How To Compute 13th Month Pay

How to Compute your Employees’ 13th Month Pay

Your business is growing and hiring more staff. One of the first things you need to learn is how to compute for the mandatory 13th month pay.

Many online businesses start as small enterprises managed and run by one person, probably with a family member as an assistant. 

When the business picks up, they hire one or more full-time staff to increase production and help with administrative tasks like managing inventory or paying business taxes

If you are at this stage in your business, your legal responsibility is to provide your employees with 13th month pay. In this article, we’ll briefly discuss the legalities behind the it and then show tips and examples on how to compute the mandatory 13th-month pay in the Philippines. 

The 13th Month Pay Law

The 13th month pay is a benefit given to all Filipino employees. It’s equivalent to one-twelfth (1/12) of an employee’s salary in one calendar year.

The Philippines is one of the countries that has made 13th month pay mandatory. It’s additional annual compensation for employees on top of their monthly salaries, benefits and other performance bonuses.

Unlike other year-end bonuses, the 13th month pay
is mandatory.

Employees can file legal action if their employer fails to follow this mandate. Knowing how to compute 13th month pay is vital for any business owner with full-time employees.

The original 13th Month Pay Law was penned by labor leader and human rights advocate, Zoila de la Cruz, and signed by then president Ferdinand Marcos on December 16, 1975. 

However, the law only granted the benefit to employees who received less than Ph1,000 monthly. It wasn’t until August 13, 1986, after Pres. Corazon Aquino amended the law and made the 13th month pay mandatory for all employers. 

13th Month Pay Cheat Sheet

  • Mandatory for all employers of Filipino workers
  • Must be paid in full on or before December 24
  • May also be paid in two installments, usually in June and December
  • Only the “basic salary” is included in the computation. Benefits like Cost of Living Allowance (COLA), overtime pay, night differential and cash conversion of vacation and sick leave credits are excluded – except if these benefits are included in the basic salary as stated in the employment contract.
  • The 13th month pay is not subject to tax. However, the TRAIN Law states if the 13th month pay plus other benefits exceed PH90,000, the excess will be subject to tax.

Who are eligible for 13th Month Pay?

  • All rank-and-file employees in the private sector who worked at least one month within the calendar year.
  • This benefit should be given regardless of position, designation or employment status.
  • Employees who resigned or terminated before the scheduled disbursement of the 13th month pay are also entitled to a prorated rate.
  • Household help (under the Domestic Workers Act or Batas Kasambahay”)

Who Are NOT Eligible for 13th Month Pay?

  • Managers (it’s up to the company to give them this benefit)
  • Government employees (all those covered by civil service law)
  • Persons in personal service of another
  • Employees who earn purely by commission or task basis
  • Freelancers

How to Compute the 13th Month Pay

According to its definition, the 13th month pay is equivalent to one month’s salary in a calendar year. As such, for employees whose monthly basic salary is the same all year is computed as:

13th month pay = total annual salary / 12

Computing With Absences

Following the definition, deductions on the basic salary because of unpaid absences will also factor into the calculation. Here’s a sample calculation of 13th month pay with absences:

MonthsAbsencesBasic Monthly Salary: P20,000
Months 1-6No absencesP120,000
Month 7With absences – paidP20,000
Month 8With absences – unpaid (worth Ph5,000)P15,000 
Months 9-12No absencesP80,000
TOTAL Annual SalaryP235,000

(13th month pay = (total annual salary – non-paid absences) / 12)

Total Annual Salary = P235,000 / 12

13th Month Pay = P19,583.33

Computing for Resigned/Terminated Employee

As long as an employee has worked one full month in the calendar year, he or she is entitled to receive 13th month pay for the number of months in the company (prorated calculation). Here’s how to compute 13th month pay for resigned employee:

MonthsAbsencesBasic Monthly Salary: P20,000
Months 1-6No absencesP120,000
Month 7With absences – paidP20,000
Month 8Resigned; last day at the end of the monthP20,000
TOTAL Salary for the YearP140,000

(13th month pay = total annual salary (minus non-paid absences, if any) / months worked)

Salary for the Year = P140,000 / 8

13th Month Pay = P17,500

Who Are Exempt from Paying the 13th Month Pay?

The law exempts the following employers from giving this mandatory benefit:

  • The government
  • Government-owned and controlled corporations (GOCCs)
  • “Distressed employers” whose businesses are not doing well may file for an exemption to DOLE.
  • Employers already paying the equivalent of 13th month pay to their employees.
  • Employers of people who are paid solely on commissions and people in personal service to another.

Do I Need to Hire an Accountant?

If you’re just starting an online business or opening a small shop, it helps to consult a certified public accountant who can help you register your business, set up your books and maybe even an accounting and bookkeeping software.

Once you have the essentials, you can study bookkeeping and financial management yourself or delegate it to a trusted individual. However, once your business grows, and you need to hire more full-time employees, it may become necessary to hire an accountant. 

Evaluate your situation:

  • How many employees are you calculating 13th month pay and taxes for? Can you handle the additional workload?
  • Can you afford to hire an accountant?
  • Can you recoup the cost of hiring an accountant, whether full-time or a consultant?

As with calculating business taxes, determining the 13th month pay of every employee should be efficient and accurate. Apart from fulfilling legal obligations, paying their 13th month pay on time can lift your employees’ morale and encourage them to give their best at work.  

Employees are the lifeblood of a business; if you want your business to prosper, you must also meet your employees’ expectations.

Browse through our blog for more helpful articles about growing your business and how to become a successful Filipino entrepreneur.

Featured image by Christiane Lois Dating via Getty Images