Payroll is often one of the largest expenses for a business—sometimes accounting for up to 70% of the total operating costs. That explains why even small errors can have big consequences. For employers, it is always a behind-the-scenes operation that keeps the business legally compliant and employees happy. For employees, it’s personal, and it’s more about getting paid accurately and on time, every time.

So, when payroll runs smoothly, no one notices it. But when it doesn’t? Everyone feels it. Payroll, therefore, is a shared thread that ties together trust, efficiency, and financial well-being. Now, whether you’re managing a growing business or working hard to earn your next paycheck, understanding how payroll really works and why it matters benefits everyone.

This blog breaks down how payroll works in the Philippines, complete with a sample payroll and a step-by-step guide to salary computation. If you need further information or just find it helpful, feel free to leave a comment below. You may also get in touch with our in-house payroll specialists for consultation and payroll outsourcing support. 

What is Payroll?

Let’s start with payroll itself. “Payroll” describes various aspects related to the process of compensating employees or workers for their work. It can mean the act of calculating and distributing pay, the list of employees and their salaries, the total salaries paid, or even the department handling all of these. 

Basic Items in a Regular Payroll

A regular monthly payroll typically contains the employee’s basic monthly salary (taxable), ad hoc items (e.g., overtime, holiday, and night differential pays), allowances, de minimis benefits (i.e., often non-taxable), basic salary deductions (e.g., for absences, tardiness, and holidays), statutory and social security contributions, loan payments, and taxes withheld.

Wages, Salaries, and Compensations Explained

Wages, salaries, and compensations are often used interchangeably, and although related, they are not exactly the same. “Wages” generally refer to hourly compensation paid to skilled and unskilled workers (usually blue-collar jobs) with time as the basis in the computation. “Salaries,” on the other hand, are income paid not on the basis of time but on the basis of performance and are usually given to professional and managerial employees or those who are performing white-collar jobs.

Both wages and salaries are forms of compensation, which, in turn, refers to the total cash and non-cash payments that employees earn in exchange for the work they do with companies or employers. These include base pays, sales commissions, overtime pays, tip income, bonuses, stock options, benefits, and others.

Payroll Periods and Dates

In the Philippines, salaries and wages must be paid at least once every two weeks or twice a month at intervals not exceeding sixteen (16) days, as mandated by Article 103 of the Labor Code. This means that the payroll cycle—the interval between two consecutive payrolls—typically follows a semi-monthly schedule, e.g., 1st to 15th and 16th to 30th of each month. Within each cycle is the pay period, which then refers to the specific range of dates employees work to earn their wages. 

Now, although the 15th and 30th are the most common pay dates, other companies and employers adopt different pay dates (e.g., 10th and 25th, 5th and 20th, etc.) based on factors such as legal compliance, cash flow, industry norms, and administrative workload. 

Importance of On-Time and Accurate Payroll 

On-time and accurate payroll is instrumental in maintaining the company’s legal compliance and financial integrity. While payroll involves adherence to complex labor, tax, and other government regulations, noncompliance can lead to fines, penalties, audits, or even suspension of business operations. 

Beyond legal compliance, payroll accuracy and efficiency also directly affect employee satisfaction, engagement, and retention. When the company or employer consistently meets payroll expectations, it also fosters trust and loyalty, thereby reducing employee turnover. In contrast, frequent payroll mistakes and delays can lead to dissatisfaction, stress, and eventual attrition.  

Additionally, the company’s reputation can also be significantly influenced by how it manages its payroll. A strong track record of prompt and accurate payroll can enhance its image and make the company more attractive to top talent and prospective partners. On the other hand, payroll mismanagement may raise concerns among job seekers and even damage relationships with external stakeholders, who may even include labor authorities. 

Methods of Payroll Processing

Payroll can be done manually or electronically, i.e., with payroll software. Interestingly, it can also be outsourced to a reliable payroll service provider to eliminate the need for a full-time and in-house payroll officer.   

Manual payroll, which is still employed by micro and small businesses with employees paid on a daily or weekly basis, typically involves making manual entries in traditional and physical payroll ledgers, spreadsheets, and a calculator. Automated payroll, on the other hand, is primarily dependent on computer-based software that automates computations but still needs expert management.

Outsourcing payroll has recently become a go-to method for businesses of all sizes, from startups to multinational companies that want more streamlined, secure, and accurate payroll management. This involves hiring an external organization or payroll firm to handle either part or the entire payroll operation.

Payroll Computation Requirements

Before starting your payroll computation, gather all required documents and information. If you’re outsourcing your payroll, you need to periodically provide your service provider with the necessary data.

Company Payroll Information

Basic company and payroll details (i.e., company name, address, contact details, etc.), tax and statutory registration information (i.e., BIR TIN and registration numbers with SSS, PhilHealth, and Pag-IBIG Fund), payroll cycle, number of working days in a year (factor rate), etc. must be readily available, especially for post-computation filings and statutory remittances.

Employee Information

These include your employees’ personal information (e.g., names, addresses, contact details, civil statuses, etc.), employment information (e.g., job titles, start dates, regular work schedules, etc.), salary information (i.e., basic monthly salary and other compensations), tax information (i.e., BIR TIN, tax exemptions, etc.), and statutory registration information (i.e., with SSS, PhilHealth, and Pag-IBIG Fund).  

Employee Daily Time Records (DTRs) 

There are records of the employees’ daily attendance and work hours for a certain pay period that will be used for the computations of salary adjustments due to absences, tardiness, overtime, and even night differentials.

Other Additional Documents

These may include documents and information about statutory loans (i.e., SSS and Pag-IBIG Fund), salary adjustments, differentials, etc.

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Sample Payroll Computation in the Philippines: Pays, Deductions, Formulas, and Step-By-Step Process

Now, to compute the monthly salary and arrive at the employee’s net pay, you need to calculate first both the gross pay and gross deductions, then subtract the totals. 

Sample Gross Pay Computation
Sample Gross Pay Computation

Part 1: Gross Pay Computation

Simply, the gross pay is the amount to receive before any deductions. It is the sum of all taxable and non-taxable salaries.

1. Determine the taxable salary, which includes the basic monthly salary, salary adjustments, taxable bonuses, and overtime pay.

2. Compute the basic salary or the fixed amount agreed upon hiring. It serves as the basis for semi-monthly rates, daily rates, hourly rates, overtime pays, and even holiday pays. 

    • Monthly Rate (e.g., PHP 25,000)
    • Semi-Monthly Rate = Monthly Rate/2 (e.g., PHP 12,500)
    • Daily Rate = (Monthly Rate X Number of Months in a Year) / Total Working Days in a Year or Day Factor (based on the table provided by the National Wages and Productivity Board) (e.g., PHP 821.92 based on a 365-day factor)
    • Hourly Rate = Daily Rate/Total Working Hours (e.g., PHP 102.74)

3. Compute the overtime, holiday, and night differential pays, if any. These additional pays are computed by multiplying the hourly rate by the standard percentage and by the number of rendered hours (i.e., Overtime/Holiday/Night Differential Pay = Hourly Rate x Percentage x Number of Hours Rendered). Use the guide below for the percentages:

    • Regular Overtime = 125%
    • Rest Days = 130%
    • Special Non-Working Days = 130%
    • Regular Holidays = 100%
    • Night Differentials = 10% (between 10PM and 06AM)

Take note that the actual percentages can also vary depending on the factor rate (i.e., total number of working days in a year). For example, if the factor rate is 365, then the work on a rest day may only be equivalent to an additional thirty percent (30%) pay of the daily rate (e.g., an additional PHP 246.58 for eight (8)-hour work on a rest day based on the daily rate of PHP 821.92) because the employee is technically paid on rest days, special days, and regular holidays.

4. Deduct absences and tardiness, if any. Use the daily and hourly rates to compute the deductions for the employee’s absences and tardiness.

5. Add the non-taxable salary, if any. This often includes de minimis benefits, which are minimal privileges provided to managerial and rank-and-file employees for promoting health, goodwill, contentment, and efficiency. Refer to Section 2.78.1 of the Revenue Regulation (RR) No. 2-98, as amended, for the maximum non-taxable amounts. 

6. Get the gross pay. Simply compute the sum of all the taxable and non-taxable salaries. 

Sample Computation of Gross Deductions
Sample Computation of Gross Deductions

Part 2: Gross Deductions

Gross deductions include all salary deductions for statutory premium contributions (i.e., SSS, PhilHealth, and Pag-IBIG Fund), withholding taxes, and loan payments. 

1. For SSS contributions, refer to the latest SSS Table of Contributions for the employee’s (EE) regular monthly and mandatory provident fund contributions.

2. For PhilHealth contributions, five percent (5%) of the basic salary is shared equally by the employer and employee (i.e., 2.5% for the employee).

3. For Pag-IBIG Fund contributions, the mandated maximum contribution is capped at PHP 400, also shared equally by the employer and employee (i.e., PHP 200 for the employee).

4. For SSS and Pag-IBIG Fund loans of the employee, refer to the approved loan documents for the accurate amount. 

5. For the withholding tax computation, first deduct the sum of the statutory contributions (i.e., excluding loans) from the gross taxable salary and then refer to the BIR Revised Withholding Tax for the applicable period, compensation range, and prescribed withholding tax. 

Sample Net Pay Computation
Sample Net Pay Computation

Part 3: Net Pay Computation

Net pay is the actual take-home pay or the amount the employee earns after the total deductions are subtracted from the total gross pay. To compute the net pay, simply subtract the gross deductions from the gross pay (i.e., Net Pay = Gross Pay – Gross Deductions).

Sample Payslip

In the Philippines, a payslip is a document that employers must provide to employees every payday. It shows the employee’s earnings, deductions, and net pay for a specific period. As mandated by the Department of Labor and Employment (DOLE) under the Labor Code and Department Order No. 183, payslips must be itemized and issued either in printed or electronic form to ensure transparency and accurate compensation.

A typical payslip includes the employee’s name, position, pay period, and a breakdown of gross earnings such as basic pay, overtime, and allowances. It also lists mandatory deductions like SSS, PhilHealth, Pag-IBIG, and withholding tax, along with any company-specific deductions. The resulting net pay is the amount the employee takes home.

Sample Payslip
Sample Payslip (Semi-Monthly Payroll)

Other Special Types of Payrolls

While we have just presented a sample payroll for a regular payroll period, there are other additional types of payrolls that may also be processed anytime depending on circumstances: 

Pro Rata (Prorated) Payroll

A prorated salary, also known as a pro rata salary, refers to a portion of a full-time salary that is calculated based on the amount of time an employee works during a specific pay period. For example, a newly hired employee was able to render only fourteen (14) days within a month-long payroll period.

Off-Cycle Payroll

An off-cycle payroll is a payroll processed separately between the usual paydays (e.g., 15th or 30th of the month) for other forms of payments, such as bonuses and reimbursements for expense claims, that are not part of the normal payroll.

Retroactive Payroll

A retroactive payroll is usually processed if an incorrect compensation amount was issued or if an employee gets a pay raise that is backdated into a prior pay period. This reflects the necessary adjustments and ensures that the employee receives the amount.  

Final Payroll

A final payroll is used to calculate the employee’s final pay, which includes all unpaid wages, holiday pay, overtime pay, night differential, service incentive leaves, separation pays (if applicable), and prorated 13th month pay (if resignation or termination is at the middle of the calendar year).

According to Labor Advisory No. 06-20, employers should give employees their final pay within thirty (30) days after the separation or termination date. Along with the final pay, the employee is also entitled to receive the BIR Form 2316, Certificate of Employment (COE), and release, waiver, or quit claim.

Other Payroll-Related Articles

Payroll processing may not be as critical as other core aspects of your business operations, but if handled manually, it demands a lot of time and poses a significant burden. To help you out in making informed decisions, here are additional payroll-related articles for your reading:

Don’t Hire a Payroll Officer Just Yet — Outsourcing Could Be the Better Fit for Your Business

This article explores why outsourcing payroll management can be a smarter and more flexible solution than hiring a full-time and in-house payroll officer, thus focusing on the costs and other benefits.  

How to Choose the Right Outsourced Payroll Service Provider in the Philippines

This article discusses the most important factors to consider when choosing an outsourced payroll service provider, including business needs, easy shift and onboarding, client support, modern solutions, and even a personalized approach. 

Why Payroll Accuracy Is Important in Business Operations — and What Can Be Done to Ensure It

This blog covers the importance of payroll accuracy in business operations – labor and tax compliance, employee trust and productivity, company credibility, and scalability – and the recommended ways to ensure it. 

Payroll Security: Essential Features and Best Practices

This blog explores the most common payroll security risks, emphasizes the importance of payroll security, and provides the best practices that employers can always employ to secure their payroll data. 

FilePino’s Outsourced Payroll Services

FilePino, Inc is a one-stop-shop business consulting firm and forms part of a group of companies and brands (i.e., a law firm, virtual office provider, global employer of record/PEO service provider, and documentation service provider) that provides professional company formation, business registration, and post-formation services. Our HR and Payroll Department offers outsourced payroll service packages that typically include: 

  • Computation of the company’s payroll based on the normal payroll schedule, client-provided timekeeping documents, and existing labor laws, rules, and regulations;
  • Generation of customized payslips for individual employees;
  • Computation of government-mandated contributions and deductions (i.e., withholding taxes, and SSS, PhilHealth, and Pag-IBIG Fund contributions);
  • Monitoring of employees’ loans, advances, and other payroll-related statutory deductions;
  • Computation of regular and pro-rata 13th month pays;
  • Computation of the final pay of the resigned employees;
  • Provision of monthly BIR 1601C details (classification of taxable and non-taxable salaries, statutory contributions, and tax payables);
  • Accomplishment, generation, and filing of SSS, PhilHealth, and Pag-IBIG Fund reports (e.g., SSS R-1A for new employees, PHIC RF-1 Remittance Report, HDMF MCRF Contribution Remittance, etc.); 
  • Annualization Report per employee (service package-based); and,
  • Other value-added services (e.g., encoding of Alphalist Schedule, generation of BIR 2316, BIR Substituted Filing Report, etc.) (service package-based)

… and you might just need our expertise.

Outsource your company payroll to ensure accuracy, avoid costly errors, and take advantage of the service provider’s expertise, personalized approach, dedicated client support, and many other benefits. Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.