Tax Saving Tips for Employees

If you are a full-time employee earn­ing pure com­pen­sa­tion income, then your biggest and first expense is taxes. You pay for your expenses with after-tax money. This is the earn-tax-spend process that puts you at a dis­ad­van­tage. You bear most of the bur­den of income taxes in the coun­try, since the tax is with­held from your income by your employer. Nev­er­the­less, there are tax strate­gies you can use to ease the pain.

Tip #1: Earn non-taxable ben­e­fits
There’s lit­tle lever­age if you’re a reg­u­lar employee work­ing in a vast orga­ni­za­tion. But if you’re a hot-shot recruit or you work in a small com­pany, you can nego­ti­ate your total com­pen­sa­tion pack­age such that you get more of tax-exempt ben­e­fits such as retire­ment plans; health, acci­dent, and life insur­ance; and the like. Sec. 32 (B) of the Tax Code enu­mer­ates the exclu­sions from gross income. Sure, you won’t exactly enjoy them now, but at least the more impor­tant things are cov­ered, at least in part, paid by your employer.

Or if your com­pany offers a “cafe­te­ria plan”, which gives employ­ees choices on what ben­e­fits to receive, go for the non-taxable ben­e­fits. Maybe if you’re young and have no plans on stay­ing long at your com­pany, you can go for the gym mem­ber­ship or the free movie tick­ets, but if you’re older, with a fam­ily, and think­ing more long-term, well, you know your priorities.

Tip #2: Make the most of your retire­ment or profit-sharing plan
It may no longer be the age of com­pany loy­alty, but there are tax advan­tages to stick­ing it out with your employer. The Labor Code requires a min­i­mum retire­ment plan for pri­vate com­pa­nies, allow­ing you to retire with tax-free ben­e­fits if you’re between 60 and 65 years old and have served at least five years in the com­pany. For com­pa­nies that have their own retire­ment plan, Sec. 32 (B) of the Tax Code has this con­di­tion for exclu­sion of retire­ment ben­e­fits: you have to be at least 50 years old and have been in ser­vice with your com­pany for at least 10 years to enjoy tax-free retire­ment ben­e­fits. If your com­pany has a defined-contribution, rather than defined-benefit, plan, or a profit-sharing scheme, con­tribute the max­i­mum you’re allowed.

Tip #3: Post­pone your bonus
Low­er­ing your tax can be as sim­ple as ask­ing that your year-end tax­able bonus or com­mis­sion be given on Jan­u­ary the fol­low­ing year, which is a par­tic­u­larly use­ful strat­egy if your income is mostly vari­able. If you have a steady fixed income and you’re already in the top tax bracket, it wouldn’t mat­ter. Say you’re expect­ing to earn P500,000 for this year, much of it vari­able com­pen­sa­tion like com­mis­sions and bonuses, which puts you in the 30% bracket. But then, you closed a sale just before the year ends that will earn you P100,000 in com­mis­sions. Now, you jump to the high­est 32% tax bracket. Your tax bill, ignor­ing per­sonal exemp­tions, is P157,000. How­ever, if you think you won’t be earn­ing as much the fol­low­ing year, ask your com­pany accoun­tant to delay the pay­ment of your com­mis­sion a few more days till Jan­u­ary. Your tax due will go down to P125,000, sav­ing you P32,000 in taxes.

Tip #4: Receive small amounts of fringe ben­e­fits
If you’re a rank-and-file employee, fringe ben­e­fits such as allowances are excluded from tax­able income up to P30,000. More than that and they’ll be included in your com­pen­sa­tion income sub­ject to with­hold­ing tax. If you’re a super­vi­sor or man­ager, as a gen­eral rule, your fringe ben­e­fits are sub­ject to a final tax of 32%, thanks (or no thanks) to the spe­cial treat­ment of fringe ben­e­fits under Sec. 33 of the Tax Code. They are not part of your gross com­pen­sa­tion income.

Now, there are some fringe ben­e­fits that are def­i­nitely exempt under Sec. 33 © and oth­ers that could be exempt under cer­tain con­di­tions. One such exemp­tion is what is called de min­imis benefits—small amounts in cash or in kind offered by your employer to pro­mote health, good­will, con­tent­ment, or effi­ciency. These include unused leave cred­its (up to 10 days), med­ical cash allowance (P125 per month), rice sub­sidy (P350 per month), cloth­ing allowance (P3,000 per year), meal allowance (below 25% of the daily min­i­mum wage), med­ical ben­e­fits (P10,000 per year), laun­dry allowance (P150 per month), achieve­ment awards (annual value below 50% of basic monthly salary), gifts on spe­cial occa­sions (like flow­ers, fruits, and books for birth­days and wed­dings), and cash gifts dur­ing Christ­mas and anniver­sary cel­e­bra­tions (up to P5,000). Ask your com­pany to max those out. But it should fol­low the lim­its imposed by the BIR, because any­thing in excess will be taxed.

Tip #5: Earn for the con­ve­nience of your employer
There are cer­tain ben­e­fits, oth­er­wise sub­ject to fringe ben­e­fits tax, which can be exempt if they fall under the so-called “con­ve­nience of the employer” rule of Sec. 33 of the Tax Code: “unless the fringe ben­e­fit is required by the nature of, or nec­es­sary to the trade, busi­ness or pro­fes­sion of the employer, or when the fringe ben­e­fit is for the con­ve­nience or advan­tage of the employer.”

Reim­bursable expenses, like taxi fares and rep­re­sen­ta­tion for client calls, are for the con­ve­nience of the employer. If you get free din­ners because you’re required to work the night shift, that’s for the con­ve­nience of your employer. If you receive a per­for­mance bonus in an effort by the com­pany to retain you and achieve its annual tar­gets, that may be con­sid­ered for the con­ve­nience of the employer, and hence, not sub­ject to fringe ben­e­fits tax (BIR DA Rul­ing No. 252‑2006). It will also not form part of your tax­able com­pen­sa­tion income if all the bonuses you receive are within the P30,000 limit.

Even edu­ca­tional assis­tance for you or your depen­dents (BIR Rul­ing No. 041‑2002), your house or condo unit (BIR Rul­ing No. 055–99 and BIR Rul­ing No. DA-170‑2004), and 50% of the value of a per­sonal com­puter (BIR Rul­ing No. 074‑2000) paid for by your employer can be exempted, if they can be proven to be for the con­ve­nience of your employer.

Now, if your com­pany really, really wants you, it may even give you tax­able fringe ben­e­fits such as hous­ing, an expense account, a car, house­hold per­son­nel, club mem­ber­ships, for­eign travel expenses, vaca­tion expenses, and edu­ca­tional assis­tance. Sure, they’re def­i­nitely sub­ject to the 32% fringe ben­e­fits tax, but you can have your employer pay for it, not you. Any­way, your com­pany can deduct the grossed-up value (which includes the tax paid) of the fringe ben­e­fits from its own gross income.

Tip #6: Adjust your with­hold­ing
Ask your employer to adjust the amount of taxes it with­holds, for instance if you change your sta­tus from sin­gle to head of fam­ily or mar­ried, or if you add more depen­dents (thus allow­ing addi­tional per­sonal exemp­tions). If you donate to char­ity, inform your pay­roll depart­ment. Instead of wait­ing till year-end to claim these deduc­tions and earn a tax refund or tax credit, have them adjust your with­hold­ing tax imme­di­ately so you can have a higher take-home pay.