How to Compute 13th Month Pay?

There’s no doubt that the last couple of months in a year are both a hectic yet exciting time for businesses. While countless virtual celebrations are just around the corner, employees are hustling to meet annual targets, especially with the pandemic still at hand. What’s more, several year-end requirements are waiting to be finalized—things like Annualization and 13th Month Pay calculation. In this blog, we focus on the latter, making it easier for you to compute for this law-mandated benefit.

Changes to 13th Month Pay Brought by TRAIN Law

The Tax Reform Acceleration and Inclusion Law or TRAIN Law was passed in 2018, effectively raising the tax exemption of 13th Month Pay to ₱90,000. This means any amount lower than this is non-taxable. However, once an employee’s pay surpasses the limit, the excess will be added to their salary and will be subject to Income Tax.

Prior to the passing of the law, the tax exemption limit is just at ₱82,000. Thanks to the tax exemption bump, Filipinos are set to receive more take-home pay come year-end.

Business Downturn Due to the Pandemic

Despite the holidays usually being the most wonderful time of the year, in reality, 2020 has been tough for businesses. The virus has rendered the majority in remote work setups, while others had to resort to layoffs to prevent insolvency. Despite this, DOLE has reminded companies that 13th Month Pay is a required benefit, and has to be given to employees on or before December 24.

Calculating 13th Month Pay

Before delving deep into the nitty-gritty of computations, here are the eligibility criteria for this law-mandated benefit.

Who Are Eligible?

All rank and file employees who have worked for at least one month in the company are entitled to receive their 13th Month Pay, except for those who fall under the following categories:

• Managers
• Government employees
• Employees paid on a commission- or project-basis
• Housekeepers and those in the personal service of another

How to Compute for 13th Month Pay?

It is calculated by getting an employees’ Total Annual Salary—the sum of all payments that they have received for the whole year. This amount will then be divided by 12, which is the number of months in a year.

13th Month Pay = Total Annual Salary / 12

Here are the following items that are excluded from an employee’s Total Annual Salary:

• Late deductions
• Absences or unpaid leaves
• Cost-of-living allowances (COLA)
• Profit-sharing income
• Cash conversion of unused vacation and sick leaves
• Overtime pay
• Premium pay
• Night differential
• Holiday pay
• Other items that are not part of the basic salary

Are Maternity Leave Benefits Included in the 13th Month Pay?

Let’s say a female employee went on Maternity Leave for two months. In this period, she will be receiving benefits from the Social Security System (SSS) and/or her employer. However, this amount is excluded from the computation of her 13th Month Pay.

To further illustrate the proper computation for this benefit, here are a few examples:

1. Employee A started working with Company A last January 1, 2020, for ₱50,000 a month. Come March, she filed for a Maternity Leave and returned in April. As mentioned earlier, Maternity Leave benefits are excluded from the calculation. Hence, by December, she will receive ₱41,666.67 as her 13th Month Pay. Here’s how to calculate this amount:

₱500,000 / 12 = ₱41,666.67

2. Employee B is working at Company B since 2018, up until July 31, 2020. Then, he entered Company C last August 1, 2020, with ₱30,000 a month as his basic pay. He went on a paid vacation leave for a week, and haven’t made any absences since. How much will he get?
   
   First of all, he should receive a 13th Month Pay from Company B for seven months’ worth of work. By December, he will also get one from his current employer, Company C, worth ₱12,500. Take note that since his one-week leave was paid, there’s no need to deduct it from the computation below.

₱150,000 / 12 = ₱12,500

Sounds simple? Really, it depends. If you have been manually calculating your employees’ monthly salaries, especially if through pen and paper, it can take a bit of work. You basically have to go back to your records for each and every employee in order to do so. Couple it with absences, unpaid leaves, maternity leaves, etc., and you get a recipe for a headache-inducing computation.

For a No-Fuss 13th Month Pay Preparation: Use MPM Payroll

At the end of the day, a dedicated software is really the best choice for businesses. Designed for the Philippines, MPM Payroll has its own 13th Month Pay calculator, doing all the grunt work for you in just a few clicks.

Reach out to us today to get started!