Introduction

If you earn compensation (employment) income in the Philippines, your tax treatment depends on your taxpayer classification. This classification determines:

Whether your salary is taxed at all
Which tax rates apply
What income is included
Whether you must file an annual income tax return (ITR)
Whether withholding tax is “final” or merely a creditable prepayment

Philippine compensation income taxation is governed primarily by the National Internal Revenue Code (NIRC), as amended, including the TRAIN Law and subsequent amendments, and implemented through BIR regulations.

This article explains, in Philippine legal context, the taxpayer types relevant to employment income and the consequences of each.

Key Concepts You Need First

1. Compensation (Employment) Income

“Compensation income” generally includes all remuneration for services performed by an employee for an employer, including:

Salaries and wages
Allowances (unless exempt)
Bonuses and incentives
Honoraria tied to employment
Benefits in cash or kind (unless excluded)

2. Withholding Tax on Compensation

Employers are required to withhold income tax from employees’ salaries and remit it to the BIR. For most employees, this is creditable withholding tax, meaning it’s an advance payment of your income tax.

3. The “13th Month Pay and Other Benefits” Exemption

Up to a statutory ceiling (currently ₱90,000) of 13th month pay and other benefits is exempt, but only for employees. The excess is taxable compensation.

4. Non-taxable/Exempt Benefits (Selected)

Some benefits are excluded from taxable compensation, such as:

Certain de minimis benefits within BIR limits
SSS/GSIS, PhilHealth, Pag-IBIG contributions (employee share)
Benefits required by law or productivity incentives within rules

The Primary Taxpayer Classifications for Employment Income

Philippine tax law classifies individuals for income tax purposes mainly by residency and citizenship, with additional special categories. For employment income, these are the core types:

Resident Citizen (RC)
Non-Resident Citizen (NRC)
Overseas Filipino Worker (OFW)
Resident Alien (RA)
Non-Resident Alien Engaged in Trade or Business (NRA-ETB)
Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB)

Each is discussed in detail below.

1. Resident Citizen (RC)

Who qualifies?

A Filipino citizen residing in the Philippines. This includes citizens who may temporarily be abroad but keep domicile/residence here.

Tax rule for employment income

RCs are taxed on income from all sources worldwide. So:

Salary earned in the Philippines → taxable
Salary earned abroad while still classified RC → taxable in PH (subject to possible foreign tax credits)

Practical impact

Most employees working locally are RCs.

Filing

As a rule, RC employees must file an ITR unless qualified for substituted filing (explained later).

2. Non-Resident Citizen (NRC)

Who qualifies?

A Filipino citizen who establishes residency abroad and meets statutory tests for non-residency (e.g., physically present abroad most of the year, with clear intent to reside there).

Tax rule for employment income

NRCs are taxed only on income from sources within the Philippines.

Employment income earned abroad → not taxable in PH
Employment income earned in PH → taxable

Practical impact

If you are an NRC but employed by a Philippine employer while physically working in the Philippines, your compensation remains PH-sourced and taxable.

3. Overseas Filipino Worker (OFW)

Who qualifies?

A Filipino citizen working abroad under an overseas employment contract (typically land-based or sea-based).

In tax terms, OFWs are treated as non-resident citizens.

Tax rule for employment income

Only PH-sourced income is taxable.

OFW salary abroad → exempt from PH income tax
Any salary/compensation from work performed in PH → taxable

Practical impact

Even if employed by a foreign employer, what matters for sourcing is where the work is performed.

4. Resident Alien (RA)

Who qualifies?

A non-Filipino citizen who resides in the Philippines, meaning:

Lives here with no definite intention as to length of stay, or
Has established substantial ties indicating residence.

Tax rule for employment income

Resident aliens are taxed only on income from sources within the Philippines.

Salary from work performed in PH → taxable
Salary from work performed abroad → not taxable in PH

Practical impact

Foreign nationals working locally with long-term residence status are often RAs.

5. Non-Resident Alien Engaged in Trade or Business (NRA-ETB)

Who qualifies?

A foreign national who:

Does not reside in the Philippines, but
Is engaged in trade or business in PH, generally meaning physical presence in PH aggregating more than 180 days in a calendar year, or otherwise conducting business here.

Tax rule for employment income

Taxed on PH-sourced income, using the same graduated income tax rates as residents.

Salary from work performed in PH → taxable at progressive rates
From work performed abroad → not taxable in PH

Practical impact

Foreign employees who stay/work here for more than 180 days in a year are typically NRA-ETB.

6. Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB)

Who qualifies?

A foreign national who:

Does not reside in PH, and
Is not engaged in trade or business here, usually by staying 180 days or less in a year.

Tax rule for employment income

Taxed on PH-sourced employment income at a flat 25% final withholding tax.

Salary from work performed in PH → taxed at 25% final
Salary from abroad → not taxable in PH

Practical impact

Short-term foreign consultants or expatriates on brief assignments often fall here.

Special Categories Affecting Employment Income

A. Minimum Wage Earner (MWE)

Who qualifies?

An employee receiving only statutory minimum wage as fixed by the Regional Tripartite Wage and Productivity Board.

Tax rule

MWEs are exempt from income tax on:

Minimum wage income
Holiday pay
Overtime pay
Night shift differential
Hazard pay

If the employee receives additional taxable income beyond what’s allowed for MWEs, the exemption may be lost for the excess.

B. Employees of Regional Operating Headquarters (ROHQ), Offshore Banking Units (OBU), and Petroleum Contractors

Certain employees covered by special laws may be taxed under preferential rates (historically a 15% rate for qualifying employees). The availability and conditions depend on current statutory rules and BIR implementation.

C. Mixed-Income Earners

Who qualifies?

Persons earning both:

Compensation income from employment, and
Income from business/profession (self-employment).

Tax rule

They are taxed on aggregate income, but:

Compensation part → subject to withholding
Business/profession part → subject to quarterly and annual ITR filing
They cannot rely purely on substituted filing even if their compensation side qualifies.

How Do You Know Your Taxpayer Type?

Step 1: Determine citizenship

Filipino citizen → RC, NRC, or OFW
Foreigner → RA, NRA-ETB, or NRA-NETB

Step 2: Determine residence and physical presence

Residing in PH? → RC or RA
Abroad with established foreign residence? → NRC/OFW
Foreigner staying >180 days and working here? → NRA-ETB
Foreigner staying ≤180 days? → NRA-NETB

Step 3: Determine where the work is performed

Employment income is generally sourced where the services are physically performed. This matters most for NRC/OFW/RAs/NRAs.

The Graduated Income Tax Rates (for RC, RA, NRC/OFW on PH income, NRA-ETB)

For individuals under the TRAIN framework:

Tax is progressive, with higher rates for higher taxable income.
The lowest bracket may be 0%, rising to a top marginal rate (currently 35%) for very high-income earners.

Your employer uses these brackets to compute withholding.

Substituted Filing vs. Required Filing

1. Substituted Filing (Typical Employees)

You are not required to file an annual ITR if ALL apply:

You earn purely compensation income
You have only one employer in the taxable year
Your employer correctly withheld tax
You are not a mixed-income earner
You are not required to file for other reasons (e.g., business, spouse’s rules in certain cases)

In that situation, the employer’s BIR Form 2316 serves as your return.

2. When You Must File Your Own ITR

Even if an employee, you must file if you have:

Two or more employers in the same year (concurrent or successive)
Mixed income (business/profession + employment)
Tax not fully withheld or incorrectly withheld
Non-taxable benefits exceeding limits without proper tax
Certain special status requiring filing

Typical Scenarios

Scenario 1: Local employee

Filipino working in Manila for one employer.
Type: Resident Citizen
Tax: Worldwide income taxable; PH salary taxed progressively.
Filing: Usually substituted filing.

Scenario 2: OFW nurse in UK

Filipino with overseas employment contract.
Type: OFW (NRC)
Tax: UK salary exempt from PH tax.
Filing: Only if with PH income not covered by final tax/substitution.

Scenario 3: Expat executive assigned in PH for 8 months

Foreigner in PH >180 days.
Type: NRA-ETB
Tax: PH salary taxed progressively.
Filing: May be substituted if single employer and purely compensation, unless excluded by status or other income.

Scenario 4: Foreign consultant in PH for 3 months

Foreigner in PH ≤180 days.
Type: NRA-NETB
Tax: 25% final withholding on PH salary.
Filing: Generally none if final tax properly withheld.

Common Misunderstandings

“My employer withheld tax, so I never file.” Not true if you had multiple employers or other income.
“If I’m an OFW, I’m tax-free.” Only OFW income abroad is exempt; PH income remains taxable.
“Allowances are always non-taxable.” Many allowances are taxable unless specifically exempt.
“Residency is based only on immigration papers.” Tax residency can depend on facts of presence and intent, not only visa category.

Compliance Notes for Employees

Make sure your employer issues BIR Form 2316 annually.
Keep records of benefits, bonuses, and other income.
If your status changes during the year (e.g., you become an OFW mid-year), your tax treatment may change.
Review whether you had multiple employers or side income.

Conclusion

For employment income in the Philippines, your taxpayer type is mainly determined by citizenship, residency, and where you perform work. The classifications—Resident Citizen, Non-Resident Citizen/OFW, Resident Alien, NRA-ETB, and NRA-NETB—carry distinct rules on:

Scope of taxable income
Applicable tax rates
Withholding tax type
Filing obligations

Understanding your classification isn’t optional—it’s the basis for correct withholding, lawful exemptions, and proper annual compliance. If your situation is cross-border, mixed-income, or status-changing, extra care is needed because small factual differences can shift you into a different tax regime.