Many of us have difficulty doing the payroll preparation of our business. One of the main reasons is the constant change of labor laws associated with payroll preparation. For example, the minimum wage, SSS contributions, PhilHealth contributions, and HDMF contributions change frequently. Added to this is the complexity of calculating the income tax you must withhold from your employees’ compensation.
As a result, we now need to hire a bookkeeper or accountant to do this work. There is nothing wrong and it’s not considered shameful as an employer if you don’t know how to do things like payroll preparation. Because in the first place, your goal is to grow the business and make money. To focus on this, you need to outsource payroll preparation work.
But it’s not also bad if you learn payroll preparation yourself. After all, this is also about money and you’re paying your employees cash. And these are called salaries and wages which are considered expenses of your business.
My advice is to hire a bookkeeper after you learn the basics of payroll preparation.
Don’t be fooled by the word “basic.” Many have fallen victim to that word. And I don’t want to victimize you either. So in this article, I will teach you how to do basic payroll preparation.
Without so much introduction, let’s dive in.
Table of Contents
What is Payroll Preparation?
In simple words, payroll is a list of your employees and the amounts you’ll pay to them. The process of doing payroll is called payroll preparation.
Isn’t it very simple? No, it isn’t. Because paying your employees is not enough. You need to consider various things in the payroll preparation process.
I’ll list down some things to consider for basic payroll preparation.
Minimum Wage
Of course, as a responsible employer, you have to comply with the existing rules and regulations and pay your employees under the minimum wage laws.
The minimum wage is not the same in the Philippines. We have what is called the “Manila rate” or the NCR minimum wage and “provincial rate.”
The minimum wage also depends on the region or area. You also need to consider whether your business is agricultural or non-agricultural.
For example here in Region I, the minimum wages for the non-agricultural sector are:
- 30 or more employees – ₱340.00
- 10 to 29 employees – ₱310.00
- 1 – 9 employees – ₱282.00
By the way, the mandated number of working hours a day is 8 hours or 9 hours that consists of 1 hour break time.
I will not discuss the minimum wage further because this article is about payroll preparation. However, if you want to learn more about the minimum wage in your region and industry, you can download the latest summary of wage orders by clicking this link.
Deductions and Add-ons
Add-ons need to be included in payroll preparation such as daily food allowances and petty cash funds. But it is not limited to the ones I mentioned. You can add what applies to your business. These are called de minimis items. Later on, it will be part of your employee’s total compensation.
Of course, absences or leaves of absence and undertime will not be out of the question. If your employee arrives late, you can reduce his or her salary. You will not pay for the day he or she was absent. But it still depends on whether it is a paid leave or not.
There are different types of leave of absence and they have different treatments under the labor code. But I will not discuss this because our payroll preparation topic will be meaningless.
Mandatory Deductions
The three mandatory deductions are SSS, PagIbig, and Philhealth. Even if you don’t know them yet I’m sure you’ve heard them too. For each wage you pay to your employee, you must deduct a corresponding amount according to the law. It is mandatory and it’s your obligation as an employer to remit the contributions of your employees to SSS, PagIbig, and PhilHealth.
In fact, in SSS, the share of the employer (you) is greater than that of the employee. And you can’t cheat it because it’s punishable by the law.
H-O-NS-H
This means holiday pay, overtime pay, night shift differential pay, and hazard pay.
By law, you have to pay them if necessary. But not all employers are required to pay them. For example, if you are an employer with no more than ten employees, you do not have to pay for regular holidays. If you also do not have a night shift employee (10 pm to 6 am), you do not have to pay night shift differential pay.
Withholding Tax
Apart from mandatory contributions, there are withholding taxes on compensation that you need to consider in payroll preparation. The taxes that you deduct from your employee’s salary will be remitted to the BIR. As a withholding agent, you will need to deduct the corresponding taxes from your applicable employees.
I have an article about this that you can read. It covers the computation of taxes to withhold as well as the process of filing the BIR Form 1601C and remittance of the said withholding taxes. All are in one article that you can read by clicking this link.
Other Considerations
The things you should consider in payroll preparation are not limited to the things I mentioned above. You have a lot to consider based on the nature of your business. Some of these are salary loans, cash advances, and other things.
If I include it in this tutorial you may be confused and you will not learn the concept of basic payroll preparation.
Actual Payroll Prepation
To make the payroll preparation process easier, I will give a basic example. We will also use my prepared simple excel template to make the process even easier. You can download it at the bottom of this article.
Illustration: EBIR Company has five employees. Details of each can be seen below.
| Name | TIN | Earner Type | Rate |
|---|---|---|---|
| Jose Rizal | 236-584-221 | non-MWE | ₱25,000 per month |
| Marcelo Del Pilar | 504-564-559 | non-MWE | ₱20,000 per month |
| Carlos Garcia | 678-221-635 | non-MWE | ₱500 per day |
| Manuel Quezon | 300-875-854 | MWE | ₱5,000 per month |
| Emilio Aguinaldo | 200-548-820 | MWE | ₱282 per day |
MWE stands for minimum wage earners. In short, these employees are paid not more than the minimum wage set by the law per region and industry.
Additional information is presented below.
First Half: January 1 – 15
| Name | No. of Days Work | Absences / Undertime | Overtime | Food Allowance |
|---|---|---|---|---|
| Jose Rizal | 2 days / 6 hours | 10 hours | ₱1,500 monthly | |
| Marcelo Del Pilar | half-day / 4 hours | 5 hours | ₱1,500 monthly | |
| Carlos Garcia | 10 days | ₱1,500 monthly | ||
| Manuel Quezon | no absences / 1 hour | 7 hours | ₱1,500 monthly | |
| Emilio Aguinaldo | 8 days | 5 hours | ₱1,500 monthly |
Second Half: January 16 – 31
| Name | No. of Days Work | Absences and Undertime | Overtime | Food Allowance |
|---|---|---|---|---|
| Jose Rizal | 5 hours | ₱1,500 monthly | ||
| Marcelo Del Pilar | 1 day / 3 hours | 4 hours | ₱1,500 monthly | |
| Carlos Garcia | 9 days | ₱1,500 monthly | ||
| Manuel Quezon | 2 days | 8 hours | ₱1,500 monthly | |
| Emilio Aguinaldo | 7 and a half day | ₱1,500 monthly |
EBIR Company is located in Region 1 and follows the minimum wage orders. It pays its employees twice a month (semi-monthly) every 17th day of the current month, covering the 1st to 15th day of the month, and the 2nd day of the following month, covering the 16th to 30th or 31st day of the current month. The Company has five workdays from Monday to Friday only.
Now, we’ll do the payroll preparation by following the five easy steps below.
Step 1: Determine the Factors Used
Factors used are the number of days per year to be used based on the workday. You can find this on the wage orders and handbook that can be downloaded below. But for this purpose, here is the summary of the number of working days.
- 5 workdays a week (Monday to Friday) – 261 days
- 6 workdays a week (Moneday to Saturday) – 313 days
- 7 workdays a week (Monday to Sunday) – 393.80 days
In this case, EBIR will use 261 days.
Step 2: Compute the Total Compensation
For monthly-rate employees:
- Total Compensation = (Monthly Rate / 2) – Absences and Undertime + Overtime + De Minimis Items
- Note: We divide the monthly rate by two because we pepare the payroll twice a month or semi-monthly.
- Computation of Overtime
- Overtime = {{[(Monthly Rate x 12 Months) / Factors Used] / 8 Hours} + OT Rate} x No. of OT Hours
- Note: We assume that the overtime is performed on normal wordking days. Normal working days have a an OT of 25% of statutory minimum wage. Other rates can be found on the handbook.
- Computation of Absences
- Absences = [(Monthly Rate x 12 Months) / Factors Used] x No. of Days Absent
- Computation of Undertime
- Undetime = [(Monthly Rate x 12 Months) / Factors Used] x (No. of Undertime Hours / 8 Hours)
Monthly Rate – January 1 – 15
Monthly Rate – January 16 – 31
For daily-rate employees:
- Total Compensation = (Daily Rate x No. of Days Worked) + Overtime + De Minimis Items
- Note: We don’t need to deduct the absences and undetime because the number of days the employees worked is already indicated. This amount is already netted with the number of of absences and undertime.
- Computation of Overtime
- Overtime = (Daily Rate / 8 Hours) + OT Rate x No. of OT Hours
- Note: We assume that the overtime is performed on normal wordking days. Normal working days have a an OT of 25% of statutory minimum wage. Other rates can be found on the handbook.
Daily Rate – January 1 – 15
Daily Rate – January 16 – 31
Step 3: Compute the SSS, PhilHealth, and PagIbig Deductions
Based on the contributions table set by SSS, PhilHealth, PagIbig, we can easily determine and compute the mandatory deductions for the payroll preparation. Note, we will only deduct the employee shares.
For consistency purposes, we’re going to use the Estimated Equivalent Monthly Rate (EEMR) in determining the mandatory deductions. We’re only using these on the daily-rate employees. As for the monthly-rate employees, we’re going to use the monthly rate itself. The EEMR is computed using the formula below.
EEMR = (Daily Rate x Factors Used) / 12 Months
The final EEMR and the mandatory deductions of the five employees of the EBIR Company.
These amounts are in a monthly form. So we need to divide them into two when computing for the net taxable compensation for semi-monthly withholding.
Step 4: Compute the WITHHOLDING TAXES
Minimum wage earners are exempt from income taxes under the law. So we’re left with the three employees. For the computation of income taxes to be withheld, we’re going to use the withholding tax table from the BIR itself. The table is presented below.
Here is the computation of the net taxable compensation as well as the withholding taxes on compensation.
Step 5: Prepare the Payroll
Payroll preparation is so easy at this point because we have already computed all the necessary amounts. A simple payroll for January 1, 2022, is e shown below.
After the payroll preparation, you’ll prepare a payslip and pay the actual amount to the employees.
After a monthly payroll, the best practice is to file and remit the withholding taxes on compensation to avoid penalties and surcharges.
I have covered a step-by-step guide on how to file and remit withholding taxes on compensation using the BIR Form 1601C thru eBIRForms. You can this ultimate guide by clicking this link.
Recommended Reading: How to Fill Up the PART II – Computation of Tax of the BIR Form 1601C (Free Excel Template Download)
Recommended Reading: Install eBIRForms And Setup Your Company in 3 Easy Steps
Recommended Reading: BIR Form 0605 Filing and Payment (An Ultimate Guide)
Recommended Reading: Bir Form 2551Q Percentage Tax Filing and Payment (A Complete Guide)
Downloads
Workers Statutory Monetary Benefits 2020 Edition
References
Department of Labor and Employment. (n.d.). Summary of Latest Wage Orders and Implementing Rules Issued by The Regional Boards | National Wages Productivity Commission. Retrieved January 15, 2022, from https://nwpc.dole.gov.ph/stats/summary-of-latest-wage-orders-and-implementing-rules-issued-by-the-regional-boards/
Philippine Social Security System. (n.d.). SSS Contribution Table. Social Security System. Retrieved January 10, 2022, from https://www.sss.gov.ph/sss/DownloadContent?fileName=2021-CONTRIBUTION-SCHEDULE.pdf
Home Development Mutual Fund. (n.d.). PagIbig Contribution Table. Pag-IBIG Fund. Retrieved January 10, 2022, from https://www.pagibigfund.gov.ph/document/pdf/circulars/provident/HDMF%20Circular%20No.%20274%20-%20Revised%20Guidelines%20on%20Pag-IBIG%20Fund%20Membership.pdf
Philippine Health Insurance Corporation. (n.d.). PhilHealth Contribution Table. PhilHealth. Retrieved January 10, 2022, from https://www.philhealth.gov.ph/news/2019/new_contri.php
