If you employ team members in the Philippines, whether through a local entity or an Employer of Record, one unusual line item will appear on your payroll every December. It’s 13th month pay and it has no equivalent in most other countries. 

The 13th month pay isn’t a discretionary bonus or gift. It’s a statutory benefit that every employer in the Philippines must pay, calculate correctly and report to the government, with real penalties for getting it wrong.

For teams used to New Zealand, Australian or European payroll norms, this catches people out. There is no concept of 13th month pay in those systems, so the cost is easy to underestimate. This guide walks through who qualifies, what goes into the calculation, how to handle pro-rated cases, how the tax treatment works and what you owe the Department of Labor and Employment (DOLE) once payment is made.

What 13th month pay actually is

13th month pay is a mandatory benefit created by Presidential Decree No. 851, signed in 1975. In plain terms, it entitles covered employees to an extra payment equal to 1/12 of the basic salary they earned during the calendar year. For someone who works a full year on a steady salary, that comes out to roughly one additional month’s basic pay.

It’s separate from, and on top of, any Christmas bonus, performance bonus or profit share you already give. It’s applicable to everyone who works in the Philippines under the national labour laws, so wherever your country is headquartered won’t change the obligation. 

There’s one notable rule: if you already pay an equivalent benefit worth at least 1/12 of annual basic salary, that can count as the 13th month pay.

Who qualifies for 13th month pay

13th month pay is a common stipulation for many employees in the Philippines. Every non-managerial employee in the private sector is covered, as long as they’ve worked at least one month during the calendar year. The DOLE guidance on 13th month pay is explicit that this includes regular, probationary, casual, contractual, seasonal and project-based staff.

Coverage also includes employees who resigned or were terminated before December (they get a pro-rated amount), piece-rate workers and employees paid a fixed or guaranteed wage, plus commission.

Only the following are exempt from 13th month pay:

1. Managerial employees: Staff with genuine authority to set management policy or to hire, discipline and dismiss others. Note, if someone is called a “manager” but has no real managerial authority, they don’t count under this definition. 
2. Government employees: With the exception of those in government-owned corporations that operate essentially as private businesses.
3. Employees who already receive an equivalent benefit of at least one-twelfth of annual basic salary.

Household workers sit under a separate law with their own 13th month entitlement, so they’re not covered by PD 851 itself.

What counts as basic salary

This is where most calculation errors happen. 13th month pay is based on basic salary earned, not gross pay and not total take-home. Basic salary means the fixed remuneration for work performed. It strips out the extras that inflate a payslip in busy months.

The table below summarises the usual treatment. Company policy or a collective agreement can pull some items into basic salary if you’ve consistently treated them that way, so review your own practice before finalising.

The guiding principle: if a payment is an add-on for special circumstances such as working late, working a holiday or working nights, it stays out of the base. If it’s the ordinary wage for ordinary work, it goes in.

How to calculate 13th month pay

The formula never changes: total basic salary earned during the calendar year / 12 = 13th month pay

The only thing that varies is the numerator. For a full year with no salary changes and no unpaid absences, the result equals one month’s basic pay. Once raises, unpaid leave or a partial year enter the picture, you have to sum the actual basic salary the person earned, rather than multiplying a single monthly figure.

Here are three full-year scenarios worked through.

Example A: steady salary, full year

An employee earns PHP 30,000 a month in basic pay and works the whole year with no unpaid days.

• Total basic earned: PHP 30,000 × 12 = PHP 360,000
• 13th month pay: PHP 360,000 ÷ 12 = PHP 30,000

Example B: a mid-year raise

An employee earns PHP 28,000 a month from January to June, then PHP 32,000 from July to December.

• January to June: PHP 28,000 × 6 = PHP 168,000
• July to December: PHP 32,000 × 6 = PHP 192,000
• Total basic earned: PHP 360,000
• 13th month pay: PHP 360,000 ÷ 12 = PHP 30,000

Example C: leave without pay

An employee earns PHP 30,000 a month but takes enough unpaid leave in one month that their actual basic pay for that month drops to PHP 24,000.

• Eleven full months: PHP 30,000 × 11 = PHP 330,000
• The reduced month: PHP 24,000
• Total basic earned: PHP 354,000
• 13th month pay: PHP 354,000 ÷ 12 = PHP 29,500

Notice how the number falls once earned pay dips. This is why you can’t simply take December’s salary and call it done. Unpaid absences, suspensions and periods of no work all reduce the base.

Pro-rated calculations for partial years

Employees who join partway through the year or who leave before December are still entitled to the benefit. You simply run the same formula on the basic salary they actually earned during their time with you. There’s no rule that says they must be on the payroll on a particular date, only that they worked at least one month.

Example D: a mid-year hire

An employee joins on 1 May at PHP 27,000 a month and works through 31 December (eight months).

• Total basic earned: PHP 27,000 × 8 = PHP 216,000
• 13th month pay: PHP 216,000 ÷ 12 = PHP 18,000

Example E: a resignation

An employee earning PHP 33,000 a month resigns effective 31 July, having worked from 1 January (seven months).

• Total basic earned: PHP 33,000 × 7 = PHP 231,000
• 13th month pay: PHP 231,000 ÷ 12 = PHP 19,250

For a leaver, the pro-rated 13th month pay forms part of their final pay and should be settled when you process their separation, not held back until the following December. Assuming that no payment is due because the person left before year end is one of the most common and most expensive mistakes employers make.

Tax treatment under the TRAIN law

13th month pay is not automatically tax-free but a generous exemption usually keeps it that way. Under Section 32 of the National Internal Revenue Code, as amended by the TRAIN law, the first PHP 90,000 of combined 13th month pay and other benefits received in a calendar year is excluded from income tax.

Two features matter for payroll teams:

• The PHP 90,000 ceiling is a combined limit. It covers 13th month pay together with Christmas bonuses, productivity incentives, anniversary bonuses and similar payments. You track the running total across the whole year, not just the December payout.
• Only the excess above PHP 90,000 becomes taxable. That surplus is added to the employee’s taxable compensation and taxed at the normal graduated rates.

Tax example 1: below the ceiling

An employee receives PHP 30,000 in 13th month pay and a PHP 15,000 Christmas bonus. Combined benefits are PHP 45,000, comfortably under PHP 90,000, so the full amount is tax-exempt.

Tax example 2: above the ceiling

An employee receives PHP 90,000 in 13th month pay plus a PHP 25,000 performance bonus. Combined benefits are PHP 115,000. The first PHP 90,000 is exempt and the remaining PHP 25,000 is added to taxable income for the year.

DOLE compliance obligations

There are two hard deadlines to keep in view when processing 13th month pay..

First, you should always pay on or before 24 December every year. You may split the payment, releasing half before the school year opens in mid-year and the balance by 24 December, but the full amount must be settled by that date. Requests to defer payment or to be exempted are generally not accepted.

Second, you need to report to DOLE by 15 January. Every covered employer must file a compliance report confirming that 13th month pay was paid, submitted through the DOLE Online Compliance Portal no later than 15 January of the following year. The report captures the establishment name, address, principal business, total headcount, number of employees who received the benefit, the amount granted and a contact person.

DOLE monitors compliance through its regional and field offices and conducts labour inspections, so a missed report or an underpayment is the kind of thing that surfaces at an inconvenient moment. Non-payment is treated as a money claim, which employees can pursue directly, and there is no financial distress exemption available without prior authorisation from the labour authorities.

What this means for employers based outside the Philippines

If you run your team from Auckland, Sydney or London, the obligation still applies the moment you employ someone working in the Philippines. Paying in a foreign currency or labelling the person a “contractor” when they function as an employee doesn’t remove it. Misclassification is a live risk and a misclassified worker can later claim unpaid 13th month pay, along with other statutory benefits.

You have two realistic routes:

1. Set up a local entity and register with the Bureau of Internal Revenue, the Social Security System, PhilHealth and Pag-IBIG, then run compliant payroll yourself.
2. Use an Employer of Record (EOR), which becomes the legal employer in the Philippines and handles the 13th month calculation, payment, tax withholding and the DOLE report on your behalf.

Either way, build the cost into your budgeting from day one. For a New Zealand employer with no equivalent obligation at home, that is a genuine addition to the cost of a Filipino hire.

Quick reference for payroll teams

Before you close out the year, run through this short checklist:

• Confirm which staff are rank-and-file and therefore covered. Don’t rely on job titles alone.
• Use basic salary earned as the base, excluding overtime, premiums, night differential, leave conversions and allowances.
• Apply the formula: total basic salary earned in the year divided by twelve.
• Pro-rate for anyone who joined or left partway through the year, and settle leavers in their final pay.
• Track combined benefits against the PHP 90,000 tax-exempt ceiling and tax only the excess.
• Pay on or before 24 December.
• File the compliance report through the DOLE portal by 15 January.

Handled carelessly, 13th month pay becomes underpayment claims, DOLE findings and unhappy staff heading into the holidays. The difference is almost always in the detail of what counts as basic salary and whether the reporting step was remembered.

Alternatively, by employing through an Employer of Record, you can leave compliance in the hands of local experts. They’ll handle your 13th month pay obligations and ensure that you don’t fall on the wrong side of the regulations. 

Speak to one of our team about our Employer of Record service.

The information in this article is current as at 1 July 2026 and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its affiliates (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. Some information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and seek professional advice before making any decisions or relying on the information in this article.