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How to Pay Employees in the Philippines

As you embark on expanding your business to the Philippines or initiating a new venture there, understanding the local payroll process is essential.

Paying employees in the Philippines isn't just about salary distribution; it's also about adhering to local tax regulations, complying with statutory requirements, and appreciating cultural differences.

This guide will walk you through the necessary steps to ensure your payroll is processed effectively, your employees are content, and your business aligns with Filipino laws.

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Paying Remote Employees in the Philippines - Your Options

Option 1: Establishing a Local Entity

For businesses planning a long-term presence in the Philippines with a considerable workforce, setting up a local entity is a viable option.

This allows you to hire Filipino workers directly and manage operations autonomously, but it also involves navigating the complex labor and tax laws of the country.

You will need to set up local payroll processing and arrange employee benefits from the ground up, which requires a thorough understanding of local regulations and a considerable investment in both time and financial resources.

Option 2: Partnering with a Global Employment Organization

Collaborating with a global employment organization offers a smoother alternative for international businesses. Instead of establishing your own legal entity, such a partner can hire and pay remote workers in the Philippines on your behalf, handling everything from payroll and benefits to tax filings and legal compliance.

Services like this can offer complete solutions that ensure your employment practices are secure and comply with local laws.

Option 3: Engaging Workers as Independent Contractors

Engaging Filipino workers as independent contractors may be suitable for project-based work or when dealing with freelancers.

However, it's essential to be cautious to avoid misclassification of employees as contractors, which is taken seriously under Philippine employment law.

For legitimate contractor relationships, there are platforms that can manage payments, allowing you to maintain a clear distinction between contractors and full-time employees.

Option 4: Utilizing Online Freelance Platforms

Online freelance platforms like Upwork and Fiverr provide a convenient avenue for engaging Filipino freelancers for short-term projects or specialized tasks.

These platforms manage the payment transactions, offering escrow services that ensure security for both you and the contractors. They also handle the reporting and tax withholding, simplifying the process of compliance with Philippine tax laws.

This method is particularly advantageous for businesses looking to scale up or down quickly based on project needs without the long-term commitments that come with hiring full-time employees.

However, the platform's service fees and the terms of engagement should be considered when opting for this approach.

Option 5: Leveraging Local Payroll Outsourcing Services

For those who prefer not to handle payroll in-house, local payroll outsourcing services in the Philippines can be a practical solution.

These services specialize in Philippine payroll and tax regulations, ensuring accurate and timely payment distribution, tax withholdings, and government reporting.

Outsourcing payroll to local experts can provide peace of mind, especially when dealing with the intricacies of Philippine labor laws, tax brackets, and mandatory contributions such as the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG).

Option 6: Implementing Payroll Software Solutions

Another option is to adopt specialized payroll software that caters to the Philippines’ payroll requirements.

Modern payroll systems can automate most of the payroll tasks, from calculating withholdings to generating payslips and year-end tax forms. They can be configured to adhere to Philippine tax tables and statutory contributions, ensuring compliance while reducing the manual workload.

Selecting a payroll software that integrates seamlessly with your business's HR system can help streamline your operations, although it does require an initial setup and continuous updates to keep up with regulatory changes.

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What Currency to Use for Remote Payments in the Philippines?

In the Philippines, employees and independent contractors should be compensated in the local currency, the Philippine Peso (PHP). Contractors may have the option to be paid in different currencies via foreign currency accounts, but typically, local currency transactions are preferred for simplicity.

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Understanding the Progressive Tax Rates in the Philippines

Like the tiered system observed in many countries, the Philippine tax structure is designed with graduated rates, providing a progression from lower to higher tax rates based on income.

Residents in the Philippines are subject to income tax on a scaling system where tax obligations are aligned with the level of income.

The progressive tax brackets in the Philippines are detailed as follows:

  • Annual income from P0 to P250,000: Exempt from income tax
  • Annual income over P250,000 up to P400,000: Taxed at 20%
  • Annual income between P400,000 to P800,000: Incur a 25% tax rate
  • Annual income from P800,001 to P2,000,000: Subject to a 30% tax rate
  • Annual income from P2,000,001 to P8,000,000: Levied with a 32% tax
  • Annual income over P8,000,000: Attracts the highest tax rate of 35%

This tiered tax system focuses solely on personal income tax. It doesn't include other mandatory contributions such as those for social security, which employers must also deduct from salaries as part of payroll obligations.

Companies are required to compute the appropriate withholding tax for each employee, ensuring that the correct amounts are deducted in accordance with these tax bands.

The Filipino Tax System and Employee Withholding

Understanding the Filipino tax system is vital for payroll processing. Employers are responsible for withholding the correct amount of tax from their employee's salaries.

The Bureau of Internal Revenue (BIR) oversees the collection of taxes, and employers must ensure they are withholding and remitting the correct amounts.

Familiarize yourself with the BIR's tax tables and deadlines to maintain compliance.

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The Best Payroll Tools and Platforms for the Philippines

Selecting the appropriate tools and platforms can greatly simplify the payroll process in the Philippines.

Businesses should opt for payroll software that is designed to comply with Filipino tax regulations and employment laws.

Such tools often include functionalities like automated tax calculations, integration with time-tracking systems, and direct deposit features.

Top Payroll Platforms in the Philippines:

1. Parallel

The number 1 payroll solution for businesses with remote workers in the Philippines. Their comprehensive EOR will streamline expansion and operations into the Philippines

2. JuanTax Payroll

This platform offers an end-to-end payroll solution that complies with Philippine tax laws, including automated tax calculations and government report submissions.

3. Salarium

Provides a complete payroll system tailored for the Philippines, with attendance monitoring, payroll computation, and disbursements through its own SAL Payroll Wallet.

4. PayrollPinas

A comprehensive HR and payroll software that caters specifically to the Philippine market, offering services such as payroll processing, government compliance, and even HRIS.

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Digital Payments in the Philippines

The Philippines has a rapidly growing digital payment landscape. Employers can consider the following methods for disbursing salaries:

  • Bank Transfers: A preferred method due to its convenience and security, especially through major banks like BDO, BPI, and Metrobank.
  • GCash and PayMaya: Mobile wallets that are increasingly popular for quick and easy transfers.
  • PESONet and InstaPay: Electronic fund transfer services that enable businesses to send and receive payments in real-time or near real-time.

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Resource Allocation for Payroll Management

Allocating the right resources is critical for successfully hiring and compensating international employees in the Philippines. This includes:

  • Human Resources: Assigning a dedicated payroll team or specialist to ensure accuracy and compliance.
  • Financial Resources: Budgeting for payroll system subscriptions, training, and potential non-compliance penalties is important.
  • Time Resources: Payroll processing is a regular task. Businesses should set aside time for processing, tax filing, and staying informed about legislative changes.
  • Outsourcing Payroll Functions: Partnering with a local payroll service provider can reduce the risk of non-compliance.
  • Consulting Tax Experts: Tax advisors can offer insights into efficient tax strategies for employees.

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Understanding Business Costs in the Philippines

If you are still planning to hire in the Philippines, it's crucial to consider the following costs before you begin hiring:

  1. Recruitment Costs: Advertising, using recruitment services, and the time involved in hiring.
  2. Training and Onboarding: Training new employees involves direct costs like materials and indirect costs such as time.
  3. Operational Costs: Providing workspace, equipment, and utilities for employees.
  4. Compliance Costs: Adhering to statutory compliance requires administrative effort and potentially legal services.
  5. Employee Benefits: Statutory benefits are mandatory, and additional benefits can include health insurance, bonuses, and retirement plans.

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