Compensation is payment for services performed by an employee to his employer under the employee-employer relationship. The basis upon they are paid is immaterial in determining whether it constitutes compensation or not. But if the remuneration is in form other than money, such is treated as compensation in kind and its fair market value is the amount that will be consider as compensation.
Forms of Compensation Income
1. Compensation paid in kind – payment in form other than money, like property, bonds, and stocks. The fair market value of it is the amount to be included in the compensation.
2. Living quarters and meals – aside from salary, if an employee were also provided of meals and living quarters, its value shall be added in computing the amount of compensation income. But if its purpose is for the convenience of the employer, the value of it is not included in determining the compensation income.
3. Facilities and privileges of a relatively small value – also known as de minimis benefits are not considered as compensation if they are within the P30,000.00 ceiling prescribed by the Tax Code. If they exceed the prescribed ceiling, the excess de minimis benefits will be then considered as “other benefits” and therefore, included in determining the compensation income.
4. Tips and gratuities – these are the tips, tokens or gratuities received by an employee from a customer of his employer which is not accounted for by the employee to the latter also form part of compensation income.
5. Pensions, retirement and separation pay – except those provided.
6. Fixed or variable transportation, representation and other allowances
- In general, they are included in compensation income.
- Advances or reimbursement for traveling, representation and other necessary expenses incurred or expected to be incurred by an employee in performance of his duties are not included in compensation income if they satisfied the following condition:
- If the expenses are incurred in pursuit of the trade, business or profession; and
- The employee is required to account the expenses conforming to the specific requirements of Section 34 of the Code. The excess of actual expenses over advances will form part of the compensation if not returned to the employer.
7. Vacation and sick leave allowances - earnings of an employee on vacation or on sick leave, which are paid nevertheless of his absence, constitute compensation. But, the monetized unused vacation of private employees not exceeding ten (10) days per year and monetized value of vacation and sick leave of government officials are not part of compensation income.
8. Deductions made by employer from compensation of employee – any amount which is required by law to be deducted by the employer from employees’ salary is considered as part of the employee’s compensation.
9. Remuneration for services as employee of a nonresident alien individual or foreign entity
10. Compensation for services performed outside the Philippines