Clarifications on minimum wage earner income tax exemption
Clarifications on minimum wage earner income tax exemption by: Catherine C. Quilantang
It had been a relief to minimum
wage earners (MWEs) when Republic Act No. (RA) 9504 was signed into law in
That law exempts MWEs in both
the private and public sectors from paying income tax. This means that anyone
earning not more than the minimum wage in his/her region will have his gross
compensation to himself and his family. The exemption covers not only the basic
pay but also overtime pay, holiday pay, night shift differential and hazard pay
In the National Capital
Region (NCR), the statutory minimum wage rate for non-agriculture sectors, at
that time, is P382. However, effective July 1 of this year, the basic wage has
been increased to P404 in the private sector. Similarly, minimum wage rates have
increased in eight other regions this year.
Because of these wage orders
increasing the minimum wage rates in certain regions, some employees who used
to be taxable will now be considered MWEs. How will this affect their income
tax exemption? Are the employers now prohibited from deducting and withholding
the tax? How do the employers annualize and present their compensation income
in the alphabetical list required to be filed on or before January 31, 2011?
Recently, the Bureau of
Internal Revenue (BIR) issued a circular to clarify tax issues arising from the
increase in the statutory minimum wage (SMW) and other concerns in relation to
the income tax exemption of MWEs.
In general, the rules laid down by the BIR are
in favor of the MWEs. In most cases, the
exemption will be allowed during the period when the employee qualifies as an
MWE, even if he is not qualified for some months in the year. Under the original regulations, the
interpretation seems stricter in that the exemption is forfeited for the whole
year in any instance that the SMW threshold or MWE definition is breached.
Consider the case of an
employee receiving salary above the SMW from his only employer from January to
June but who suddenly qualifies as an MWE after the SMW was increased to P404 a
day in July. The BIR clarifies that the
employee may enjoy the exemption beginning only at the time he qualifies as an
MWE. Hence, from January to June, the
employer is required to withhold the tax considering that his basic daily wage
is above the SMW. However, no withholding tax is required to be deducted from
his salaries and overtime pays, if any, from July to December. In the year-end adjustment or annualization,
only the salary from January to June is considered taxable compensation subject
to income tax (if it exceeded his personal and additional exemptions) since his
daily salary during these periods is still above the SMW. Compensation received
from July to December, including overtime pay and 13th month pay,
should be considered non-taxable compensation exempt from income tax since he
is earning purely compensation income from only one employer and his basic
daily wage rate does not exceed the SMW.
It was also clarified that
the employer is required to withhold the income tax from the salary of an MWE
who is receiving salary within the SMW, and who is, at the same time, earning
additional income from her small “sari-sari” store business or who has two simultaneous
employers even if both pay him a salary that is within the SMW. An employee who earns other income on top of
his salary as an MWE is not exempt from income tax. In the case of multiple employers paying the
SMW, the total daily wage from the two employers will already exceed the
prevailing minimum wage.
On the question of who will
deduct the personal and additional exemptions in the computation of withholding
tax in case of multiple employers, it will be the main employer to whom the
employee renders services for the most part of the taxable year. The other employer should not consider any
personal nor additional exemptions.
The regulations, however, did
not clarify the responsibility of the employer to actively secure information
or confirmation on other income or employment of all its employees. Will the employer who has no knowledge on the
other income or employment of his employee be penalized if it does not withhold
the income tax from the salary of its MWE employee who, in fact, is engaged in
business or has other employers? Moreover, is the employee expected or
required, as a company policy, to disclose this information to her employer/s?
In another instance, an MWE was
given a one-time commission by her employer in October only. No other commissions were paid in the other
months of the year. In this case, the
employee will not enjoy the income tax exemption beginning in October because she
ceased to be an MWE in October when she received additional income in the form
of commission. For the remaining months, the employer is required to deduct and
withhold the tax even if the employee will be receiving only her salary which
is within the prevailing minimum wage. In the preparation of alphabetical list
at year-end, the entire income of the employee is to be declared as taxable compensation
subject to income tax provided that it exceeded her personal and additional
If an employee who is assigned
in Metro Manila and is receiving a salary at the SMW is transferred with the
same compensation to another region where the SMW is lower, the tax exemption
will no longer apply beginning on the date of transfer. The employer is now required to deduct and
withhold tax from the salaries earned while in his assignment outside Metro
Manila. However, in the annualization,
his tax exemption while employed within Metro Manila where his salary is within
the SMW will still apply.
An MWE who was promoted in
December and was given a salary raise that is beyond the minimum wage rate
shall be exempt from income tax during the time that his salary did not exceed
the SMW. Furthermore, he shall only be subjected to income tax and withholding
tax in December if his new salary exceeds his personal and additional exemptions. If the year-end adjustment was already made
before the effectivity of the promotion, the employer should amend the year-end
adjustment to reflect the adjustment in salaries of the promoted employee.
MWEs, regardless of their tax
treatment and of when they qualified as MWEs (which determines whether they receive
total or partial taxable income or whether they are altogether exempted from
tax on compensation income), are required to be declared under Alphabetical List
of Minimum Wage Earners to be filed on or before January 31, 2011.
It is a relief to the employers
when the BIR clarified these issues on MWEs.
This is very timely considering that employers are required, under
penalty, to withhold the correct amount of tax on their employees. The employers
now have a clearer picture on the tax treatment of MWEs and are able to apply
these for this year’s annualization of withholding taxes.