Who Is Entitled to 13th Month Pay
Under Presidential Decree No. 851, every rank-and-file employee in the private sector who has worked for at least one month during the calendar year is entitled to 13th month pay, regardless of the nature of employment, position, or how wages are paid (daily, weekly, or monthly). This covers regular, probationary, project-based, and even resigned or terminated employees, as long as they rendered at least one month of service within the year.
Managerial employees — those whose primary duty is to manage the establishment or a department and who have the authority to hire, discipline, or lay off staff — are not covered by the mandatory rule, though many employers extend the benefit to them anyway as company policy. Household workers (kasambahay) are covered separately under Republic Act No. 10361 (the Kasambahay Law), which also requires a 13th month payment. Employees paid purely on commission, boundary, or task basis without a fixed or guaranteed wage are generally excluded, unless their commission is effectively part of a guaranteed basic salary.
How the Computation Works
The legal formula is straightforward: 13th month pay equals the total basic salary actually earned during the calendar year, divided by 12. "Basic salary" means the fixed compensation for services rendered, and it excludes allowances, cash equivalents of unused leave, overtime pay, night differential, holiday premium, and other monetary benefits that are not considered part of the regular basic pay — unless a company policy, employment contract, or collective bargaining agreement integrates them into basic pay.
Because the formula runs on salary actually earned, unpaid absences, leave without pay, and partial-year service all reduce the base used in the computation. There is no need to gross up for days not worked, since those days never entered the numerator in the first place.
Example 1 — Full year, no absences. An employee earns a fixed monthly basic salary of ₱25,000 and works the entire calendar year without unpaid leave. Total basic salary earned = ₱25,000 × 12 = ₱300,000. 13th month pay = ₱300,000 ÷ 12 = ₱25,000.
Example 2 — Resigned mid-year. An employee with a monthly basic salary of ₱20,000 resigns effective August 31 after starting January 1. Total basic salary earned = ₱20,000 × 8 months = ₱160,000. 13th month pay = ₱160,000 ÷ 12 = ₱13,333.33, payable together with the employee's final pay.
Example 3 — Unpaid leave during the year. An employee earning ₱30,000 a month takes 15 days of unpaid leave in one month, reducing that month's basic pay to ₱15,000. Total basic salary earned for the year = (₱30,000 × 11) + ₱15,000 = ₱345,000. 13th month pay = ₱345,000 ÷ 12 = ₱28,750.
Employers who provide statutory maternity or paternity leave, sick leave conversions, or salary adjustments mid-year should compute the actual basic salary paid per month and sum it before dividing by 12 — averaging the current salary rate across all 12 months is a common but incorrect shortcut when a mid-year raise or unpaid period occurred.
The ₱90,000 Tax-Exempt Ceiling
Under the TRAIN Law (Republic Act No. 10963), 13th month pay and other benefits (such as Christmas bonus, cash gifts, and productivity incentives) are exempt from income tax up to a combined threshold of ₱90,000 per employee per year. Any amount in excess of ₱90,000 is added back to the employee's taxable compensation income for the year and subjected to withholding tax under the regular graduated income tax table.
Example. An employee's 13th month pay is ₱75,000 and the company also gives a ₱45,000 year-end bonus, for a combined ₱120,000 in "other benefits." Since the exempt ceiling is ₱90,000, the excess of ₱30,000 (₱120,000 − ₱90,000) is treated as taxable compensation and included in the employee's withholding tax computation for the applicable pay period, typically reflected in BIR Form 2316 at year-end.
Note that this ₱90,000 ceiling is a threshold that has been adjusted by law in the past (it started at ₱82,000 before TRAIN raised it), so bookkeepers should reconfirm the prevailing figure on the BIR website each filing season in case of future legislative changes, even though ₱90,000 remains the applicable ceiling as of 2026.
Deadline and Employer Compliance
PD 851 and its implementing rules require that 13th month pay be paid not later than December 24 of every year. Employers are allowed to pay it in two installments — for instance, half in June or July and the remainder in December — provided the second installment is released on or before December 24. Some establishments are required to submit a "Report on Compliance with PD 851" to the DOLE regional office where they operate, indicating the total amount disbursed and the number of employees covered; requirements can vary by region, so employers should confirm with their local DOLE field office.
Failure to pay 13th month pay on time exposes an employer to DOLE labor standards inspection, potential penalties, and money claims from affected employees, since 13th month pay is treated as a statutory monetary benefit, not a discretionary bonus.
Manually tracking basic pay earned per employee per month, unpaid leave deductions, and the running total against the ₱90,000 exemption is where many payroll teams lose time — and where errors creep in during December crunch. In Kontabler, monthly basic pay recorded through regular payroll runs is automatically summed across the year, the 13th month pay is computed per employee using the correct pro-rated formula, and the resulting entry is posted to your books automatically, so accountants can focus on reviewing exceptions rather than doing the arithmetic by hand.
Common Mistakes to Avoid
A frequent error is including overtime pay, night shift differential, and holiday premiums in the base used for computation — these should be excluded unless a company explicitly integrates them into basic salary by policy. Another common mistake is forgetting that resigned, terminated, or retired employees are still entitled to a pro-rated 13th month pay based on the months actually worked, payable as part of their final pay rather than withheld until December.
Employers sometimes also misapply the ₱90,000 exemption by evaluating 13th month pay alone rather than combining it with other benefits paid in the same year, which can understate the taxable excess. Finally, treating the 13th month pay deadline as flexible is a compliance risk: December 24 is a fixed statutory cutoff, not a target date, and late payment can trigger DOLE inspection even if the amount is eventually paid in full.
Because rules on tax thresholds and contribution rates are reviewed periodically by government agencies, always verify the current ₱90,000 exemption ceiling and any related BIR issuances on the official BIR website before finalizing year-end payroll.
Frequently asked questions
Is 13th month pay mandatory for all employees?
It is mandatory for rank-and-file private sector employees who worked at least one month during the year, including resigned, terminated, and probationary employees. Managerial employees and those paid purely on commission without a fixed wage are generally excluded, though employers may still choose to grant it.
How is 13th month pay computed for an employee who resigned before December?
Add up the basic salary actually earned from January up to the last day worked, then divide that total by 12 — the divisor stays at 12 regardless of how many months were worked. This pro-rated amount is normally released together with the employee's final pay.
What happens to 13th month pay above ₱90,000?
The excess over the combined ₱90,000 tax-exempt ceiling for 13th month pay and other benefits is added to the employee's taxable compensation income and subjected to regular withholding tax.
Can an employer pay 13th month pay in installments?
Yes, it can be split into two payments during the year, such as half-year and year-end installments, as long as the full amount is completely paid on or before December 24.
