A key compliance obligation that companies in the Philippines (PH) must get right every month is payroll processing and payroll taxes.

PH employers must ensure that: a) their employees get paid on time for every payroll cycle; and b) that the company complies with all of its mandatory tax filing and ancillary government filing obligations.

A payroll system is an excellent way to move your company’s payroll to a streamlined and centralized employee management system. A cloud-based payroll system will also enable HR and management teams (and indeed, company employees) to manage, monitor and store all their employee-related data and access it from anywhere.

However—simply subscribing to a payroll system does not solve all of your company’s payroll challenges. There are a number of additional activities—largely dictated by the Philippine payroll compliance framework, that companies must consider to ensure their payroll system actually adds value for the business.

So, in this article, we identify four (4) key additional considerations that companies in the Philippines must take into account when using or subscribing to a payroll system.

A payroll system is just a system

First off, PH founders, owners and managers need to understand from the outset that a payroll system is simply that – a system!

When considering subscribing to a payroll system, or if you have just recently subscribed, it’s critical to understand the key functions and limitations of a payroll system.

Let’s keep it simple.

A payroll system is a technology or software platform, usually cloud-based, that enables an employer, and in many cases, the employees, to input, manage and process HR and employee data. This enables automation and greater efficiency across a company’s payroll processing function.

In theory, assuming the correct information is being entered into the payroll system on a regular basis and the system has been set up correctly to align with local Philippine compliance requirements, the payroll system should be able to manage, process and compute payroll, taxes, and government contributions with 100% accuracy for every payroll cycle.

However, there are numerous additional tasks and requirements that need to be performed which will usually require some form of human interaction.

In short, the payroll system still needs to be managed, monitored, and controlled.

For example, if certain data has not been entered or has been recorded incorrectly, your payroll system will not know and will perform the computations anyway. As such, somebody within the company needs to ensure that data is being entered into the system and that it is accurate.

Further, if there is an issue with your company bank which prevents payroll from being disbursed, your payroll system will not be able to resolve this issue.

Also, if there are changes within the company’s operational model, the set-up of the payroll system will have to be customized or changed. For example, perhaps the company wishes to change its shift schedules, overtime payments or leave policy, this will require a manual update by the payroll system owner.

In summary, by simply subscribing to a payroll system for the purpose of supporting payroll processing, a company is usually just automating the data management and computation elements of payroll.

Someone from within the company still needs to manage the payroll system and ensure it remains fully updated and customized to align with what is happening inside the business.

Garbage in, garbage out

'Garbage in, garbage out' is a common phrase often used by founders, managers and company executives—particularly when dealing with tech systems, cloud solutions and/or large volumes of data.

The concept of “garbage in, garbage out” is particularly relevant to the area of payroll due to the various categories, variations, and regular updates of data for each payroll cycle across numerous employees.

So, what does “garbage in, garbage out” mean?

In short, if your employee data is not being entered into the payroll system on a systematic, accurate and timely basis, the computations and output generated by the payroll system will not be correct.

What are the implications of sub-standard or incorrect data input? Your team will have to look back through the system and manually update the data wherever discrepancies are found. This is exactly the opposite of what a payroll system (or any tech platform or system) is designed to achieve. Systems and solutions, in general, are designed to add value by automating processes and removing or reducing the level of human interaction.

There are several actions a company may undertake to help maintain the integrity and accuracy of the data being entered into a payroll system. This might include:

• First off, the payroll system must be set up correctly from the very start. It should be set-up to align with the company’s operational model (e.g. shift work, daily workers, overtime, etc). This helps ensure that there is a specific category or location for each type of data to be entered into the system. If not, users may inadvertently allocate data to incorrect categories just to ensure their data is captured somewhere on the system.
• There should be a specific company policy on the entry of data into the payroll system – on both the employer and the employee side. By having a policy in place and ensuring it has been communicated successfully to all company representatives, users will have more clarity on how data should be entered. This, in turn, should result in less data issues arising!
• There must be a designated payroll system controller whose job it is to ensure that the right data is being entered at the right time and in accordance with the data entry policy. This controller should also regularly perform checks and tests on the system to ensure it is working as required.
• Notwithstanding that the payroll system will compute payroll, taxes, and government contributions via automation, there should always be a final reviewer and approval before the payroll register is uploaded for payment. A final approval mechanism ensures that the data has an extra level of review—even if it is just spot-checks when there are large numbers of employees.

Remember! A payroll system is only as good as the data being entered into the system. So always make sure the input data is correct.

Payroll processes and controls are still essential

Question! What do we mean exactly when we speak about “payroll processes and controls”?

As mentioned above, a payroll system is just one factor or element that must be considered to process payroll.

Payroll processes and payroll controls are therefore designed to ensure that payroll is performed successfully and completely, from start to finish, for every payroll cycle. The payroll process and controls provide the steps and safeguards for ensuring that this happens every time!

Is the need for robust processes and controls across the payroll function more important in the Philippines than in any other country?

While we can’t speak for all countries, there is no doubt that there are a significant number of considerations when processing payroll under the Philippine tax and compliance framework.

Below are just a few examples of some additional considerations—aside from just computing net salaries, that PH business must consider from the perspective of payroll processes and payroll compliance in the Philippines:

• Payroll Frequency: It is quite standard in the Philippines for employees to be paid on a bi-monthly basis. This means that the entire payroll process must be repeated every two weeks.
• Taxation: Payroll tax filings must be filed and paid to the BIR every month. This will usually involve a company representative or an outsourced tax provider generating the tax filings, approving the filings and computations, then ensuring the taxes are filed and paid at the local tax office—every month.
• Mandatory Government Contributions: Similar to payroll taxes, government contributions must be deducted from employee salaries every month and submitted to three government agencies: SSS, PhilHealth, Pag-IBIG.
• Annualization: Payroll tax filings are not only monthly—payroll tax filing obligations arise annually also via BIR Form 1604-C. However, if this only happens once every year, why is a process so important here? The payroll annualization obligations that arises each year for PH employers are based on payroll processing computations that occurred during the year. Without a specific process in place during the year and at the end of the year, payroll compliance can be particularly challenging. 
• DOLE or BIR Changes: A payroll system should be set up to align with the local payroll tax and compliance framework in the Philippines under DOLE or the BIR. However, payroll and employee guidelines, laws and regulations can, and often do, change. As such, the company should have a specific process for monitoring changes to the compliance framework and updating the payroll system to reflect such changes without delay.

A payroll system will help manage some of the above activities including salary computations, tax computations, payslips, and generation of the payroll register.

However, a company will need to include in their payroll process all the activities that lie outside of the payroll system’s computing ability.

Below are just a few examples and questions that PH companies need to consider and provide for within their payroll processes:

• Who, within the company, is going to manage the payroll system? Or will the company use an external provider to manage the system on behalf of the company?
• Will employees have access to the system for the input of timekeeping and reviewing of payslips? If not, how will time and attendance be tracked and entered into the system?
• How will employee data inputs be monitored for accuracy? Will the line managers approve the data inputs for their specific teams?
• Who is responsible for identifying changes in labor or payroll legislation or regulations? How does that person perform their role of monitoring?
• What about timelines? Who will monitor and ensure that payroll cut-offs are followed?
• Who will perform the final review and approval of the payroll register prior to sending for payroll disbursement?
• Who will prepare and process the tax filings and tax payments once payroll has been disbursed? Will this be the same person who has access to the company bank account and can process the tax payments?

The key to ensuring that payroll runs smoothly, from start to finish—every two weeks, is through the design and implementation of a robust payroll process that covers every element of the payroll cycle—from data input to tax filings to annualization.

Remember, the payroll system is just one element of the entire payroll process.

Payroll tax and government contribution obligations

As you may have gathered by now, the monthly payroll process in the Philippines does not stop once payroll has been processed and the payslips have been issued.

As mentioned briefly in the previous sections, there are various additional requirements, two of which include the filing of: a) payroll taxes; and b) payroll-related government contributions.

a) Payroll and Taxes

In short, every month, PH employers are required to deduct an amount of an employee’s salary prior to it being paid to an employee. This is called Withholding Tax on Compensation. The value of the withheld amount must then be paid by the employer to the BIR each month. BIR Form 1601-C is the relevant BIR form for this filing.

b) Payroll and Government Mandatories

In addition to the filing of payroll taxes in the Philippines, employers are also required to deduct, pay, and remit contributions to various social government statutory contribution schemes. This is a mandatory compliance requirement.

The three primary government agencies to which employers (and employees) must contribute include SSS, PhilHealth and Pag-IBIG. 

The key point in relation to both filing categories is that your payroll system will not automate the filing and payment of these compliance obligations.

Sure, the payroll system will be able to generate the data necessary to make the filings. However, the company will need to ensure that it has a process in place and a designated individual or outsourced payroll services provider who is responsible for ensuring that these taxes and social contributions are filed and paid on-time every month.

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DISCLAIMER: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.