Every December, Philippine employers face the same question: how much exactly do we owe for 13th month pay? Getting it wrong, or paying late, creates problems with both your employees and the Department of Labor and Employment (DOLE).
Here is the simple version.
What the law says
Under Presidential Decree No. 851, rank-and-file employees in the private sector are entitled to a 13th month pay. Generally, it covers employees who worked at least one month during the calendar year, regardless of whether they are regular, probationary or paid by the day or by the month. Certain categories are excluded, such as managerial employees, so check how your company's roles are classified.
The deadline
The 13th month pay must be paid on or before December 24. Many employers release it earlier, and some split it into two parts, for example half in mid-year and the rest in December. The full amount still has to be complete by December 24.
The formula
13th month pay = total basic salary earned during the calendar year ÷ 12
"Basic salary" is the regular pay for work done. Items such as overtime, holiday premium and night differential are generally not part of it, and unpaid absences reduce the amount because they reduce the basic salary actually earned. If you pay commissions or allowances as part of the basic wage, ask your HR adviser how they should be treated.
Example 1: full year employee
Ana earns a basic salary of ₱20,000 a month and worked all 12 months with no unpaid absences.
Total basic salary: ₱20,000 × 12 = ₱240,000 13th month pay: ₱240,000 ÷ 12 = ₱20,000
Example 2: employee who joined mid-year
Ben started on July 1 at ₱15,000 a month and worked 6 months.
Total basic salary: ₱15,000 × 6 = ₱90,000 13th month pay: ₱90,000 ÷ 12 = ₱7,500
Example 3: employee who resigned
Carla resigned on September 30 after earning ₱30,000 a month from January.
Total basic salary: ₱30,000 × 9 = ₱270,000 13th month pay: ₱270,000 ÷ 12 = ₱22,500
A resigned or separated employee is still entitled to the prorated amount. It is usually included in the final pay.
Is 13th month pay taxable?
Under the TRAIN law, 13th month pay and other benefits such as a Christmas bonus are tax-exempt up to a combined ₱90,000 per year. Only the amount above ₱90,000 is added to taxable income. Most rank-and-file employees stay under this limit, but you must count all the bonuses, not just the 13th month pay.
Five mistakes to avoid
- Paying after December 24.
- Forgetting resigned employees.
- Including overtime or other premiums in the basic salary total.
- Ignoring the ₱90,000 limit when you also give large bonuses.
- Computing in a spreadsheet at the last minute, with no record of how each amount was reached.
Plan the cash early
13th month pay is a predictable cost. A simple trick is to set aside 1/12 of basic salary every month (about 8.33%). That way December is a payment you have already saved for, not a cash flow shock. This is also an important part of your true labor cost, which we cover in how to track project profitability.
Payroll that tracks basic salary, absences and bonuses through the year can show each employee's 13th month pay at any time. Explore the HR and payroll tools in GodoERP or get in touch.
General information, not legal advice. For special cases such as commission-based pay or unusual contracts, check with DOLE or your HR adviser.