This article is part of a larger series on How to Do Payroll.
Handling payroll in the Philippines is a bit different from doing payroll in the US. For instance, one big difference is that every US employee has a Social Security number, which is used to track the employee’s wages and tax requirements; meanwhile, in the Philippines, each employee has a tax identification number (TIN), which must be registered in their employer’s local government office and updated every time they change jobs.
If you’ve hired someone from the Philippines or are considering hiring from the country, you need to understand the nuances and complexities of doing payroll for employees in the country.
This guide is focused on handling payroll for Philippine employees, not independent contractors. If you’re looking on hiring the latter, then check out our guide on how to pay independent contractors.
Step 1: Set Up Your Business as an Employer
When you run payroll in the Philippines, you must first register your company with the Bureau of Internal Revenue. Doing this will give you an employer identification number (EIN), similar to the one you’d get when doing payroll in the US. Your EIN is used to ensure you’re properly calculating and remitting taxes for the different Philippine requirements—more on those in Step 5.
As with most government filings, you’ll need to pay a registration fee, currently priced at Php (Philippine peso) 500 (about $10 US dollars). You may also need to pay for each certified copy of your registration.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process to follow so that you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: Will you pay weekly, every other week, twice monthly, or monthly?
- Type of employees: Full time vs part time, exempt vs nonexempt?
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Benefits: What benefits will you offer? Who pays for them? How will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
Payroll Policy Regulations & the Philippine Labor Code
The Philippine Labor Code provides certain protections for workers and requires employers to enact certain policies. For example, it specifies that a day of work shall not exceed eight hours. While this is a legal regulation, you should still have a clear policy stating the working hours for good measure. This is particularly important for US-based businesses that require Filipino workers to work during US hours.
To ensure your company processes payroll in the Philippines effectively, you should also have policies on:
- Benefits: What benefits are required, and how do you remit payments?
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees’ overtime, and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Finally, you need to have a policy on your payroll schedule. It’s common in the Philippines to run payroll twice monthly. Most companies pay on the 15th and 30th of each month, but you are free to set your own schedule, just make sure you have a clear policy.
Step 3: Determine Salaries & Ensure Compliance
The cost of living in the Philippines is much less than in the US, nearly half as much. As a result, salaries are much lower, averaging about $890 US dollars per month. When determining the salary that you’re going to pay your Filipino employees, consider their experience, as well as the cost of living. This can help your company save money, but you still need to pay competitive rates to ensure you attract and retain the best talent.
Payroll & Employment Law Compliance
The general workweek in the Philippines is 40 hours, and each worker is required to receive at least one one-hour break each day. Overtime is allowed at 1.25 times the regular hourly rate and must be paid to employees working over 40 hours in a workweek or eight hours in a single workday.
Here are some special laws you need to know.
- 13th Month Pay: This payment, a requirement for companies registered in the Philippines, should be made on or before Dec. 24 of each year and is equivalent to one-twelfth of the employee’s annual salary. If an employee is part-time, you can prorate the amount. This is in addition to any end-of-year or holiday bonus that a company may give employees.
- Retirement Pay: All employees may retire once they reach age 60 and must retire by 65. Employees must receive at least one-half of their normal monthly salary (which comes out to 22.5 days) and must include:
- Fifteen days salary based on working salary
- Five days of incentive leave
- 1/12 of the 13th-month pay
Note: Employees must have worked for the company for at least five years. The minimum retirement pay = amount the employee made per day x 22.5 days x number of years of service.
- Night Shift Differential: All PH employees must be paid a night shift differential of no less than 10% of their regular wage for each hour of work performed from 10 p.m. to 6 a.m. This also applies to all overtime work done from 10 p.m. to 6 a.m. (meaning an additional 10% of overtime hourly rate for work done within that time period for rest days, regular holidays, and special non-working holidays). The exception to this rule would be for managerial staff, employees in government agencies, domestic workers, and non-agricultural field personnel whose actual hours worked cannot be determined with reasonable certainty.
- Service Charges: For businesses in the restaurant, retail, hotel, or any such industry, service charges collected shall be distributed at the rate of 85% for employees and 15% for management. The employees’ share will be equally distributed to all workers. If the service charge is abolished, then the employee share shall be considered integrated into their wages.
- Paid Leave: The Philippine government requires companies to provide five days of PTO for any reason (e.g., sick and vacation). If an employee does not use the time, it must be included as pay in the employee’s last paycheck of the year.
- Parental Leave:
- Maternity: 105 days of 100% paid maternity leave (120 days for a single mother)
- Miscarriage: 60 days of 100% paid leave for a miscarriage or emergency termination of pregnancy
- Paternity: Seven days of 100% paid paternity leave
- Solo-parent: Seven days of 100% paid leave, provided that the employee had been working for at least one full year before the leave
- Gynecological Leave: Any woman who has worked at least six months in the prior year is eligible for two months of full pay leave following surgery for a gynecological disorder.
- Leave for Women and Children of Domestic Violence: Victims of domestic violence may take up to 10 days of paid leave. This time may be extended based on a court order.
- Social Security System (SSS): For any Filipino worker under 60 years old making more than Php1,000 per month, contributions are mandatory and determined by salary.
- Philippine Health Insurance Corporation (Philhealth): Even if private insurance is offered by a company, contributions to the Philippine Health Insurance Corporation are required at 3% of the employee’s monthly salary.
- Home Development Mutual Fund (HDMF): This fund collects money for a national savings program and affordable housing. For Filipino workers making less than Php1,500 per month, their contribution is 1% of their monthly salary. For all other workers, the contribution is 2%.
- Holiday Pay:
- Regular Holidays: These are recurring holidays, like New Year’s and Christmas. If you need a Filipino worker to work on a regular holiday, you are required to pay them twice their normal hourly rate for the first eight hours.
- Special Non-Working Days: These holidays are flexible and generally based on regional events. Companies must pay workers required to work on these days 1.3 times their hourly rate for the first eight hours of work.
Step 4: Collect Employee Data & Forms
Just like in the US, you need to collect employee data. You’ll need employees’ names, addresses, hire dates, work authorizations, as well as their bank account information to pay them timely. Every employee’s personnel file should also include their pay rate so that you know how much to deduct in taxes.
It’s important that you regularly update this information. As employees’ pay rates change, as they get promoted, and as their dependents change, you need to have a process to update this information to ensure you’re paying them correctly.
In the Philippines, you’ll also need to collect certain forms from new hires. The Philippine government requires employers to notify them of employment status to provide the mandatory employee benefits.
TIN (BIR Forms 1902, 1905, & 2305)
The Bureau of Internal Revenue (BIR) requires employees to have a tax identification number (TIN). For new workers who haven’t previously been given a TIN, you must have them complete BIR Form 1902, and you must file this with the Revenue District Office (RDO) where your company is registered.
If your employee has an existing TIN from a previous employer that was registered in the same RDO as your company, have them complete BIR Form 2305 for you to file. If the employee has an existing TIN from a previous employer registered in a different RDO than your company, have the employee complete BIR Form 1905 and file that in the RDO where their previous employer is registered.
SSS (Form R1A)
When your company hires a new employee, you’re required to fill out Social Security System (SSS) Form R-1A and submit it within 30 days of the hire date. This form alerts the SSS of the new employee and ensures you’re withholding the right amounts.
New employees must also register for the HDMF—also known locally as Pag-IBIG Fund—within 30 days of their hire date. They can do this online but must first be registered with the SSS.
PhilHealth (Form ER2)
The Philippine Health Insurance Corporation provides medical insurance to employees. You must complete Form ER2 when you hire a new employee, providing their information for insurance purposes, and submit it within 30 days of the hire date.
Step 5: Collect Time sheets & Calculate Payroll
Most businesses start with simple, handwritten time sheets—but we don’t recommend this, as it’s ripe for errors and misuse. The best way to keep track of employee hours is to use time-keeping software. Your employees can clock in and out electronically, and your managers can review and approve timesheets before they get to your payroll team for processing.
Once payroll receives the time sheets, they should still review them for accuracy. Does anything look way off? Does someone have substantially more hours than the last payroll? Keep an eye out for anything that looks off. It’s easier to fix now than after you’ve run payroll.
Payroll Deductions in the Philippines & Other Considerations
Handling payroll for Filipino employees is similar to calculating payroll in the US—there are tax and payroll deductions you must make to ensure full compliance. The following chart outlines the employer and employee payroll contributions you’ll need to make every payroll run.
For SSS, PhilHealth, and HDMF, both workers and employers have to contribute specific amounts based on each agency’s contribution table and the employee’s salary. You also have to remit and report the contribution payments (both employee and employer shares) to each agency based on its monthly reporting schedules.
2022 Payroll Contributions in the Philippines
Type of Payroll Contribution
Social Security System
8.5% of employee’s monthly salary
4.5% of employee’s monthly salary
Philippine Health Insurance Corporation*
4% of employees monthly salary, split equally between employer and employee with premium caps of:
Php400 monthly if earning Php10,000 and below per month
Php3,200 monthly if earning Php80,000 and up per month
Home Development Mutual Fund
2% of employee’s monthly salary
1% of employee’s salary if earning Php1,500 and under per month
2% of employee’s salary if earning Php1,500 and up per month
Php42.50–Php425, depending on employee’s monthly salary
Php22.50–Php225, depending on employee’s monthly salary
*Note that the Philhealth premium is set to move up until it reaches 5% (schedule is 4% in 2022, 4.5% in 2023, and 5% by 2024 to 2025). However, we recommend waiting for the official announcement from the agency before implementing the premium increase.
The below tables show the income taxes that should be deducted from the employee’s salary come year-end. So, you’ll need to ensure you withhold the right amount from each paycheck based on the employee’s salary.
Annual Income Tax Withholding
Up to Php250,000
Php250,000 to Php400,000
20% of the excess over Php250,000
Php400,001 to Php800,000
Php30,000 + 25% of the amount over Php400,000
Php800,001 to Php2,000,000
Php130,000 + 30% of the amount over Php800,000
Php2,000,001 to Php8,000,000
Php490,000 + 32% of the amount over Php2,000,000
Php2.41 million + 35% of the amount over Php8,000,000
Annual Income Tax Withholding
Up to Php250,000
Php250,000 to Php400,000
15% of the excess over Php250,000
Php400,001 to Php800,000
Php22,500 + 20% of the amount over Php400,000
Php800,001 to Php2,000,000
Php102,500 + 25% of the amount over Php800,000
Php2,000,001 to Php8,000,000
Php402,500 + 30% of the amount over Php2,000,000
Php2,202,500 + 35% of the amount over Php8,000,000
*While the PH income tax brackets are set to change in 2023, we recommend waiting for the official announcement from the BIR before implementing the withholding tax changes.
To help you deduct the appropriate taxes per pay run, the Philippines’ BIR has a withholding tax table you can use to identify how much to withhold based on specific compensation ranges and pay periods (such as daily, weekly, semimonthly, and monthly). If used correctly, the taxes deducted per pay run should be equivalent to the expected income tax amount by the end of the calendar year.
There may be instances wherein the total amount withheld may be more than what should have been deducted; in this case, employees can claim a tax refund from the BIR. This can be done when employees file their annual income tax returns for the preceding taxable year on or before April 15 of each year. On the other hand, if the total amount deducted is less than what should have been withheld, employees have to pay the remaining amount directly to the BIR on or before the tax return filing deadline.
Step 6: Pay Employees
When you’ve reached this point, it’s time to pay your Filipino employees on the schedule you previously determined. If you only have a handful of employees in the Philippines, it might be worth your time to partner with a local payroll processing company. It will be licensed and ensure your employees receive the right amounts and that your deductions and taxes go to the right government agencies.
If you have lots of employees in the Philippines, however, you may want to do your payroll in-house. Just ensure that your payroll employees are familiar with the Philippine Labor Code and the nuances of employee entitlements. In the Philippines, employees and their spouses receive social insurance like maternity pay, sick pay, pension, life insurance, and even funeral grants. Employees are also eligible for government healthcare, where the employer is required to contribute half of the employee’s premium.
Regardless of what you choose, you’ll need to make sure that taxes and deductions are withheld at the right amounts and remitted to the appropriate agencies. Even if you use a payroll processing company, the burden is on you to ensure this information is accurate.
Step 7: Document & Store Your Payroll Records
According to the Philippine Labor Code, all employment records must be kept for at least three years. This includes payroll records, specifically:
- Dates of employment
- Rate of pay
- Frequency of pay
- Total regular and overtime pay
- Net employee pay
Storing these payroll records in a safe place is crucial to meeting this requirement. Not only will you want these records for business purposes, you’ll also want to make sure you’re meeting the requirements of payroll record keeping in the Philippines.
Paying employees in the Philippines has challenges but it can be done. If you’ve determined that adding Filipino employees to your workforce is the right move for your company, this guide helps you ensure payroll compliance with Philippine labor laws and keeps your workers happy by ensuring they’re paid accurately and on time.