Is Overtime Pay Taxable for Minimum Wage Earners in the Philippines?

Executive Summary

For Minimum Wage Earners (MWEs), **overtime pay (OTP) is generally not taxable—together with basic minimum wage, holiday pay, night-shift differential, and hazard pay—so long as the worker continues to qualify as an MWE. If an employee ceases to be an MWE (e.g., receives pay beyond the statutory minimum or other taxable compensation), overtime pay becomes part of taxable compensation for the period of non-qualification. Non-MWEs are taxed on overtime pay like ordinary compensation, subject to the usual withholding rules and the prevailing income tax brackets (including the annual ₱250,000 zero-tax threshold for purely compensation income).

Key Concepts and Definitions

Minimum Wage Earner (MWE)

An employee who is paid the statutory minimum wage applicable to the workplace’s region/industry/classification under wage orders, without receiving compensation that would push them beyond “minimum wage” status. The definition generally covers:

Daily/hourly employees paid exactly the statutory minimum.
Piece-rate or “by results” workers whose rates do not exceed the minimum equivalent for the standard workday.
It excludes those whose basic pay exceeds the statutory minimum or who receive other taxable compensation that disqualifies them from MWE treatment (details below).

Note: Cost-of-Living Allowance (COLA) and other mandated wage components are part of the statutory wage structure established by regional wage boards and must be considered when determining MWE status.

Overtime Pay (OTP)

Compensation for work performed beyond eight (8) hours a day. As a labor standard:

On ordinary working days, OTP is at least 25% of the employee’s hourly rate for the overtime hours.
On rest days/special days/holidays, higher premium rates apply under the Labor Code and wage orders.

(Labor rules determine the amount; tax rules determine whether that amount is taxable.)

The Tax Treatment in a Nutshell

1) If the employee is an MWE

Exempt from income tax and withholding:

Basic statutory minimum wage
Overtime pay
Holiday pay
Night-shift differential
Hazard pay

Other common items for MWEs:

13th-month pay and “other benefits” are exempt up to the statutory cap (currently ₱90,000). Any excess over the cap is taxable even if the worker is an MWE.
De minimis benefits (within regulatory ceilings) remain exempt.
Mandatory contributions to SSS, PhilHealth, and Pag-IBIG are not taxes but continue to apply.

Employer withholding obligation: None on exempt items. Employers should nonetheless keep complete payroll records evidencing MWE status (regional wage order, pay slips, timekeeping/overtime logs).

2) If the employee is not an MWE

Taxable as ordinary compensation subject to withholding:

Basic pay
Overtime pay
Premiums and allowances (unless specifically exempt)
Holiday, rest-day, and night differential pay (no special tax exemption once not an MWE)
The first ₱250,000 of annual taxable compensation income remains not subject to income tax under the current graduated rates. Withholding tables reflect this; many low-income non-MWEs effectively have zero withholding if projected annual taxable pay does not exceed ₱250,000.

Losing (or Regaining) MWE Status: Practical Rules

Triggers that typically forfeit MWE status
- A basic pay increase above the statutory minimum for the position/region/sector.
- Taxable bonuses, commissions, or incentives not covered by an exemption (e.g., not de minimis; not within the ₱90,000 “13th-month and other benefits” cap).
- Allowances that are taxable and push compensation beyond what regulations recognize for MWEs.
Effect on taxability
- From the month/period the employee ceases to be an MWE, their compensation (including overtime) becomes taxable like any non-MWE’s compensation.
- Amounts earned while validly an MWE remain exempt.
- If the employee later returns to MWE status (e.g., reassignment or adjustment back to the statutory minimum with no disqualifying pay), the exemption resumes prospectively.

Payroll practice tip: Employers should evaluate MWE status each payroll period. System flags should automatically toggle tax codes once a disqualifying compensation item is paid.

Illustrative Scenarios

Scenario A: Always an MWE

Facts: A factory worker earns exactly the regional daily minimum. Works 12 hours one day and receives OTP for 4 hours.
Tax Result: No income tax on basic wage and the overtime pay. Employer does not withhold tax on these items. SSS/PhilHealth/Pag-IBIG still apply.

Scenario B: MWE who receives a taxable commission mid-year

Facts: A retail worker at the regional minimum receives a sales commission in June that is taxable and not covered by de minimis rules. Thereafter, the worker also receives OTP in June–December.
Tax Result: From June onward, the worker is no longer MWE. OTP for June–December is taxable; compensation January–May remains exempt (assuming MWE status truly applied in those months). Withholding begins June payroll.

Scenario C: Non-MWE with low annual pay

Facts: An employee earns slightly above the minimum; overtime is paid occasionally. Projected annual taxable compensation is ₱230,000.
Tax Result: Employee is not an MWE; overtime pay is taxable compensation. However, because the annual taxable total does not exceed ₱250,000, no income tax is due under current brackets. Employer’s withholding tables should yield zero or negligible withholding.

Scenario D: 13th-month exceeds the cap

Facts: An MWE receives a 13th-month and other benefits totaling ₱110,000.
Tax Result: ₱90,000 is exempt; ₱20,000 is taxable. If this does not otherwise disqualify MWE status (it does not, since the cap itself governs the exemption), the employee remains an MWE for wage/OTP purposes; only the excess over the cap is taxed.

Payroll, Documentation, and Compliance

Determine statutory wage correctly. Use the applicable regional wage order (industry classification, COLA components, and effective dates).
Track MWE status every pay period. Automate checks when paying:
- Commissions/incentives
- Allowances beyond de minimis
- Salary increases
Withholding and reporting.
- For MWEs, withhold none on exempt items; for non-MWEs, apply the withholding tax tables to total taxable compensation (including OTP).
- Issue BIR Form 2316 reflecting exempt vs. taxable amounts and any year-to-date status changes.
Maintain records: employment contracts, wage order references, timekeeping and overtime logs, payslips itemizing OTP, and computations supporting exemption or withholding.

Common Pitfalls and How to Avoid Them

Assuming all allowances are exempt. Many allowances are taxable unless they qualify as de minimis or fall under a specific exemption; paying these can void MWE status prospectively.
Retroactive misclassification. If an employee becomes non-MWE mid-year, don’t automatically tax the entire year’s prior MWE-period income. Tax from the period of disqualification onward, and leave the earlier exempt months as exempt (unless there was a misclassification error all along).
Ignoring the ₱90,000 cap. For 13th-month and other benefits, tax the excess over ₱90,000 even for MWEs.
Forgetting the ₱250,000 annual threshold. Non-MWEs with very low annual taxable pay may still pay no income tax, though overtime remains part of taxable compensation for withholding computations.

Quick Reference (Tax Side)

Employee status	Basic wage	Overtime pay	Night diff	Holiday/rest-day pay	13th-month & other benefits	De minimis
MWE	Exempt	Exempt	Exempt	Exempt	Exempt up to ₱90,000; excess taxable	Exempt (within ceilings)
Non-MWE	Taxable	Taxable	Taxable	Taxable	Exempt up to ₱90,000; excess taxable	Exempt (within ceilings)

Practical Checklist for Employers and HR/Payroll

Confirm the current regional minimum and document it in the employee’s file.
Configure payroll to recognize MWE status and to reflag upon paying taxable extras.
Tag overtime distinctly in payslips; compute labor-law premiums correctly.
Apply no withholding on MWE-exempt items; otherwise use the withholding tables.
Monitor the ₱90,000 cap on 13th-month/other benefits.
Keep tight audit trails for BIR: time records, overtime computations, and wage-order references.

Bottom Line

Overtime pay is not taxable for MWEs—provided the worker remains an MWE.
If the worker stops being an MWE, overtime pay becomes taxable like any other compensation from that point forward.
Non-MWEs include overtime in taxable compensation, but many low-income workers still pay no income tax if their annual taxable compensation does not exceed ₱250,000.

This article is for general information only and is not a substitute for tailored legal or tax advice based on your specific facts and the most current regulations.