Get Adobe Reader

In order to view PDF files, you need to install Adobe Reader. Please click here to download a free copy of Adobe Reader.

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 2008.

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 of MWEs.

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 exemptions.

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.