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INCOME TAX > Compensation Income > Flashcards

Compensation Income Flashcards

1
Q

Elements of employer-employee relationship

A
  1. Selection and engagement of employees
  2. Power of wages
  3. Power of dismissal
  4. Power of control

An arrangement which does not manifest all the elements is not an employee-employer relationship but an independent contract for the provision of service.

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2
Q

Those which are not considered employees:

A
  1. Consultants
  2. Directors without management function
  3. Talents and artists

The income or fees of these individuals are not compensation income but are business or professional income.

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3
Q

Types of employees as to taxability

A
  1. Minimum wage earners (MWEs) - exempt from income tax on their compensation (50k a month or 600k a year)
  2. Regular employees - subject to the regular progressive income tax
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4
Q

Gross Compensation Income

A

generally includes all remunerations received under an employer-employee relationship

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5
Q

Non-taxable compensation

A

a. ) Mandatory deductions

b. ) Exempt benefits

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6
Q

Exempt benefits

A
  1. Benefits excluded and/or exempted under the NIRC and special laws
  2. Benefits exempt under treaty or international agreements
  3. Benefits necessary to trade, business, or conduct of profession of the employer
  4. Benefits for the convenience or advantage of the employer
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7
Q

Benefits excluded and/or exempted under the NIRC and special laws

A
  1. Remunerations received as incidents of employment
  2. De minimis benefits
  3. 13th month pay and other benefits not exceeding 90k
  4. Certain benefits of minimum wage earners
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8
Q

De minimis benefits

A

facilities or privileges such as entertainment, medial, services, or courtesy discounts on purchases that are relatively small value and furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. These are petty fringe benefits that are exempt from income tax.

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9
Q

List of de minimis benefits (CuTe SmALLL CRiMe)

A
  1. Uniform and Clothing Allowance
  2. Employee Achievement Award
  3. Daily Meal allowance for OT work and graveyard shift
  4. Gifts given during Christmas and anniversary
  5. Laundry allowance
  6. Monetized unused vacation leave of private employees
  7. Monetized unused vacation leave and sick leave of government employees
  8. Benefits received by an employee by virtue of a collective bargaining agreement and productivity incentive schemes
  9. Rice subsidy
  10. Medical cash allowance to dependents
  11. Actual medical assistance
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10
Q

Uniform and Clothing Allowance

A

not exceeding 6000 per annum

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11
Q

Employee Achievement Award

A

must be in the form of tangible property other than cash or gift certificates, with annual monetary value not exceeding 10k under un established written plan

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12
Q

Daily Meal allowance for OT work and graveyard shift

A

not exceeding 25% of the basic minimum wage

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13
Q

Gifts given during Christmas and anniversary

A

not exceeding 5k per employee per annum

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14
Q

Laundry allowance

A

not exceeding 300 per month or 3600

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15
Q

Monetized unused vacation leave of private employees

A

not exceeding 10 days during the year

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16
Q

Monetized unused vacation leave and sick leave of government employees

A

no threshold/unlimited; exempt from income tax

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17
Q

Benefits received by an employee by virtue of a collective bargaining agreement and productivity incentive schemes

A

total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed 10k per employee per year

18
Q

Rice subsidy

A

not exceeding 2k or 1 sack of 50 kg of rice per month amounting to not more than 2k

19
Q

Medical cash allowance to dependents

A

not exceeding 1500 per employee per semester or 250 per month

20
Q

Actual medical assistance

A

not exceeding 10k per annum

21
Q

Taxable de minimis benefits

A
  1. Excess de minimis benefits over their regulatory limits

2. Other benefits of relatively small value that are not included in the list of de minimis benefits

22
Q

Treatment of taxable de minimis benefits

A

a. For rank & file employees - under 13th month pay and other benefits
b. For managerial and supervisory employees - treated as fringe benefits subject to final fringe benefit tax

23
Q

Benefits necessary to trade, business, or conduct of profession of the employer / Necessity of the employer rule

A

Benefits or allowances furnished by the employer to the employees to enable them to appropriately and effectively execute their duties are exempt from income tax. Not considered compensation income of the employee since it is expenses of the employer.

24
Q

Benefits necessary to trade, business, or conduct of profession of the employer / Necessity of the employer rule

A

Benefits or allowances furnished by the employer to the employees to enable them to appropriately and effectively execute their duties are exempt from income tax. Not considered compensation income of the employee since it is expenses of the employer.

25
Q

Benefits for the convenience or advantage of the employer / Convenience of the employer rule

A

Benefits or allowances which are intended for the furtherance of the interest of the employer’s business or to ensure its smooth operations are likewise exempt from income tax. These are considered business expenses and are not considered employee rewards.

26
Q

Examples of benefits necessary to trade, business, or conduct of profession of the employer / Necessity of the employer rule

A
  1. Necessary for traveling, transportation, representation, or entertainment expenses that are subject to an accounting or liquidation in accordance with specific requirements of substantiation of expense
  2. Allowance which essentially constitute reimbursement to government personnel for expenses they incurred in the performance of their official duties such as:
    a. ) RATA
    b. ) PERA
  3. Reasonable amounts of reimbursements or advances to employees for traveling and representation which are pre-computed on a daily basis and which are paid to any employee while on assignment or duty
27
Q

Composition of Taxable Compensation Income

A
  1. Regular compensation - pertains to the fixed remunerations received by the employee for every payroll period
  2. Supplemental compensation - pertains to the performance-based pays to employees with or without regard to the payroll period. The excess above 90k from the 13th month pay is added to supplemental compensation.
28
Q

Regular Compensation

A
  1. Basic salary

2. Fixed allowances paid every payroll period

29
Q

Exception rules on the taxability of allowances

A

a. ) Ordinary and necessary allowances for travelling, representation or entertainment expense of employee incurred in the pursuit of the employer’s trade, business, or profession
b. ) The expense is subject to accounting or liquidation
c. ) Any excess advances are returned to the employer

Note: Advances in excess of actual expenses, if not returned to the employer, and is retained by the employee for himself constitutes a taxable compensation.

30
Q

Paid vacation and sick leave allowance

A

Paid vacation and sick leave allowance applied against his vacation or sick leave credits which are normally received as part of the regular salary is part of the regular compensation

31
Q

Non-compensation items

A
  1. Retainer fees of consultants, talents, and directors who have no management function are professional income.
  2. Commissions to non-employees such as independent sales agents are business income to sales agents.
  3. Tips and gratuities paid directly to an employee which are not accounted for by the employee to the employer are not considered as compensation income, but are to be reported as other income of the employee.
32
Q

Valuation of compensation paid in kind

A

Taxable at the fair value of the consideration received. If shares, the FV at the date services were provided is used.

33
Q

Supplementary/Additional Compensation

A
  1. Overtime pay
  2. Hazard pay
  3. Night shift differential pay
  4. Holiday pay
  5. Commissions
  6. Fees, including director’s fees (if employee)
  7. Emoluments nd honoraria
  8. Taxable retirement and separation pay
  9. Value of living quarters or meals
  10. Gains on exercise of stock options
  11. Profit sharing and taxable bonuses

Note: GR: These are taxable unless otherwise stated.

34
Q

13th month pay and other benefits

A
  1. 13th month pay
  2. Other benefits
    a. ) Christmas bonus of private employees
    b. ) Cash gifts other than christmas or anniversary gifts of private employees
    c. ) Additional compensation allowance (ACA/supplemental)
    d. ) 14th month pay, 15th month pay, etc.
    e. ) Other fringe benefits of rank and file employee
35
Q

Other fringe benefits

A

Include all other taxable fringe benefits not specifically included in compensation income as regular, supplementary or 13th month pay and other tax benefits such as:

  1. Employee personal expenses shouldered by the employer
  2. Taxable de minimis benefits
36
Q

Tax treatment of other fringe benefits

A

a. For rank and file - treated as compensation income as part of other benefits under 13th month pay and other benefits
b. For managerial and supervisory - treated as fringe benefit subject to fringe benefit tax

37
Q

MWEs are exempted on the following:

A
  1. Basic minimum wage
  2. Other benefits (HHON)
  3. Holiday pay
  4. Hazard pay
  5. OT pay
  6. Nigh shift pay
38
Q

What are the taxable and non-taxable de minimis benefits?

A

Non-taxable - if within their regulatory limit

Taxable - excess de minimis and benefits not included in the list

39
Q

What are the taxable and non-taxable composition of regular compensation?

A

Non-taxable: For the allowance to be considered tax-exempt it must be:

a. incurred in the pursuit of trade, business of employer
b. subject to accounting and liquidation
c. liquidated in the name of employer

Taxable:

  1. Basic salary
  2. Fixed allowances such as COLA, fixed housing allow, and other allowances paid to employee every payroll period
  3. Advances in excess of actual expense if not returned to the employer
  4. Paid vacation and sick leave allowances applied against his vacation or sick leave credits which are normally part of regular compensation
40
Q

What are the taxable and non-taxable composition of supplemental compensation?

A

Non-taxable:

a. ) If MWE, HONN = exempted/nontaxable
b. ) Retainer fees of consultants, talents, and directors who have no management function = professional income
c. ) Commissions to non-employees
d. ) If living quarters or meals are furnished out of necessity of the employer’s business
e. ) Tips and gratuities paid directly to an employee = presented as other income in the income tax return of the

Taxable:
Performance-based payments such as:
a)	Overtime pay
b)	Hazard pay
c)	Night-shift differential pay
d)	Holiday pay
e)	Commissions
f)	Fees, including director’s fees (if he is an employee)
g)	Emoluments and honoraria
h)	Taxable retirement and 
i)	separation pay
41
Q

What are the taxable and non-taxable composition of supplemental compensation?

A

Non-taxable:

a. ) If MWE, HONN = exempted/nontaxable
b. ) Retainer fees of consultants, talents, and directors who have no management function = professional income
c. ) Commissions to non-employees
d. ) If living quarters or meals are furnished out of necessity of the employer’s business
e. ) Tips and gratuities paid directly to an employee = presented as other income in the income tax return of the employee

Taxable:
Performance-based payments such as:
a)	Overtime pay
b)	Hazard pay
c)	Night-shift differential pay
d)	Holiday pay
e)	Commissions
f)	Fees, including director’s fees (if he is an employee)
g)	Emoluments and honoraria
h)	Taxable retirement and 
i)	separation pay
k)	Value of living quarters or meals
l)	Gains on exercise of stock options
m)	Profit sharing and taxable bonuses

INCOME TAX (8 decks)

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