Why is Overtime Pay Taxable in the Philippines in 2024

Who can get a Digido loan?

Working additional hours can boost your earnings, but it is quite important to accurately calculate them and apply the right tax rates to your overtime pay to maximize your profit from the extra workload. This article will give you a detailed explanation of what overtime pay is in the Philippines, how it is calculated and how it is taxed.

An Overview of the Philippine Tax System

The citizens of the Philippines pay taxes on income earned within the country and abroad. There are 3 different types of income ― compensation, passive and business income ― and each of them is taxed differently.

Compensation and business income are taxed at progressive rates of up to 32%. That means that those who earn more pay higher taxes. Passive income is subject to a tax deduction of 7.5% (1). Compensation income of the Filipino employees is divided into a regular basic salary and supplementary premiums such as hazard and holiday pay, other bonuses and benefits. Overtime pay is considered an extra payment on top of the fixed salary.

The Labor Code of the Philippines

The Department of Labor and Employment (DOLE) is in charge of defending the employees’ rights in the Philippines. Its main law, the Labor Code, is set to regulate work conditions within the country.

The Labor Code of the Philippines explains the term ‘overtime work’ as any work an employee does beyond the regular 8 hours of a working shift (2). Not only does it state the overtime pay rates, but it also obligates employers to maintain records of the overtime hours completed by their workers. The document doesn’t not limit the amount of overtime working hours allowed.
The Code also states the foundation of the Regional Tripartite Wages and Productivity Boards (RTWPBs). These organizations determine minimum wage rates and overtime hours allowed within a specific region and industry.

An Overview of the Philippine Overtime Pay

The Labor Code establishes a 25% pay rate for working extra hours on a regular day and a 30% one for a holiday or weekend. That means that if you earn PHP 50 an hour, and you work one hour beyond the 8-hour day, you should calculate your overtime hourly work rate by multiplying 50 by 1.25. Thus, your extra hour costs PHP 62.5.

If you work overtime on a national holiday, two types of additional pay must be applied ― a holiday pay and an overtime pay. According to the Labor Code, a national day wage is twice as much as a regular pay. So if your standard hourly rate is PHP 50, you should first multiply 50 by 2 to see how much your regular work hour is worth on a holiday, and then by 1.30 to determine the overtime hourly wage. In this case, the rate for working an extra hour turns out to be PHP 130. According to the Labor Code, employers are entitled to establish even higher overtime pay rates.

Learn How to
Calculate Overtime Pay in the Philippines

How is Overtime Pay Taxable in the Philippines in 2024?

Under the National Internal Revenue Law (3), overtime pay is defined as taxable income. The tax on overtime pay must be paid every month first by the employer and then by the worker.

Overtime Pay Taxes for Employers

Employers who pay a monthly sum of over PHP 250 for the work beyond 8 hours must add the overtime pay to the basic salary of their employees, and settle a 10% tax on the resulting amount. If the overtime pay is less than PHP 250 per month, it is not not taxable.

Overtime Pay Taxes for Workers

In order to determine how much tax you must pay as an employee, you must first add overtime pay ― if it is over PHP 250 ― to your basic salary, as well as holiday pay and night shift differential pay (a 10% compensation for working during night hours from 10pm to 6am). The final amount will be the employment income. So if your monthly salary is PHP 30,000, and the additional monthly pay reaches PHP 3,000, then the monthly employment income equals 33,000. However, not all of it is taxable.

To determine taxable employment income, you should subtract the following mandatory government contributions from your employment income:

• Social Security System (SSS) contribution of 14% (an employer covered 9.5% of it, and 4.5% is deducted from the worker’s salary) (4)
• Health Insurance (PHIC) contribution of 4.5% (5)
• Home Development Mutual Fund (HDMF) contribution of 4%, if the income exceeds PHP 1500 (it is paid 50/50 by an employer and an employee) (6)

Let’s keep up with the previous example. Say you’ve got the amount of PHP 33,000 as the employment monthly income. The SSS contribution of 4.5% from this amount is PHP 1,485. The PHIC contribution equals the same sum of PHP 1,485. The HDMF contribution will be PHP 660. You deduct all 3 contributions from the employment monthly income of PHP 33000. So the taxable employment monthly income will come to PHP 29,370.

To proceed to the final stage of your analysis, you’ll need to select a relevant monthly income tax rate. The Tax Reform for Acceleration and Inclusion (TRAIN) Law introduced on January 1, 2023 (7), established the following figures:

Monthly taxable income	Tax rate
Under PHP 20,833	0%
PHP 20,833 to PHP 33,332	15% of the excess over PHP 20,833
PHP 33,333 to PHP 66,666	PHP 1,857 + 20% of the excess over PHP 33,333
PHP 66,667 to PHP 166,666	PHP 8,541.80 + 25% of the excess over PHP 66,667
PHP 166,667 to PHP 666, 666	PHP 33,541.80 + 30% of the excess over PHP 166, 667
Over PHP 666,667	PHP 183,541.80 + 35% of the excess over PHP 666,667

If the taxable income is PHP 29,370, only the sum of PHP 8,537 is subject to tax. The resulting tax due will be PHP 1,280.55.

Individual taxpayers including self-employed workers and freelancers are supposed to file their tax returns once a year. So when calculating the taxable employment income, they should convert the sums above into yearly figures.

Overtime Pay Tax Concerns

In 2020, Senate President Pro Tempore Ralph Recto (8) affirmed that overtime pay of employees should not be taxable in the Philippines. In his opinion, the heavy taxation on extra hours demotivates employees to work more. However, as per 2023, this initiative has not yet been approved at the state level.

Need extra money for your business? Present 1 valid ID and get an online loan of up to 25,000 pesos! Calculate your pre-approved loan amount with Digido’s calculator:

Who is Except From the Overtime Pay Tax

According to the Republic Act No. 9504 (9), workers with a minimum pay are not required to report and pay taxes, unless they have extra sources of income. The minimum wage employees are exempt from tax on both basic and additional pays.

According to The Labor Code, RTWPBs are to specify the minimum pay wages in their regulated regions and industries. However, it is the Labor Code that defines the minimum wage criteria including the cost of living, the needs of workers and their families.

There are 3 formal employment categories where different wage rates are used: agriculture, non-agricultural sector, and retail. RTWPBs may officially increase or decrease the minimum wage in different regions. For example, in 2023, the daily minimum wage in Region 2 of the Cagayan Valley was increased by PHP 30 to reach PHP 430 for workers of the agricultural sector and PHP 450 for non-agricultural employees (10). RTWPBs’ task is to ensure that the minimum wage paid to workers is not lower than the current approved wage rate in the area.

According to the TRAIN Law, the common non-taxable income rate in the Philippines is under PHP 20,833 per month, or under PHP 250,000 a year.

The Importance of Calculating the Tax on Overtime Pay Correctly

Due to the difference in taxation rates in the Philippines and the calculation complexity, the final amount earned as a result of overtime work may significantly differ from the sum calculated only upon the overtime pay rate. If you don’t know how to compute the tax, you might end up getting less than you’ve estimated and fail to make an important purchase you’ve planned for.

It is crucial for an employee to consider that the employer also pays tax on their salary amount including payments for extra hours and to calculate the overtime pay tax as part of the income tax to receive a fair pay for extra work after all tax deductions.

Conclusion

Overtime work is the one you accomplish beyond a regular 8-hour shift. The overtime pay is taxable in the Philippines, as it is considered income. If the overtime pay surpasses PHP 250 per month, both employers and employees are obligated to pay the tax. You should calculate the preliminary tax rate to figure out when it is more profitable to work extra hours and to plan your future expenses based on the actual amount you’re going to get.