Employer – Employee relationship (Four Fold test)
o Selection and engagement
Power of the employer to hire and engage the services of the employee
o Payment of Wages
Responsibility – the employer has the responsibility to pay the wages equivalent to work bound by the
employee
Power – the power of employer to withhold wages under the authorize causes under the labor code
such as when there is no work perform
o Power of dismissal
Power of the employer to dismiss or to terminate the services of the employee under the authorize
causes of the labor code, specific causes under the labor code which the employer can terminate the
employee
o Power of Control
Power of employer to control the methods and the means by which the employee is to render his
services to the employer
Note: All of this test are not required to be present as held from several cases, and the power of control is the most
important test and the existence of the power of control alone will established an Employer-Employee relationship.
Types of employees as to function:
Managerial – involved in strategic decisions within the company including the hiring and the termination of employee or
subordinates.
Supervisorial – which recommends actions to managerial employees and whose work are not really clerical in nature
Rank and File – are those involved into day-to-day operations or daily task of the trade or business and whose work are
somewhat clerical in nature.
Types of employees as to taxability
o Minimum wage earner
Income from labor as we know not just the basic pay but including supplementary compensation like
overtime pay, hazard pay and nightshift deferential pay etc. are tax exempt by express provision of the
law.
But if the minimum wage earner earns other income, then that other income would be subjected to the
regular income tax rates.
o Managerial
Compensation Income > Subject to graduated rates
Other benefits in excess of limit under law > Subject to FBT (Chapter 11)
o Rank and File
Compensation Income >Subject to graduated rates
Other benefits in excess of limit under law > Subject to 90K threshold on 13 th moth pay and other
benefits
Basic Model of Compensation Income
Gross Compensation Income xx
Less: Non- Taxable Income (xx)
Taxable Compensation Income xx
Compensation Income
Four categories:
o Regular Compensation
Basic Pay
Fixed Allowances
Cost of living allowance (COLA)
Fixed housing allowance
Representation
Transportation
Other Allowances
Note: Does not include those:
1. Incurred in the pursuit of trade or business (convenience of employer rule)
2. Subject to liquidation
3. Advances returnable to employer
o Supplemental Compensation
Performance based that is given to employee and are receive by the employee on top of the regular
compensation
- Overtime pays
- Hazard Pay
- Night Shift differential pay
- Holiday pay
- Commissions (If received by employee)
- Fees – if the director is considered as employee by the employer
- Emoluments and honoraria
- Taxable retirement and separation pay
- Value of living quarters or meals - but if it is for the convenience of the employer then that will
be excluded from the Gross Income as it will treated as business expense of the employer
- Gains on exercise of stock options (highly technical topic)
- Profit sharing and taxable bonuses (other than 13th month pay and other bonuses.
o 13th Month pay and other benefits
13th Month pay (Both private and public employees)
14th month pay, onwards
Christmas Bonuses
Other Benefits that of similar nature
o Other fringe benefits
Personal expenses of employee shouldered by employer
De minimis benefits – relatively small value that are given by the employer in order to support the
welfare of their employees or to encourage productivity for the employees
o De minimis benefits – relatively small value given by employer to promote the welfare of the employees.
- Monetized unused vacation leave credits to employees not exceeding ten (10) days during the
year. (For Private Employees)
- Monetized value of vacation and sick leave credits paid to government officials and employees
- Medical cash allowance to dependents of employees, not exceeding 1,500 per employee per
semester of 250 per month
- Rice subsidy of 2,000 or one sack of 50kg rice per month amounting to not more than 2,000
- Uniform and clothing allowance not exceeding 6,000 per annum
- Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultation, not
exceeding 10,000 per annum.
- Laundry allowance not exceeding 300 per month
- Employees achievement awards, e.g. for length of service or safety achievement, which in the
form of a tangible personal property other than cash or gift certificate, with an annual
monetary value not exceeding 10,000 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees;
- Gifts given during Christmas and major anniversary celebrations not exceeding 5,000 per
employee per annum
- Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic
minimum wage.
- Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from
both CBA and productivity incentives schemes combined do not exceed ten thousand pesos
(10,000) per employee per table year.
Components of Non-Taxable Income
o Government Contributions
SSS, Pag-Ibig, Philhealth contributions for private employees, GSIS for Government Employees
o First 90K of 13th month pay and other benefits
Declared by NIRC as tax exempt
Not excluded from gross Income but it will form part of the Non-taxable income
o De minimis benefits if received by rank-and-file employee and within the limit as provided by law.
Basic Model – Compensation Income
Exercises: Quiz Assignment
Rank and File
Managerial
