1) Executive summary

All rank-and-file private-sector employees in the Philippines who have worked at least one (1) month during the calendar year are entitled to 13th-month pay, computed as one-twelfth (1/12) of the employee’s basic salary earned within the year, and payable on or before December 24. Those who resign, are terminated, or are newly hired during the year are entitled to a pro-rated amount.

2) Legal basis and scope

Presidential Decree (PD) No. 851 (1975) and its implementing rules require 13th-month pay for rank-and-file employees in the private sector, regardless of the nature of their employment (regular, probationary, casual, fixed-term) and regardless of method of wage payment (monthly, daily, piece-rate, etc.), as long as they earned basic salary for at least a month in the year.
Exclusions from statutory coverage:
- Government and its political subdivisions/instrumentalities (they have a separate “year-end bonus and cash gift” regime).
- Managerial employees are not covered as a matter of strict statutory entitlement (many employers still grant them by policy).
Creditable compliance: If an employer already grants a fixed annual benefit at least equivalent to 1/12 of basic salary (e.g., a guaranteed mid-year pay legally counted as 13th-month under company policy), it may be credited toward the statutory 13th-month obligation. A discretionary “Christmas bonus” is not a substitute unless expressly structured and computed to satisfy PD 851.

3) What counts as “basic salary earned”

“Basic salary” is the pay for services actually rendered exclusive of the following typical exclusions (unless, in rare cases, they have been expressly integrated into basic pay by law, CBA, or written company policy):

Allowances (e.g., transport, meal, representation), including COLA
Overtime pay, premium pay, night shift differential
Holiday pay (regular or special)
Commissions and incentives that are contingent/productivity-based and not integrated into basic wage
Profit sharing, gratuities, performance bonuses not forming part of the basic wage
Cash conversion of unused leaves, and other one-off payments
Government/SSS-paid benefits (e.g., maternity benefit paid by SSS under RA 11210)—these are not employer salary and therefore not included in the “basic salary earned” numerator

Important nuances

Monthly-paid employees: Their monthly pay may arithmetically include pay for unworked regular holidays; however, for 13th-month purposes, only the basic salary portion for work or paid leaves counts. Many payroll systems therefore exclude holiday pay components, OT, premiums, and differentials before summing the “basic salary earned.”
Paid leaves (VL/SL): If the leave is paid by the employer, the corresponding salary is part of “basic salary earned.” The cash conversion of unused leaves is not.
Commissioned/sales staff: If there is a guaranteed basic wage, compute 13th-month on that guaranteed basic alone (commissions are usually excluded). If a CBA, contract, or practice integrates commissions into basic wage, they may be included—this is fact-sensitive and should be documented.

4) Core formula

13th-Month Pay = (Total Basic Salary Earned within the Calendar Year) ÷ 12

“Basic salary earned” is the sum of all includable basic pay actually received/earned from January 1 to December 31 (or from start date to separation date), less the excluded items above.
No minimum tenure beyond one (1) month of service during the year.
No cap in labor law on the amount (but see tax rules below).

5) Payment timing and manner

Deadline: On or before December 24.
Employers commonly advance a portion in mid-November or mid-December and true-up by December 24.
13th-month must be separately itemized on the payslip.
Late or non-payment may lead to labor standards violations, money claims, and potential administrative sanctions.

6) Pro-rating rules

A) New hires (mid-year)

Compute on the basic salary earned from date of hire up to December 31, divided by 12.

B) Resignation/termination (mid-year)

Compute on the basic salary earned from January 1 up to separation date, divided by 12. Best practice is to pay upon clearance/final pay.

C) Suspensions, no-work-no-pay stretches, LWOP

Months with no basic salary contribute zero to the numerator; thus the 13th-month decreases accordingly.

D) Unpaid absences within a month

If the employer follows a daily-rate deduction for absences, the basic salary earned for that month is lower, which reduces the 13th-month.

7) Tax treatment (common payroll practice)

Under current tax rules, the combined value of 13th-month pay and other benefits (e.g., Christmas bonus, productivity incentives) is tax-exempt up to a statutory ceiling. Any excess over the ceiling is subject to income tax and withholding.
Minimum wage earners have separate tax exemptions consistent with the Tax Code and its amendments.
Employers should track the cumulative “other benefits” bucket so that withholding is correctly applied when the ceiling is exceeded.

(The specific peso ceiling has been adjusted by tax reform; payroll must apply the ceiling in force for the current taxable year.)

8) Worked examples

Example 1 — Simple monthly-paid employee (full year; no exclusions)

Monthly basic: ₱25,000
No OT/premiums/allowances (or all are zero/none)
Total basic salary earned (Jan–Dec) = ₱25,000 × 12 = ₱300,000
13th-month = ₱300,000 ÷ 12 = ₱25,000

Example 2 — With allowances, OT, and holiday pay

Monthly basic: ₱20,000
Average monthly OT/premiums: ₱2,000 (excluded)
Fixed transport allowance: ₱1,000 (excluded)
Total basic salary earned = ₱20,000 × 12 = ₱240,000
13th-month = ₱240,000 ÷ 12 = ₱20,000 (OT and allowance do not enter the numerator.)

Example 3 — New hire in May 16 with daily-rated basic

Daily basic: ₱900; Workdays May 16–Dec 31 actually paid: 150 days
Basic salary earned = ₱900 × 150 = ₱135,000
13th-month = ₱135,000 ÷ 12 = ₱11,250

Example 4 — Commissioned salesperson with guaranteed basic

Guaranteed monthly basic: ₱12,000
Average monthly commissions: ₱10,000 (excluded, absent integration)
Basic salary earned = ₱12,000 × 12 = ₱144,000
13th-month = ₱144,000 ÷ 12 = ₱12,000

Example 5 — Resigned on September 10; some unpaid absences

Monthly basic: ₱30,000
Paid Jan–Aug: ₱240,000
September basic actually earned (after LWOP deductions): ₱12,000
Basic salary earned (Jan 1–Sep 10) = ₱252,000
13th-month = ₱252,000 ÷ 12 = ₱21,000 (to be paid with final pay)

Example 6 — Maternity leave covered by SSS

Monthly basic: ₱22,000
On SSS-paid maternity leave for 105 days; employer did not advance salary (no company pay top-ups)
Includable basic salary earned is only the months actually paid by employer as salary (pre- and post-leave); SSS benefit is excluded
Compute using salary months actually earned; divide by 12.

9) Payroll procedure (step-by-step)

Aggregate year-to-date wages and strip out excluded items (OT, premiums, differentials, allowances, holiday pay, SSS-paid benefits, leave conversions, bonuses, commissions unless integrated).
Sum the remaining basic salary actually earned for the year.
Divide by 12 to get the statutory 13th-month.
Apply tax rules: add other benefits to determine if the exemption cap is exceeded; withhold on the excess.
Schedule payment not later than Dec 24 (or upon separation), issue payslips, and post general ledger entries.
Document: keep schedules showing inclusions/exclusions; ensure the company policy or CBA clearly states any creditable compliance or integration of specific payments into basic wage.

10) Frequently asked compliance questions

Q1: Are piece-rate workers entitled? A: Yes, if they are rank-and-file and earned basic pay. Compute based on the sum of basic piece-rate earnings (exclude allowances/premiums), then divide by 12.

Q2: Are probationary or fixed-term employees entitled? A: Yes. Status does not matter as long as they are rank-and-file and earned basic salary for at least one month within the year.

Q3: Must managers receive 13th-month? A: Not by statute (they are outside mandatory coverage), but many employers voluntarily grant a benefit equivalent to maintain internal equity.

Q4: Can a Christmas bonus be treated as 13th-month? A: Only if clearly defined and computed to meet PD 851 requirements (creditable compliance). A purely discretionary bonus is not a substitute.

Q5: What if we paid part in June and the rest in December? A: Permissible if the total paid by Dec 24 equals (basic salary earned ÷ 12). Keep a reconciliation schedule.

Q6: Employee worked only one month—are they entitled? A: Yes, pro-rated: (basic salary for that one month) ÷ 12.

Q7: Is holiday pay included? A: Generally no; holiday pay is an exclusion unless a CBA/policy validly integrates it into basic wage (rare—document if so).

Q8: What if the employee was on “no work, no pay” for several months? A: Those months contribute zero to the numerator; the 13th-month decreases.

11) Common pitfalls (and how to avoid them)

Including exclusions (OT/premiums/allowances/holiday pay) in the numerator → overpayment or inconsistent practice. Fix: Configure payroll to flag and exclude these categories.
Treating SSS maternity benefit as salary → overstatement. Fix: Exclude unless there is an employer-paid salary top-up (only the top-up, if treated as basic, may count).
Missing cutoffs for separated employees → wage claims. Fix: Compute and pay the pro-rated 13th-month with final pay.
Tax ceiling misapplication on “13th-month and other benefits.” Fix: Track cumulative “other benefits” per employee and withhold on the excess only.
Managers automatically paid as if mandated (policy choice is fine, but label correctly). Fix: Distinguish statutory 13th-month from company bonuses in policy and payslips.

12) Documentation & policy checklist

Written compensation policy defining what counts as basic wage and what is excluded for 13th-month purposes.
Clear treatment of commissions and any integration (if any)—must be explicit in contracts/CBA to avoid disputes.
Payroll worksheet that starts from gross, then subtracts exclusions to arrive at basic salary earned.
Cutoff calendar (for mid-month advances and Dec 24 final payment) and final-pay SOP.
Payslip itemization showing 13th-month as a separate line item.
Tax compliance memo on the current exemption ceiling and “other benefits” tracking.

13) Quick reference (at a glance)

Who: Rank-and-file private-sector employees with ≥1 month of service in the year
What: (Total basic salary earned in the year) ÷ 12
When: On or before Dec 24 (or upon separation, pro-rated)
Exclude: Allowances/COLA, OT, premiums, NSD, holiday pay, commissions/incentives (unless integrated), leave conversions, SSS-paid benefits
Tax: Exempt up to the statutory cap for “13th-month and other benefits”; excess is taxable
Docs: Keep reconciliation schedules, policies, and payslip proof

Final note

This article summarizes prevailing rules and common payroll practice for Philippine 13th-month pay. Because edge cases (e.g., integrated commissions, unusual CBAs, or policy integrations) can change outcomes, employers and employees should review their contracts/CBA, written policies, and most recent tax guidance when finalizing computations.