The Simple and Complete Guide to Payroll Deductions

How do you sort through all the many payroll deductions? It is not an easy job, especially for a newbie.

You could be just like Mads. He’s been working in HR for some time and only recently got put in charge of payroll duty. It’s going to be his first time doing this. He knows handling payroll involves several deductions, especially in the Philippines. But Mads isn’t sure just how many kinds there are.

If you’re in the same situation as Mads, how are you going to sort through all the payroll deductions before payday?

Find Taxable Income

You’ll first need to know how much of the staff’s monthly pay is deductible by tax. Here’s the formula:

Taxable income = [(Monthly Basic Pay + Overtime Pay + Holiday Pay + Night Differential) – (SSS/PhilHealth/Pag-IBIG deductions – Tardiness – Absences)]

Say Pablo’s income is PHP 20,000 monthly. He is single, has no kids or dependents at home, and has a clean record – meaning no tardies or absences. Using the formula above, you’ll be able to determine how much is deductible from Pablo’s income. Before you can do this, you’ll need to sort through the kinds of payroll deductions first to plug into the formula.

Kinds of Payroll Deductions

Late Deduction

Tardiness is one of the deductions employee salaries can incur. More often than not, your company decides the amount to be deducted from employees who come late to work. Certain companies deduct late fees by a half-hour of work.

Be sure to review your company handbook to ensure that there will be  no confusion along the way. It also helps if your company staff are all aware of this particular policy in the business. Best to avoid angry and confused employees on payday.

Absences

These absences don’t count as paid leaves. Again, this will depend on your company’s policies about the matter. Be sure to review how many paid leaves your staff can receive, either in a month or in a year. Once they go beyond this number, that can count as a deduction in their monthly salary.

SSS Contribution

Every month, there are SSS deductions. These are mandated by law; very few individuals are exempted from it.As an HR employee, you are in charge of deducting their SSS contribution every month. Keep in mind that there are certain deadlines you have to follow with these deductions.

For a complete list, refer to the official SSS schedule of contributions here.

Using their table, in Pablo’s case, his monthly SSS contribution is PHP 581.30.

Philhealth Contribution

Philhealth is a body that can provide financial assistance for Filipino employees in cases of emergency. Every Filipino worker can become a member through their employer. Membership to Philhealth is mandated by law, just like SSS contributions. In effect, there are monthly dues that count as payroll deductions.

Because of their guidelines, Pablo’s Philhealth Contribution is PHP 250 per month. Plug that into the formula.

Pag-IBIG Contribution

Contribution to the Pag-IBIG membership fund is again compulsory under Philippine Law. It guarantees that all employees and even their spouses can avail of certain loans. Housing loans are the more popular association to the fund, though Pag-IBIG also offers short term loans and savings benefits as well.

Back to Pablo, by default his Pag-IBIG contribution is PHP 100. This is currently the set amount for this contribution.

Loans

Employees may have requested for loans from the company, especially if yours allows such. These can be automobile loans, housing loans, or even business loans. Agree first on terms and conditions if needed. Then you can begin to deduct an agreed rate from certain employees’ payroll every month until the loan is paid for.

Insurance Payments

Your company might offer insurance premiums to employees. You’ll have to know whether these insurance payments are paid monthly or annually.

Deductions from Specific Company Policy

It’s important to review any additional deductions your company may have for payroll. Discuss this with your department, especially your boss, just to be sure. These may be additional payments or premiums provided by your company to employees.

Use the Proper Tools

You now know the different kinds of payroll deductions. Knowing is only half the battle. Now you’ll need the proper tools to help you sort through payroll.

Microsoft Excel is one of the more popular office tools you’d want to use. It supports formulas and rules that make sorting easier and less of an eyesore.

You might also opt to use payroll tax calculators. You should be able to find some in certain websites, or ask your department if there are payroll-friendly software your company can invest in.

Another option would be for your company to get an automated payroll system that automatically computes payroll  in just a few clicks and in only a few minutes. It does sound costly, but there are those who only require a little investment and provides you with big returns. 

Deductible Income and Income Tax

So let’s go back to Pablo and his deductible income. Plugging in the amounts using the SSS, Philhealth and Pag-IBIG tables, you’ll get this:

Taxable income = [(20,000) – (581.3 + 250 + 100)]

= PHP 19,068.7

PHP 19,068.70 is Pablo’s taxable income where you base your calculations of income tax.