With our years of experience in payroll computation, one of the most common errors that we see in businesses is in how they compute their employee’s daily rates. This is only applicable if your employee’s salary is fix per month and you just deduct absences and add overtime pays. You might be wondering why this is very important so Ill discuss some reasons below.
1. You need the correct daily rate of the employee when you are deducting their absences. If you are deducting absences for your employees, you want to make sure that you are not under-deducting or over-deducting them. The same applied when you are deducting their tardy and undertimes.
2. Their daily rates have an impact to their tax computation, minimum wage earners have additional tax benefits here in the Philippines. You need to make sure that their daily rate is correct so you can properly check if they are minimum wage earners or not.
3. It’s important when computing overtime pays, if you incorrectly computing your employee’s daily rates, it is more likely that you are incorrectly computing their hourly rates as well which you normally use in computing their overtime pays.
Here is how you should compute your employee’s daily rates, you can surely come up with the same result with different formulas but at least this is the most common formula that we see in many companies.
Daily Rate = (Monthly Rate x (Number of months in a year which is 12)) / Total working days in a year
With that, how can you know the total number of working days in a year? Thats where the problem usually comes in.
We have 52 weeks in a year. If your employees are required to work from Mondays to Fridays (5 days a week), just multiple 5 by 52 which is 260 but during leap years we sometimes get additional 1 working day so some companies actually use 261. You can also see the same figure in BIRs guidelines about the this subject. You can find their document here.
Here is an example.
If you have an employee with a monthly rate of 10,000 and working 5 days a week.
His\Her daily rate will be
(10,000 x 12) / 261 = 459.77
That 459.77 will be your basis when you are checking if the employee is a minimum wage earner or not. Which if you look in the DOLE website in NCR, that is not classified as a minimum wage earner so you should deduct taxes to the employee’s basic salary. If the employee is also required to work during Saturdays with the same monthly rate that will make it (10,000 x 12) / 312 = 384.62 which is below minimum wage and you don’t need to deduct withholding tax to their basic salaries.
That rate will also be your basis when computing their absences and their hourly rates which will be your basis in the computation of their overtime pays.
Trust is very important between employer and employees and correct salary computation is one way to strengthen it.