Allowance and its Labor and Tax ImplicationsAtty Elvin
Allowance is generally used by employers as means to augment the take home income of employees hoping to avoid impacting on basic salary and/or paying the tax.
However, it is not as simplistic as that.
Grab a copy of the newly released title Tax Solutions on Employee Compensation and Benefits (under TRAIN Law), 2nd Edition 2019 by Atty. Villanueva
Allowance can take several forms. It may be regular part of compensation or given occasionally. It can serve various purposes like transportation, communication, relocation, economic, etc.
In labor law context, allowance can be:
- Voluntary but can become mandatory
Mandatory allowance refers to those mandated by the wage order like the Cost of Living Allowances (COLA). There are regional wage boards that mandate the payment of COLA. For example, NCR’s P10.00 to make the daily minimum wage of P512.00.
See Labor Code 2018 Edition by Atty. Villanueva
Allowance can be voluntary. Companies are required to comply with the minimum wages and benefits mandated by law. In regions where there are no COLA provisions companies may not have allowance in their mandatory labor expense. However, this does not mean the employers cannot grant allowance.
Hence, companies may provide company-initiated allowance or allowances. Being company-initiated it is not mandatory. Employers should understand though that voluntary allowances can be mandatory if regularly given. In certain cases, they can form part of the wage.
It was ruled that allowances regularly given shall form part of any or all of the following as held in the cases and PD 851, shown below:
- Separation pay in lieu of reinstatement
- 13th month pay
For instance, in the case of Santos vs. NLRC (G.R. No. 76721, 21 September 1987, 154 SCRA 166) the Supreme Court decreed that in the computation of separation pay awarded in lieu of reinstatement, account must be taken not only of the basic salary but also of transportation and emergency living allowances.
Guide on Employee Compensation and Benefits Volume 1 by Atty. Villanueva
Further, in Soriano vs. NLRC (G.R. No. 75510, 27 October 1987, 155 SCRA 124), it was held that the salary base properly used in computing separation pay where reinstatement was no longer feasible should include not just the basic salary but also the regular allowances that the employee had been receiving.
The case of Pan-Philippine Life Insurance Corporation vs. NLRC, (G.R. No. 53721, 29 June 1982, 114 SCRA 866) included transportation allowance in the computation of back wages. The case of General Bank and Trust Company vs. Court of Appeals, (G.R. No. 42724, 9 April 1985, 135 SCRA 569) included housing allowance in the computation of separation pay that was granted in lieu of reinstatement.
The “basic salary” of an employee for the purpose of computing the 13th month pay shall include all remunerations or earning paid by his employer for services rendered but does not include allowances and monetary benefits which are not considered or integrated as part of the regular or basic salary, such as the cash equivalent of unused vacation and sick leave credits, overtime, premium, night differential and holiday pay, and cost of living allowances. However, these salary-related benefits should be included as part of the basic salary in the computation of the 13th month pay if by individual or collective agreement, company practice or policy, the same are treated as part of the basic salary of the employee. (PD 851)
The base figure in the determination of full backwages is fixed at the salary rate received by the employee at the time he was illegally dismissed. The award shall include the benefits and allowances regularly received by the employee as of the time of the illegal dismissal, as well as those granted under the Collective Bargaining Agreement (CBA), if any. (United Coconut Chemicals, Inc. vs. Valmores, G.R. No. 201018, July 12, 2017)
Hence, unless expressly excluded by the employer the allowance regularly given can form part of the regular benefit. The case of Estate of the late Eugene J. Kneebone vs. NLRC (G.R. No. 77109, 8 November 1988, 167 SCRA 99) is instructive in this instance. The Court held that the representation and transportation allowances couldn’t form part of salary as to be considered in the computation of retirement benefits on the main ground that the retirement plan of the company expressly excluded such allowances from salary.
Thus, employers have to be very clear on this item, as follows:
- Is the allowance intended as part of regular compensation?
- If yes
- Express it in the contract and/or the policy
- If no
- Formulate a policy on its availment or grant
- Clearly state that it is not regularly given
- Provide the conditions for availment (when, how, why)
- If yes
- If not intended to form part of the basic salary separate this from the payroll records since DOLE usually reacts upon seeing “non-mandatories” in the regular payroll.
Sample Form Separating Allowances from Regular Pay
Is allowance taxable? It depends.
There are allowances that are, by law, non-taxable and there are those that are taxable.
The overarching perspective on this score though is the TRAIN Law. The total income ceiling that is non-taxable is P20,833.00 per month. This means that if the allowance and the salary fall within this amount there can be no tax on the income. It does not matter if the allowance is, on its own, taxable.
For example, X’s pay for the month of April:
Basic Salary P15,000.00
Is this taxable? No. It is below the ceiling under the TRAIN Law.
If the non-taxable ceiling is disregarded, allowance is non-taxable if it falls within the De Minimis Benefits (DMB) pursuant to RR 5-2011, as amended. The following list of allowances are non-taxable being DMBs:
- Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month.
- Uniform and Clothing allowance not exceeding P5,000.00 per annum.
- Laundry allowance of P300 per month.
- Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis.
The BIR came out with a ruling that work-related mobile phone allowance shall not be subject to fringe benefits tax (FBT) if the employee is expected to be on-call 24 hours a day, accessibility is necessary to the business, and if it is pre-computed on a daily basis. (BIR Ruling No. DA-233-07)
Likewise, work-related transportation allowance is not subject to FBT if (BIR Ruling No. DA-350-04; Ruling No. DA-233-07):
- Given to an employee to pay for expenses to enhance the business
- Pre-computed on a daily basis
- Incurred in pursuit of the business
The employer granting an allowance has several things to consider. In addition, this benefit must be implemented with caution and precision. Otherwise, unexpected consequences may arise such as being computed as part of the basic salary or subjected to tax.
– Atty. Elvin B. Villanueva