Understanding the Building Blocks of Philippine Payroll
Computing payroll in the Philippines involves four layers: gross pay, mandatory government contributions, withholding tax, and finally net pay. Each layer is governed by a different agency — the Social Security System (SSS), the Philippine Health Insurance Corporation (PhilHealth), the Home Development Mutual Fund (Pag-IBIG), and the Bureau of Internal Revenue (BIR) — and each publishes its own contribution or tax table that can change from year to year. Getting the sequence right matters because withholding tax is computed on taxable income after mandatory contributions are deducted, not on gross pay itself.
Before running any payroll, confirm you are using the current SSS, PhilHealth, and Pag-IBIG tables for the applicable year, since rates and salary brackets are periodically revised by law or by agency circular. The figures below reflect the rates and thresholds in effect for 2026, but always cross-check against the SSS, PhilHealth, Pag-IBIG, and BIR websites before finalizing a payroll run, especially at the start of a new year.
Step 1: Compute Gross Pay for the Period
Gross pay is the employee's total earnings for the payroll period before any deduction. It includes basic salary, overtime pay, holiday and night-shift differential pay, allowances that are part of regular compensation, and any commissions or incentives paid within that cutoff. Most Philippine employers run payroll on a semi-monthly basis (for example, the 15th and the end of the month), so basic monthly salary is typically split into two equal cutoffs.
For clarity, the worked example in this guide uses a full calendar month rather than splitting it into two cutoffs, since the computation logic is identical — you would simply divide the monthly figures by two for a semi-monthly run.
Example: An employee has a monthly basic salary of ₱30,000, with no overtime or additional pay for the month. Gross pay for the month is ₱30,000.
Step 2: Deduct Mandatory Government Contributions
Three contributions are deducted from every regular employee's gross pay, matched by an employer counterpart share that the employer pays on top of payroll cost (not deducted from the employee):
- SSS: Under the SSS contribution schedule that took full effect in 2025, the total contribution rate is 15% of the employee's monthly salary credit (MSC), split 5% employee share and 10% employer share, applied on MSC brackets ranging roughly from ₱5,000 to ₱35,000. Contributions above an MSC of ₱20,000 are allocated partly to the Workers' Investment and Savings Program (WISP), a mandatory provident fund layered on top of the regular SSS pension fund.
- PhilHealth: The premium rate is 5% of monthly basic salary, split equally — 2.5% employee, 2.5% employer — subject to a salary floor of ₱10,000 and a ceiling of ₱100,000.
- Pag-IBIG (HDMF): The employee share is 1% of monthly compensation if pay is ₱1,500 or below, or 2% if above ₱1,500; the employer contributes 2%. Since 2024, the maximum monthly fund salary used as the base is capped at ₱10,000, so the maximum regular employee contribution is ₱200 per month.
Continuing the example: For a monthly basic salary of ₱30,000, the employee-side contributions are approximately: SSS ₱1,350, PhilHealth ₱750 (2.5% x ₱30,000), and Pag-IBIG ₱200 (capped), for a total of ₱2,300. The exact SSS figure depends on the specific salary bracket in the current contribution table, so always verify it against the published schedule or the My.SSS portal rather than computing a flat percentage, since SSS uses banded salary credits rather than a pure percentage of actual pay. In Kontabler, these contributions are computed automatically against the current SSS, PhilHealth, and Pag-IBIG tables each time you run payroll, and the entries are posted to your books without manual lookup.
Step 3: Compute Withholding Tax Using the BIR Graduated Table
Withholding tax on compensation is computed on taxable income, which is gross pay minus the mandatory SSS, PhilHealth, and Pag-IBIG employee contributions (and any deductible union dues). Since the TRAIN law's compensation tax table took effect January 1, 2023, the annual graduated brackets are:
- Annual taxable income up to ₱250,000: 0% (no withholding tax)
- Over ₱250,000 up to ₱400,000: 15% of the excess over ₱250,000
- Over ₱400,000 up to ₱800,000: ₱22,500 + 20% of the excess over ₱400,000
- Over ₱800,000 up to ₱2,000,000: ₱102,500 + 25% of the excess over ₱800,000
- Over ₱2,000,000 up to ₱8,000,000: ₱402,500 + 30% of the excess over ₱2,000,000
- Over ₱8,000,000: ₱2,202,500 + 35% of the excess over ₱8,000,000
For everyday payroll runs, the BIR publishes a corresponding withholding tax table broken down by pay frequency (daily, weekly, semi-monthly, monthly), which is simply the annual table divided proportionally. Employers should use the pay-frequency table that matches their payroll cycle rather than manually annualizing and de-annualizing each cutoff.
Continuing the example: Taxable income for the month is ₱30,000 gross minus ₱2,300 in mandatory contributions, or ₱27,700. On the monthly withholding table, the bracket for compensation between ₱20,833 and ₱33,332 has no base tax and a 15% rate on the excess over ₱20,833. Excess = ₱27,700 − ₱20,833 = ₱6,867. Tax = 15% x ₱6,867 = approximately ₱1,030 for the month.
Note: 13th-month pay and other statutory benefits are tax-exempt up to a combined ₱90,000 per year; amounts beyond that threshold are added back to taxable compensation and subjected to withholding tax.
Step 4: Arrive at Net Pay — Then Remit and File on Time
Net pay is gross pay minus mandatory contributions minus withholding tax, minus any other authorized deductions such as loan amortizations or tardiness. Completing the example: ₱30,000 gross − ₱1,350 SSS − ₱750 PhilHealth − ₱200 Pag-IBIG − ₱1,030 withholding tax = ₱26,670 net pay for the month.
Computing payroll correctly is only half the job — remitting and reporting on time is the other half. As a general rule for 2026, non-eFPS filers remit withheld compensation tax through BIR Form 1601-C on or before the 10th day of the following month (eFPS filers follow a staggered schedule based on industry grouping, typically the 11th to 15th). SSS, PhilHealth, and Pag-IBIG each maintain their own remittance deadlines tied to the employer's registration number, generally falling within the month following the applicable payroll period — check each agency's current circular, since these schedules are periodically revised. At year-end, employers file BIR Form 1604-C (Annual Information Return of Income Taxes Withheld on Compensation) and issue BIR Form 2316 to each employee, both due on or before January 31 of the following year.
Late filing or remittance of BIR returns generally exposes an employer to a 25% surcharge on the tax due, 12% annual interest, plus a compromise penalty, so timeliness is not a minor administrative detail — it has a direct cost. It is also worth noting that the Ease of Paying Taxes (EOPT) Act removed the old ₱500 annual registration fee and simplified several filing and invoicing requirements, which has made compliance somewhat lighter for employers registering or maintaining their BIR accounts, though the withholding tax and payroll remittance obligations described above remain fully in effect.
Frequently asked questions
How often should I check for updated SSS, PhilHealth, and Pag-IBIG rates?
At least once a year, ideally in January, since contribution schedules and salary brackets are revised periodically by law or agency circular and can change without a payroll system update if you're computing manually.
Is 13th-month pay subject to withholding tax?
No, not up to a combined ₱90,000 per year for 13th-month pay and other statutory benefits; any amount exceeding that threshold is added back to taxable compensation and subjected to withholding tax.
What happens if I remit withholding tax late?
Late BIR filings generally incur a 25% surcharge on the tax due plus 12% annual interest and a compromise penalty, so missing the BIR Form 1601-C deadline has a direct financial cost, not just an administrative one.
Do I compute withholding tax on gross pay or on pay after contributions?
Withholding tax is computed on taxable income, which is gross pay minus the employee's mandatory SSS, PhilHealth, and Pag-IBIG contributions, not on gross pay itself.
