate is flat at 25%.
Payroll in the Philippines follows a monthly cycle, depending on the employer and the sector. Employers must pay salaries once every two weeks at intervals of not more than 16 days.
The Philippines has a 13th pay provision, a bonus of one extra month of the employee’s regular salary. This has to be paid on or before 24th December.
Payroll Options for Companies in The Philippines
Remote: This option includes the subsidiary’s payroll process within the parent company based in another company. Although it streamlines the process, the regulations for each remote employee differ.
Internal: This option is viable if you have a large organization based in the Philippines as it requires more resources. Companies must be well-versed with the Philippine Labor Code, tax policies, and employment laws.
Local payroll processing: Companies can outsource the payroll function to a local payroll processing firm in the Philippines. But you will still be liable for all non-compliance matters.
Fully outsourcing: Companies can rely on a global PEO agency like Multiplier to take care of payroll management. It makes the task hassle-free and ensures total compliance with the Philippines payroll process.
Entitlement and Termination Terms
Your Philippines payroll guide must specify entitlement and termination terms. It includes the leave policies, notice period, and severance pay.
- ~The probation period for employees is six months
- ~a typical working day in the Philippines is eight hours. Employees working overtime are entitled to 25% compensation of their basic wage.
- ~Employees who have completed 12 months of service are entitled to ‘service incentive leave’ - paid vacation for five days.
- ~There are 18 public holidays in the Philippines
- ~The termination process in the Philippines is usually complex if the grounds for termination is a just and authorized cause.
- ~Employers must give a 30-day notice period to an employee before terminating them.
Philippines Payroll Processing Company
Expanding to the Philippines can be smoother with the help of a payroll processing company. Non-compliance with payroll policies can result in hefty fines for foreign businesses.
If you are unaware of a reliable Filipino firm, you can look at a global PEO company like Multiplier. With a strong experience in payroll management, we can shoulder this and many more HR responsibilities for you.
How Can Multiplier help With Global Payroll?
You can outsource your company payroll in the Philippines to Multiplier, an expert PEO solution. We offer global payroll solutions in 150+ countries, so our team has a thorough knowledge of local labor laws. We can manage employee salary calculations and tax filing, making your payroll management a streamlined operation.
Frequently Asked Questions
Who are rank and file employees in the Philippines?
Employees who don’t hold any managerial or leadership positions are called rank and file employees.
How to calculate the 13th month’s pay in the Philippines?
Here’s the formula to calculate the 13th-month pay in the Philippines:
Total basic salary / 12.
In other words, calculate the sum of your total salary for the entire year and divide it by 12.
What is the night shift differential?
Night shift differential is additional compensation given to an employee for working between 10 PM to 6 AM.