Kaltas 101: A Step-by-Step Guide to Computing Salary Deductions in the Philippines

Salary is both a monthly source of celebration and a cause of stress. When we start hailing “may sweldo na! (our pay is in!)” it’s generally followed by “kaso ang laki ng kaltas (but the deductions hurt our pockets).”

While these deductions are part of the burden that the working class needs to shoulder, it would help to know how to properly compute them. Deducting too little will hurt the company during remittance and might put the company in hot legal trouble. Deducting too much will definitely hurt employees which in turn could also hurt morale and tarnish company trust.

So how do you properly deduct, well, deductions? Here’s a follow along guide.

Step 1: Determine Income

This is the first step to both payroll processing and deductions computation. Determining income is important to bracket employees into their proper tax brackets. For 2023, these tax brackets have actually eased up; we are paying less tax than we did in the past years. You can read more about these new tax brackets for 2023 here. Along with base income, you also have to add in other taxable forms of income like commissions and overtime.

Step 2: Deduct Contributions & Other Deductions

When processing payroll, after the income has been determined, next is to deduct contributions. Government contributions do not change on a monthly basis however, it’s prudent to always stay on top of new regulations. Just recently PhilHealth has increased contributions.

After Government contributions, you need to deduct other items like absence without leave, tardiness, and cash advance among others. Unlike government contributions, these items may be different every cutoff, they might not even be present.

To help you be on top of Government mandated deductions and policy change, having a payroll software that updates as soon as policy changes as well will help in ensuring that no payroll is ever delayed.

Step 3: Deduct Tax

After all the deductions have been computed, you will now have taxable income. To emphasize, you only start computing tax after deductions, this way the percentage deduction is also lower compared to deducting tax from the gross income.

Fun fact: if after deductions, an employee’s salary falls below the taxable threshold, then that salary is considered non-taxable!

Step 4: Add Non-taxable Income

After deducting tax, add the non-taxable pay items. These pay items may include allowances, reimbursements, and some forms of bonuses that are below the tax threshold.

And that’s it! With these steps, you have properly computed deductions. But the work isn’t over yet: you now have to submit pay, prepare payslips, and process payout for your employees. Luckily, all of these can be done for all your employees in just a few minutes! Try Salarium for free to see how we reduce the hundreds of steps in payroll processing into a few quick clicks.