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BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every Thursday.

Bonus is such a lonely word


BONUS. A word that is so pleasing to hear, one that we constantly hear or read nowadays from
our favorite media outlet. It is also a word many consider as lonely. A bonus is an amount
granted and paid to an employee for his or her industry and loyalty, which contributed to the
success of the employers business and made possible the creation of profits. It is an act of
generosity granted by an enlightened employer to spur his or her employee to exert greater
efforts for the success of the company and the creation of bigger profits (G.R. 10071).
Less than three months before we celebrate the birth of Jesus, some employers in both the public
and private sector have started giving out bonuses, incentives, allowances and other perks to their
employees. But did it ever cross your mind whether or not these bonuses will be subject to
income tax? Well, the answer to this is: It depends.
The amount of 13th-month pay and other benefits are excluded in the computation of taxable
income. However, the rule is not absolute, considering that current rules limit the amount of nontaxable 13th-month pay, bonuses and other benefits to P30,000 annually. Should one of these or
the aggregate exceeds that amount, the excess will be considered part of the compensation
subject to income tax and, consequently, to withholding tax. The other benefits refer to payments
made by the employer other than the 13th-month pay, such as the annual Christmas bonus given
by private offices; 14th-month pay; mid-year productivity incentive bonus; gifts in cash and
kind; and other similar benefits received by an officer or employee from his employer. The
P30,000 limit may actually be increased by the finance secretary through an appropriate issuance
upon the recommendation of the Bureau of Internal Revenue commissioner, but as of now, there
has been no change in the amount. So if a government official or a private-sector employee
receives bonuses beyond the P30,000 cap due to his or her excellent professional performance or
for whatever reason, the excess is not covered by the exclusion from taxable income.

The reasonableness or unreasonableness of the amount given as a bonus does not affect its
taxability. The excess will, as a rule, be always taxable. But the deductibility of the expense on
the part of the employer will be affected if the amount is not reasonable. An unreasonable
amount is not considered an ordinary and necessary expense and, therefore, not deductible in
computing the employers taxable income.
Actually, there is no fixed test in determining the reasonableness of a bonus as additional
compensation. The following are the conditions that may be taken into consideration: payment
must be made in good faith; the character of the taxpayers business; the volume and amount of
its net earnings; its locality; the type and extent of the services rendered; the salary and policy of
the corporation; the size of the particular business; the employees qualification and
contributions to the business venture; and the general economic conditions (C.M. Hoskins & Co.
Inc. v. CIR).
Employers, especially those in the private sector, are at liberty to determine the amount of the
bonus they provide to their officers and employees, but there may be tax consequences. Huge
amounts of bonuses would necessarily exceed the ceiling allowed as non-taxable. It follows that
the excess will be taxable on the part of the officer or employee. In so far as the employer is
concerned, he or she must be able to justify the reasonableness of the amount. Otherwise, the
same may not be treated as ordinary and necessary and, therefore, not deductible in computing
the employers income subject to income tax.
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The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a
member-firm of World Tax Services (WTS) Alliance.
The article is for general information only and is neither intended nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should be supported by professional study or advice.
For comments or questions concerning the article, e-mail the author at
nicolas.pataueg@bdblaw.com.ph or call 403-2001, local 350.