When expanding into a new country, a common pitfall that can easily lead to compliance issues is payroll. Companies have to learn the nation’s employment laws, hire employees, and decide among the many payroll options that exist — all while trying to run a new business location. Let’s explore a few key aspects about setting up payroll in the Philippines.
Taxation rules in the Philippines
The Philippines has a mandatory Social Security System for private-sector employees. SSS contributions are generally shared by the employer and employee, with the employer deducting the employee share and remitting both shares under the current contribution schedule.
The Philippines Social Security System, strengthened by the provisions of the Republic Act No. 8282 or the Social Security Law, is the country’s social insurance program and consists of the following bodies:
- Social Security System (SSS): The SSS generally covers private-sector employees and their families, with benefits including sickness, disability, maternity, retirement, death, and funeral benefits. The Government Service Insurance System (GSIS) is the comparable system for government employees in the Philippines.
- Home Development Mutual Fund (HDMF): The HDMF, also known as the Pag-IBIG Fund, is a government-run provident savings system for covered workers. It provides mandatory savings benefits, housing finance, and other member benefits, with housing loans subject to eligibility requirements.
- Philippine Health Insurance Corporation (PhilHealth): PhilHealth is the national health insurance program. It helps cover eligible medical care, subject to PhilHealth rules, benefit packages, eligibility, and contribution requirements.
Employers and employees must contribute to all 3 of these funds in accordance with these agencies’ contribution table. For 2023, the SSS contribution rate was 14% of an employee’s monthly salary, provided it does not exceed PHP 30,000. That rate gets divided between employers and employees, so employers pay 9.50%, while employees contribute 4.50%. Whereas PhilHealth contributions are generally 5% of the employee’s monthly basic salary. Employers and employees usually share this equally, with each paying 2.5%, subject to the PHP 10,000 to PHP 100,000 monthly salary base.
The Philippines uses a progressive income tax system based on how much an employee earns. The income tax rates are as follows:
| TAXABLE INCOME (PHP) | TAX ON COLUMN 1 (PHP) | TAX ON EXCESS |
|---|---|---|
| 0 – 250,000.00 | 0 | 0% |
| 250,000 – 400,000 | 0 | 15% |
| 400,000 – 800,000 | 22,500 | 20% |
| 800,000 – 2,000,000 | 102,500 | 25% |
| 2,000,000 – 8,000,000 | 402,500 | 30% |
| 8,000,000 – | 2,202,500 | 35% |
Philippines payroll options
There are 3 main Philippines payroll options to choose from, including:
- Internal: If you operate a larger company that’s committed to the Philippines, instituting an internal payroll may make sense for your daily operations. However, this option requires a larger team and budget.
- The Philippines payroll processing company: You can choose to work with a Philippines payroll processing company that will run payroll for you. Bear in mind that your company will still be held liable for all matters of compliance with this option.
- G-P: By partnering with G-P, you can expand your global footprint without the hassle of entity setup and management. With us, companies can rest assured that all employees will be paid punctually and compliantly.
How to establish a payroll in the Philippines
Before you can set up payroll in the Philippines, you have to establish a subsidiary in the country. The process depends on the location and type of entity you choose for your subsidiary, but it could take weeks or months before you can hire employees and start your payroll. You also have to set up a bank account in the Philippines to start paying employees. Instead, you can seek a subsidiary alternative such as G-P. With us, companies can begin hiring in minutes, not months — without setting up a subsidiary.
Entitlement/termination terms
It’s good business practice to draft a strong employment contract with entitlement and termination terms before setting up your Philippines payroll. Terminating employees in the Philippines is extremely difficult and the law is protective of workers, so it’s a good idea to have all agreements in writing. Employers can dismiss workers for just cause, including misconduct or other employee-fault grounds, if they follow the 2-notice rule. Dismissal for authorized causes generally requires statutory separation pay, often called severance pay. The amount depends on the specific authorized cause.
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