How to Process Payroll in the Philippines: A Step-by-Step Guide

Overview: The Philippine Payroll Cycle

Payroll processing in the Philippines involves more than just computing salaries. Every pay period, you must calculate statutory contributions, apply withholding tax under TRAIN Law, generate compliant payslips, and stay aligned with three government agencies (SSS, PhilHealth, Pag-IBIG) and the BIR.

This guide walks through the complete process using a real example: a company with a semi-monthly payroll schedule (two cutoffs per month).

Step 1 — Collect and Verify Attendance Data

Payroll starts with attendance. For every employee, you need for the pay period:

Number of regular work days/hours present
Number of absences (unpaid or deducted against leave credits)
Overtime hours (categorized by day type: regular day, rest day, holiday)
Late and undertime minutes
Night shift differential hours (work between 10PM–6AM)

Sources: biometric/timekeeping devices (ZKTeco is common in PH), manual DTR sheets, or HR software. Verify the data against approved leave requests and overtime approval forms before computing pay.

Step 2 — Compute Gross Pay

Gross pay = basic salary +/- adjustments for the pay period:

Component	Formula
Basic salary (semi-monthly)	Monthly basic ÷ 2
Deduction for absences	(Monthly basic ÷ working days) × absent days
Late/undertime deduction	(Hourly rate) × late/undertime minutes ÷ 60
Regular overtime (weekday)	Hourly rate × 125% × OT hours
Rest day overtime	Hourly rate × 169% × OT hours
Fixed allowances	COLA, transportation, etc. (per employment contract)

Step 3 — Compute SSS, PhilHealth, and Pag-IBIG Deductions

These are computed on the full monthly salary, but deducted in each payroll run (semi-monthly = split the monthly deduction in half, or deduct the full amount in one cutoff per your company policy).

Agency	Employee Share	Employer Share	Total
SSS	5% of MSC	10% of MSC	15%
PhilHealth	2.5% of BMS	2.5% of BMS	5%
Pag-IBIG	₱200	₱200	₱400

Example: Employee with ₱25,000 monthly salary. SSS: ₱1,250 employee share (5% × ₱25,000 MSC). PhilHealth: ₱625 employee (2.5% × ₱25,000). Pag-IBIG: ₱200. Total employee deductions for government contributions: ₱2,075/month.

Step 4 — Compute BIR Withholding Tax (Annualized Method)

Philippine withholding tax uses the annualized method — never a flat rate. For a semi-monthly payroll:

Compute taxable income for this pay period: Gross pay − employee statutory contributions − non-taxable items
Annualize: Multiply by 24 (for semi-monthly) to get the projected annual taxable income
Apply TRAIN Law tax table to get the annual tax
Divide by 24 to get the tax for this pay period

TRAIN Law Tax Table (2023 onwards):
₱0 – ₱250,000: 0%
₱250,001 – ₱400,000: 15% of excess over ₱250K
₱400,001 – ₱800,000: ₱22,500 + 20% of excess over ₱400K
₱800,001 – ₱2M: ₱102,500 + 25% of excess over ₱800K
₱2M – ₱8M: ₱402,500 + 30% of excess over ₱2M
Above ₱8M: ₱2,202,500 + 35% of excess over ₱8M

Step 5 — Apply Other Deductions

After government deductions and withholding tax, apply any remaining deductions:

SSS salary loan repayments (per approved loan schedule)
Pag-IBIG multi-purpose loan repayments
Company loan repayments
Cash advance salary deductions
Health insurance (HMO) premium — if employer-sponsored plan has employee share

Step 6 — Compute Net Pay and Generate Payslips

Net pay = Gross pay − all deductions (government contributions + withholding tax + loan repayments + other deductions).

Payslips must show, at minimum: employee name and TIN, pay period, gross pay breakdown, all deduction items with amounts, and net pay. Under DOLE rules, payslips must be issued on or before the payment date.

Step 7 — Remit Contributions and File Reports

Agency / Report	Deadline	How to File
SSS Monthly Contribution (R3)	By last day of the month following the contribution month	SSS portal (My.SSS)
PhilHealth RF-1	Every 11th–15th day of the following month	PhilHealth ER2 portal
Pag-IBIG (HDMF)	Within 10–15 business days after end of month	Virtual Pag-IBIG portal
BIR Form 1601-C (withholding tax)	10th of the following month (non-eFPS); 15th (eFPS)	eBIRForms or eFPS

13th Month Pay (Process Once a Year)

Compute in November/December: Total basic salary paid January–December ÷ 12. Must be released no later than December 24. Mandatory for all rank-and-file employees who have worked at least one month. Exempt from income tax up to ₱90,000.

Frequently Asked Questions

What is the most common payroll schedule in the Philippines?

Semi-monthly (twice per month, usually the 15th and 30th/31st) is the most common schedule in Philippine private companies. Some employers pay monthly; some pay weekly or bi-weekly. All are legal under the Labor Code as long as intervals do not exceed 16 days.

Can the employer deduct absences from the 13th month pay?

No. Under DOLE, 13th month pay is based only on total basic salary actually paid — absences are automatically accounted for because unpaid absences reduce the total basic salary received during the year. You do not separately deduct absences; the formula self-corrects.

Is payroll outsourcing common in the Philippines?

Yes, especially among smaller companies without a dedicated HR team. However, outsourcing does not relieve the employer of statutory compliance obligations — SSS, PhilHealth, Pag-IBIG, and BIR filings remain the employer's legal responsibility. Using payroll software keeps everything in-house and ensures compliance with Philippine statutory rates.

What happens if payroll is released late?

Late payment of wages is a Labor Code violation under Article 116. An employee may file a money claims case at DOLE or NLRC. In practice, DOLE may impose a fine and require immediate payment of unpaid wages with interest. Repeated violations can lead to suspension or closure of business operations.