What are De Minimis Benefits?

Employers are looking for ways to drive their employees’ performance and achieve the best output, one of which is by giving incentives. Giving additional compensation may motivate employees to work hard but as compensation increases, so does tax. In return, the resulting net pay is lower than expected. The BIR passed regulations that exempts some benefits from income tax, thereby increasing the net pay which the employees receive.

The BIR have provided a list of de minimis benefits that are exempt from income tax. De minimis benefits are amount given my employers to their employees that are relatively minimal in value.

As per Section 2 of Revenue Regulation 2-98, De Minimis Benefits are facilities or privileges given by an employer to its employees, provided such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of its employees.

The BIR although set a limit that de minimis benefits will be exempted from withholding tax and income tax. These amounts are reflected as allowable deductions under salaries expense for the employer.

The following are de minimis benefits as per Revenue Regulations 11-2018 in accordance with Republic Act 10963 also known as TRAIN (Tax Reform and Acceleration and Inclusion) LAW which took effect on January 1, 2018 onwards:

a. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year

b. Monetized value of vacation & sick leave credits paid to government official & employees.

This is different from the vacation leave under private employees since it does not have any limit as to the number of days. In addition, it also includes sick leave credit which is not present on private employees.

c. Medical cash allowance to dependents of employees must not exceed ₱ 1,500.00 per employee per semester or ₱ 250.00 per month each.

d. Rice subsidy either in cash of ₱ 2,000.00 or in kind consisting of one sack of 50-kilogram rice per month and the amount thereof must not exceed ₱ 2,000.00.

e. Yearly uniform and clothing allowance not exceeding ₱ 6,000.

f. Actual medical assistance- just like medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10, 000 annually.

g. Laundry allowance not exceeding P300 per month.

h. Employee achievement awards, which must be in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees

i. Gifts made during Christmas and major anniversary celebrations in the company not exceeding ₱5,000 per employee per annum.

j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis

k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) & productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000 per employee per taxable year

To determine if the total de minimis benefits granted by the employer to its employee are partially, totally, or not exempted for withholding tax purposes, we have to determine if:

-De minimis benefits exceed over their limits.

De minimis benefit is applicable for both managerial and rank and file employees but the treatment for the excess in limitation is different. For managerial and/or supervisory position, excess de minimis benefits are considered as fringe benefits subject to fringe benefits tax.

While for rank and file employees, excess de minimis benefits will form part as “other benefits”. If excess over limits is beyond the 90,000 threshold, it will be treated as part of taxable income, subject to withholding tax. 90,000 threshold includes 13th month pay and other benefits.

Example 1: Mr. X is employed in YZA Company, a multinational company based in the Philippines, as rank and file employee. For the year end 2019, the following are his benefits:

a. Unused vacation leaves of 10 days which is convertible in cash at ₱ 1,000.00 per day.

b. Medical Cash allowance to dependents of ₱ 10,000

c. Rice Subsidy of ₱ 2,00.00 per month

d. Uniform allowance of ₱ 6,000.00

e. Actual Medical Assistance of ₱ 10,000.00

f. Laundry Allowance of ₱ 300.00 per month

g. Employee award in the form of tangible asset worth ₱10,000.00

h. Christmas gift of ₱5,000.00

i. Daily Meal Allowance worth ₱ 2,400, which is equivalent to 25% of basic minimum wage in the region; and,

j. Productivity Incentive worth ₱10,000

In addition, he also received 13th month pay of ₱20,000.00 for the year.

How much is the taxable benefits and other bonuses?

The answer is zero. Since all of the enumerated benefits fall under the criteria for de minimis benefits and within the limit, there is no need to assess for excess portion as part of limit within ₱90,000 together with 13th month pay. Even though if you add all the amounts and results to a total of ₱ 104,000, it is still exempt because all amounts of de minimis are within their limits.

What if Mr. X is a Managerial or Supervisory Employee?

The answer would still be the same since Mr. X doesn’t have any excess over de minimis limitation which should supposedly form part as taxable income subject for fringe benefits tax. So the taxable benefits and other bonuses is zero.

Example 2: Assuming on the same example, except that the benefits for the year consists of:

a. Unused vacation leaves of 15 days which is convertible in cash at ₱ 1,000.00 per day.

b. Medical Cash allowance to dependents of ₱ 10,000.00

c. Rice Subsidy of ₱ 2,500.00 per month

d. Uniform allowance of ₱ 10,000.00

e. Actual Medical Assistance of ₱ 10,000.00

f. Laundry Allowance of ₱ 500.00 per month

g. Employee award in the form of tangible asset worth ₱10,000.00

h. Christmas gift of ₱7,000.00

In addition, he also received 13th month pay of ₱20,000.00 for the year.

How much is the total non-taxable benefits and how much is taxable income?

Answer: The total non-taxable benefits is ₱ 118,000. Taxable income is Zero since all other benefits did not exceed with the ₱ 90,000 threshold therefore it is part of the total nontaxable benefit.

What if Mr. X is a Managerial or Supervisory Employee?

Answer: The total non-taxable benefits is now ₱ 91,600. The excess of de minimis benefits in the amount of ₱ 26,400 is then subject to fringe benefit tax.

Example 3: In the same example, assuming that X receives the following:

a. Unused vacation leaves of 15 days which is convertible in cash at ₱ 1,000.00 per day.

b. Medical Cash allowance to dependents of ₱ 10,000.00

c. Rice Subsidy of ₱ 2,500.00 per month

d. Uniform allowance of ₱ 10,000.00

e. Actual Medical Assistance of ₱ 10,000.00

f. Laundry Allowance of ₱ 500.00 per month

g. Employee award in the form of tangible asset worth ₱10,000.00

h. Christmas gift of ₱7,000.00

i. Vacation expenses of employee shouldered by employer in the amount of ₱50,000.00

In addition, he also received 13th month pay of ₱20,000.00 for the year.

How much is the total non-taxable benefits and how much is taxable income?

Answer: Total non-taxable benefits is ₱ 161,600. The excess of 13th month pay and other benefits above threshold in the amount of ₱ 6,400 is the taxable income.

What is Mr. X is a Managerial or Supervisory Employee?

Answer: The total non-taxable benefits is now ₱ 91,600. The excess of de minimis benefits in the amount of ₱ 76,400 is then subject to fringe benefit tax.

It is best to take advantage of these schemes in order to minimize tax. A well thought compensation package can be a great help to your employees.