A Complete Guide to Philippine Payroll Processing

Processing payroll in the Philippines can be intricate, given the numerous legal requirements and government-mandated contributions. However, mastering it not only ensures compliance but also builds trust with your employees. This guide outlines the essential steps, legal obligations, and best practices for effectively streamlining payroll processing.

• What is Payroll?
• How Does Philippine Payroll Differ from Other Countries?
• What are the Key Steps in Payroll Processing?
• What are the Best Practices for Smooth Payroll Processing?
• Frequently Asked Question About Payroll Processing 

What is Payroll?

Payroll is the process of managing and compensating employees for their contributions to an organization. It involves calculating and distributing salaries, wages, bonuses, and deductions, while also ensuring compliance with tax laws and labor regulations. Below are the key components of payroll:

• Employee Compensation. Calculating gross pay based on hours worked, overtime, or agreed-upon salaries.
• Deductions. Withholding taxes, social security contributions, and other mandatory or voluntary deductions.
• Government Compliance. Filing and remitting taxes and contributions to the relevant agencies.
• Record-Keeping. Maintaining accurate records of payments, deductions, and employee details.

How Does Philippine Payroll Differ from Other Countries?

One of the most notable differences in processing payroll in the Philippines compared to other countries lies in the withholding of taxes and government-mandated contributions.

In many countries, including the United States, Australia, and certain European nations, employees are primarily responsible for filing and paying their income taxes. Employers may withhold taxes temporarily or provide tax documentation, but the obligation to file typically rests with the employee.

In contrast, the Philippine payroll system places the responsibility on the employer. Employers serve as withholding agents on behalf of the government. This means they are legally required to withhold income taxes and social contributions, such as SSS (Social Security System), PhilHealth, and Pag-IBIG Fund, directly from employee salaries. These withholdings are then remitted to the respective government agencies on a scheduled basis.

What are the Key Steps in Payroll Processing?

Effective payroll management ensures accurate compensation and compliance with tax and labor laws. Understanding key steps streamlines operations and builds team trust. Here are the essential processes of payroll processing:

1. Gather Employee Information. To begin, gather the following essential information for each employee to ensure accurate payroll processing and compliance with regulations:
   • Full name and contact details
   • Employment contract
   • Tax Identification Number (TIN)
   • Social Security System (SSS) number
   • PhilHealth membership number
   • Pag-IBIG Fund (HDMF) membership number
   • Bank account details for salary crediting
2. Track Work Hours and Days. Accurate timekeeping is crucial for effective payroll management. Utilize tools such as biometric systems or work schedules to monitor the following:
   • Attendance
   • Approved Overtime hours
   • Leaves (e.g., sick leave, vacation leave)
3. Compute Gross Pay. Gross pay comprises an employee’s basic salary along with any supplementary earnings, including:
   • Overtime pay (if applicable)
   • Holiday pay
   • Bonuses or allowances
4. Deduct Taxes and Contributions. Employers in the Philippines are required by law to withhold taxes and remit contributions to government agencies. These include:
   • Withholding Tax. Deductions are based on the Bureau of Internal Revenue (BIR) tax table, considering the employee’s taxable income.

The tax rates are progressive, ranging from 0% to 35%, depending on the total income and applicable exemptions.

For example:

An employee earning ₱20,833 and below per month may be exempt from withholding tax.

Higher-income earners (with an annual income above ₱ 250,000) are taxed progressively according to the BIR-prescribed tax brackets.

Taxable income includes basic salary, allowances (unless considered as de minimis), bonuses beyond the non-taxable ceiling of Php 90,000, commissions, and other earnings.

• • Social Security System (SSS). Under the law, both employers and employees are required to contribute a percentage of the employee’s monthly salary. As of 2025, the total SSS contribution rate is 15%, with the employer shouldering 10% and the employee contributing 5%. This contribution is based on the employee’s gross salary, subject to a prescribed maximum ceiling of Php35,000.

These contributions are not merely compliance requirements—they serve as the foundation of an employee’s future benefits. By regularly remitting to the SSS, employers not only fulfill their legal obligation but also help secure the long-term welfare of their workforce.

• • PhilHealth. serves as the national health insurance program in the Philippines, providing employees with access to hospitalization benefits.

Unlike SSS contributions, which are based on the total gross income, PhilHealth contributions are directly computed based on the employee’s monthly basic salary.

As of 2025, the total premium rate is 5% of the monthly salary, with the employee contributing 2.5% and the employer covering the remaining 2.5%. The contribution is subject to a salary floor and ceiling, with the current maximum monthly salary capped at ₱100,000, resulting in a maximum total contribution of ₱5,000 per month.

• • Pag-IBIG Fund (HDMF). is a mandatory government savings program that helps employees access housing loans and financial assistance. The monthly contribution rate is 2% of the employee’s monthly compensation, matched by 2% from the employer. Starting January 2025, Contributions are capped at a ₱10,000 monthly salary, resulting in a standard ₱200 employee share and ₱200 employer share. Though small, these contributions accumulate over time, supporting employees’ long-term financial and housing goals while ensuring employer compliance with government regulations.

5. Issue Payslips. In line with Labor Advisory No. 11, Series of 2014, employers are required to issue itemized payslips to employees on or before every wage payment. This promotes transparency and ensures that workers are fully informed about how their salaries are computed.

Each payslip should reflect the following details:

• • Gross pay (including basic salary, allowances, overtime, etc.)
  • Itemized deductions (taxes, loans, or other authorized amounts)
  • Net pay (take-home pay)
  • Government-mandated contributions to SSS, PhilHealth, and Pag-IBIG

6. Comply with Reporting Requirements. Ensure timely submission of payments and corresponding reports to the appropriate government agencies. Requirements include:
   • Monthly contributions to SSS, PhilHealth, and Pag-IBIG
   • Monthly and annual tax filings with the BIR using the BIR Form 1601C, BIR Form 1604C, and BIR Form 2316
7. Credit Salaries on Time. As mandated by Article 103 of the Labor Code, wages must be paid at least once every two weeks or twice a month, with intervals not exceeding sixteen (16) days. Timely salary payment is not only a legal requirement—it’s also a critical aspect of employee satisfaction and operational integrity.

To ensure compliance and efficiency, employers should:

• • Deposit salaries directly into employees’ designated bank accounts
  • Follow a consistent and transparent payroll schedule
  • Ensure that all salary computations and deductions are accurate and well-documented

What are the Best Practices for Smooth Payroll Processing?

Accurate and timely payroll management, whether handled in-house or through payroll outsourcing, is essential for maintaining employee satisfaction and ensuring compliance with labor laws. This section offers practical tips to optimize payroll processes and foster a well-organized, efficient operation.

• Automate Payroll Systems. Utilize payroll software to automate calculations, minimize errors, save time, and ensure tax tables and compliance rates are consistently up-to-date.
• Maintain Accurate Records. Maintain comprehensive records of work hours, absences, payments, and deductions for a minimum of three years, as required by law.
• Stay Updated on Regulations. Regularly monitor updates to tax rates, contribution requirements, minimum wage laws, and labor policies to maintain compliance.
• Conduct Regular Audits. Regularly review payroll processes to identify discrepancies and address any issues to ensure compliance and maintain accuracy.
• Train Payroll Staff. Provide your HR or payroll team with comprehensive training in labor laws and technical skills to efficiently handle complex payroll tasks.