How to run payroll in the Philippines: A guide for global employers

Running payroll for remote employees in the Philippines for the first time? It's crucial to get it right. If you miss a step, you could rack up steep penalties—or even risk legal action from the Bureau of Internal Revenue (BIR).

Here’s a step-by-step guide to running payroll in the Philippines, with everything you need to get it right every time.

How is payroll calculated in the Philippines?

In the Philippines, two crucial factors make up payroll calculation: The first is an employee’s gross pay and the second is deductions. 

Gross pay typically includes the base salary, overtime pay, 13th month pay, and other bonuses. Deductions, also known as payroll taxes, include income tax, Social Security, PhilHealth, and Home Development Mutual Fund.

As an employer, you’re legally responsible for ensuring your payroll process complies with Philippine tax laws—so it’s crucial to have accurate payroll computations.

Key payroll components in the Philippines

If you plan to hire in the Philippines, you’ll need to familiarize yourself with the Labor Code, which covers most employment and labor regulations like wages and working hours. Here are the key payroll elements you’ll want to know:

• Minimum wage: The minimum wage varies based on sector and region. Metro Manila has the highest minimum wage at PHP 645 per day (PHP 608 for most agriculture, service, and retail workers).
• Overtime: Employees who work more than eight hours daily are entitled to 125% of their normal pay, but the overtime rate may be higher on special holidays.
• Holiday pay: The Philippines has many public holidays during which employees receive paid time off at 100% of their salary. Employees can receive up to 200% of their salary if they work during regular holidays.
• Cost of living allowance (COLA): COLA is an integral part of minimum wage, designed to offset living costs in the Philippines. Employees can receive this fixed amount in addition to their base salary. Keep in mind that the exact amount differs based on sector and region.
• Social security system (SSS): A government-mandated program, acting like a state-run pension fund to which both an employer and employee contribute 12% of an employee’s monthly salary (8% employer share, 4% employee share) for a maximum salary of P20,000. The fund supports employees in the case of sickness, disability, and maternity benefits.
• PhilHealth (Philippine health insurance corporation):  An affordable health insurance program for all Filipino employees. Employees and employers contribute to the fund on a monthly basis through 3% of an employee's salary. 
• Home development mutual fund (Pag-IBIG): A national fund to which employers and employees contribute (contribution rates depend on the salary), offering home loan provisions for affordable housing to Philippine employees. 
• Severance pay: Severance is required for certain types of terminations, such as just cause or redundancy. The amount varies depending on the employee’s year of service. For instance, those in their first year will be entitled to less pay than those in their second, and so on.
• Non-taxable benefits: Some employers offer small-value benefits in addition to the employees' base pay and allowances. These are also called de minimis benefits and usually include gifts up to P5,000 per year, unused leave converted to cash, or clothing/uniform allowances.  

How to run payroll in the Philippines

Everyone, from your HR and finance department to your Filipino employees, will want you to know how to run the Philippine payroll properly. 

Step 1. Create your own entity in the Philippines or use an employer of record (EOR)

To hire and pay employees in the Philippines, first you need to establish a business entity in the Philippines. You can do this by either creating your own local entity or by using what’s known as an “employer of record.”   

EORs allow you to hire and pay employees through their own entities. They’re responsible for calculating and withholding the appropriate taxes (more on that below), and for paying your taxes to the BIR.

When, why, and how do companies use an EOR? 

When companies expand their operations to the Philippines—and around the world—they typically use EORs to run payroll, issue benefits, and navigate international compliance issues. 

This is because EORs can take months to set up, depending on how you apply, and whether the BIR manually reviews your registration. It’s a significant administrative load, and most smaller companies don’t have the time or resources to spare.

When, why, and how do companies create their own entity?

If you create your own entity, that replaces the EOR as the legal entity hiring employees and running payroll. Companies typically create their own entities once the costs of an EOR outweigh the costs of creating their own entities.

To set up an entity in the Philippines, you need to pay a filing fee and register your business with the BIR and get an Employer Identification Number (EIN), which ensures you’re remitting the necessary taxes to adhere with Philippine labor law. From there, you need to register your company with the government agencies you’re required to send deductions to, including:

• The Social Security System (SSS)
• Philippine Health Insurance Corporation (PhilHealth)
• The Home Development Mutual Fund (HDMF), also known as the Pag-IBIG Fund 

Step 2. Pick a global payroll software solution

Outsourcing payroll comes with many benefits, like time and cost savings and professional compliance support—but before you land on a choice, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.

• Global payroll processors actually process your payroll, transmit funds, and calculate and file taxes in every country through their own software. Put simply: global payroll processors allow you to pay your international employees just as easily as your local employees: together in a single pay run.
• Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.

Step 3. Determine your workers’ employment status

Before onboarding your workers, and certainly before you run payroll, it’s crucial to understand who you’re paying in the eyes of Philippine law: Are your workers employees or contractors? 

It’s essential to classify them correctly to avoid big fines. Also, if they’re employees, there are payroll deductions you’re responsible for, including tax obligations and superannuation contributions—see the tables below for the full list.

While no single factor is determinative, a Philippine Supreme Court ruling developed certain “tests” to decide whether a worker is an employee or a contractor, including:

• The level of control the employer has over the worker's activities
• Whether they work on an ongoing or per-project basis
• Allowable reasons for a worker to be terminated

Step 4. Capture your new hires’ payroll information

Once you’ve decided whether to use an EOR or your own entity, picked a payroll solution, and ensured that your employees are correctly classified, you should be able to automatically collect (and then pay) your team in the Philippines. Just make sure you’re adhering to statutory requirements when calculating each full-time employee’s payroll deductions.

Here’s the information you need to collect:

• Name (matching the account where you’ll deposit their pay).
• Date of birth and date of hire.
• Contact information, including their mailing address in the Philippines.
• Bank account information.
• Amount to be paid in PHP (including any bonuses).
• Tax Identification Number (TIN).
• Social Security System (SSS) number
• PhilHealth number 
• Home Development Mutual Fund (HDF) registration, available online.

Step 5. Choose to pay in your local currency or in Philippine pesos (PHP)

While it’s common to base a remote Filipino employee’s salary around your local currency, you should pay in Philippine pesos (PHP).

Of course, there are challenges for companies based outside the Philippines that need to pay Philippines-based employees in PHP: The exchange rate between your local currency and PHP can vary (see exchange rates here). If the rate is unfavorable, you’ll end up paying more USD to cover your employee’s wages. You may also need to account for fluctuations in the exchange rate when calculating your financial statements, which can create accounting complexities.

Step 6. Run payroll

You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under Philippine law. Time to run payroll!

Here’s a preview of how Rippling’s global payroll system works: Video presentation

Step 7. File your taxes in the Philippines

Once you’re up and running paying your employees in the Philippines, you have to withhold a certain amount of local taxes to send the BIR. Employers are responsible for calculating and withholding:

• Income taxes
• Social security (which covers retirement, unemployment, and paid leave entitlements)
• Health insurance
• Affordable housing development funds 

How much salary is taxable in the Philippines? It depends on the annual amount, as shown in the table below.

Run payroll in the Philippines with Rippling

While global hiring in the Philippines can help companies tap into a highly skilled workforce, it also comes with payroll and compliance complexities. Instead of hiring an in-house expert or draining time constantly staying up to date on international employment laws, you can use Rippling, which helps global teams quickly hire, manage, and pay employees in the Philippines—and elsewhere around the world—quickly and compliantly. Rippling’s global payroll service offers: 

• Multi-country payroll processing: Calculating and distributing employee salaries, wages, bonuses, and deductions. 
• Tax compliance: Filing and payment of payroll taxes in accordance with local laws and to the correct local entities. 
• Benefits administration: Managing employee benefits for your global workforce, including health insurance, retirement plans, and other perks. 
• Local compliance: Ensuring adherence to local labor laws and regulations in different countries.
• Reporting: Providing detailed payroll data reports and analytics for internal and external use. 
• Multinational payments: Handling currency conversions for international payments in employees’ local currencies. 
• Employee support: Acting as payroll experts and working with your organization’s human resources to provide assistance and support for employee payroll inquiries, solve problems, keep records of pay stubs and payslips, and more.

Payroll in the Philippines FAQs

What are the payroll deductions in the Philippines?

Employers are responsible for monthly contributions, which means deducting the following from their full-time employees’ paychecks. Along with social security and health insurance contributions, employers must also help subsidize a government program that provides housing loans and financial assistance to Filipino citizens in search of affordable housing, known as the Pag-IBIG Fund. Find the details for employer costs below:

What is the average salary for employees in the Philippines?

The average monthly salary of a Filipino employee is PHP 44,600—but this varies widely by industry, occupation, and experience level. 

Top 5 salaries in the Philippines by industry and profession:

What are the minimum wages in the Philippines?

There is no nationally set minimum wage requirement in the Philippines. Different rates are instead set by wage boards and vary across regions. In June 2022, daily minimum wages increased to between PHP 533 and PHP 570 in Metro Manila (the country’s capital region) and between PHP 306 and PHP 470 in more rural areas across other regions.

In 2023, the daily minimum compensation in the non-agriculture sector in Metro Manila was PHP 610 and  PHP 601 in agriculture, while it ranged from 369 to almost 500 across regions. 

According to the Department of Labor and Employment, current rates are as follows: 

What is the pay cycle in the Philippines?

The Philippines payroll cycle is biweekly, meaning employees should be paid twice a month at a maximum interval of 16 days. However, employers can pay employees at different frequencies as long as they don’t violate any labor laws—just be sure to include the terms in each employment contract.

Do employers in the Philippines commonly implement a probationary period for new hires?

Yes, Philippine companies often have probationary periods, typically lasting six months. Employers use that time to monitor a new hire’s performance and determine whether they are a good fit for the company in the long run. 

If we look at it from a payroll perspective, two things are important to keep in mind:

• Probationary employees are usually entitled to the same pay rate as regular employees, although their benefits may differ depending on the company’s policy. 
• If an employer decides not to retain a probationary employee, they must ensure that termination complies with due process under Philippine law. On the other hand, whether severance pay will be required depends on the circumstances of the termination. 

How much does it cost to run payroll in the Philippines?

Most payroll software is priced on a per-employee basis, or per pay run. Payroll service pricing varies according to:

• Payroll frequency.
• The number of employees on your payroll.
• The number of provinces and territories where you employ Filipino workers.
• How often you add and remove payees.
• Any additional services you need, such as year-end processing or mailing out pay stubs.

Can I manually run payroll for workers in the Philippines?

Some small business owners choose to run payroll themselves, using a payroll calculator and making a direct deposit to employee accounts, in an attempt to cut costs. But running payroll can be a time-consuming process, especially as your business grows. If you go this route, there are potentially risks to keep in mind:

Compliance: Running payroll manually in the Philippines, without using native global payroll software, puts you at risk of manual errors and omissions. Rippling handles your compliance work for you—enforcing minimum wages and overtime rules, which can save you from heavy fines.

Security: Processing payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.

What are the late tax filing penalties in the Philippines?

The BIR imposes several penalties for violating tax requirements. 

Surcharge: There is a civil penalty rate of 25% on the amount of tax due for failing to file a return.

Interest: Any unpaid taxes are subject to a 12% annual interest fee or 1% per month. 

Compromise: If you don’t file a return on time, provide inaccurate information, or fail to withhold the necessary tax deductions, you’re subject to fines of up to PHP 20,000 and can face between 1 and 10 years’ imprisonment. 

How do you pay contractors in the Philippines?

• First, ensure you’re correctly classifying your workers as a contractor (you can use Rippling’s free Worker Classification Analyzer).
• Next, agree on the payment terms with the contractor: the hourly or project rate, the payment cadence, and the method of payment. 
• Collect their payroll information, including their name, date of birth, contact information, bank account information.
• Use your chosen payroll software to pay the contractor in PHP. With Rippling, you can pay contractors in Philippine pesos, in a single pay run, without waiting on transfers or conversion.

Remember, when hiring Filipino contractors, employers are not responsible for deducting taxes from their paychecks. Instead, the contractor is responsible for tax remittance to the BIR. But employers must still keep an accurate record of employment and payroll information for each worker.

This blog is based on information available to Rippling as of December 3, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.