Tax Exemption of Minimum Wage Earners

The recent Php20 minimum wage increase, which took effect last August 3, 2018, is a welcome development for the minimum wage earners working in the private sector in the Central Visayas area, albeit the labor sector was clamoring for a higher wage increase in view of the rising prices of goods and commodities partly due to the implementation of the controversial Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Speaking of TRAIN Law, the Bureau of Internal Revenue (BIR) has already issued the implementing rules and regulations pertaining to the amendments introduced by the said law. Revenue Regulations (RR) No. 11-2018 provides that for minimum wage earners, their statutory minimum wage, holiday pay, overtime pay, night shift differential pay, and hazard pay shall be exempt from income tax and withholding tax. Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the mandatory non-taxable amount of Php90,000, taxable allowances, and other taxable income earned by a minimum wage earner shall, however, be subject to withholding tax using the revised withholding tax table under the TRAIN Law.

In other words, the income tax exemption of minimum wage earners covers only their basic pay (statutory minimum wage), overtime pay, holiday pay, night shift differential pay, hazard pay, and the non-taxable benefits up to a maximum amount of Php90,000. Any additional compensation and benefits are not covered by the exemption and shall therefore be subject to tax.

The foregoing categorical provision in RR No. 11-2018 is a welcome development for minimum wage earners. It can be recalled that there was a revenue regulation issued by the BIR in 2008 (RR No. 10-2008) which states that a minimum wage earner who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the tax-exempt threshold, taxable allowances and other taxable income (other than the statutory minimum wage, holiday pay, overtime pay, hazard pay and night shift differential pay) shall not enjoy the privilege of being a minimum wage earner and, therefore, his/her entire earnings are not exempt from income tax, and consequently, from withholding tax.

The aforementioned provision in RR No. 10-2008 was subsequently declared as void by the Supreme Court in its decision in the 2017 case of Jaime Soriano, et al. vs. Secretary of Finance, et al. The Supreme Court held that the proper interpretation is that minimum wage earners would be subject to income tax only on the taxable income received in excess of the statutory minimum wage, overtime pay, holiday pay, hazard pay and night shift differential pay, but they will not lose their exemption and status as such. The receipt of any other income during the year does not disqualify them as minimum wage earners. They remain minimum wage earners entitled to exemption as such, but the taxable income they receive may be subjected to appropriate taxes.

Although the strict construction rule states that tax exemptions are strictly construed against the taxpayer and liberally in favor of the government, there is a clear legislative intent to exempt the minimum wage received by a minimum wage earner who earns additional income on top of the statutory minimum wage.

With the issuance of RR No. 11-2018 and the promulgation of the 2017 Supreme Court decision, the rule on the tax exemption of minimum wage earners is now well-settled.