The Foreign Employers’ Guide to Payroll Taxes in the Philippines

Many Australian employers prefer hiring Filipino professionals for several reasons. 

The Philippines is home to more than 115 million people, most of whom are proficient English speakers. Moreover, its predominantly young population offers a large pool of skilled and work-ready talent, providing SMEs the world over with a competitive and reliable labour force.

However, hiring overseas involves substantial paperwork and legal processes. Australia and the Philippines, for instance, each have their own laws governing labour rights and taxation requirements.

In this guide, we provide a comprehensive overview of the payroll taxes you must comply with when hiring employees directly from the Philippines — and how you can significantly reduce the stress and administrative burden involved.

Payroll Taxes You Must Know When Hiring Filipino Workers 

The tax requirements and statutory contributions for individuals and companies in the Philippines differ significantly from those in Australia. 

Let’s take a closer look at some of them:

Philippines’ Income Tax Withholding Requirements (BIR 2307) 

The Philippine Bureau of Internal Revenue (BIR), imposes the following tax obligations:

• Employer as Withholding Agent – The employer is legally required to act as the withholding agent, deducting the correct amount of income tax from the employee’s salary before payment and remitting it to the Philippine government. This obligation underscores the need to register as a business entity in the country.
  
• Progressive Tax Rates – Individual income tax in the Philippines is calculated based on a graduated, progressive tax schedule. Those with an annual income of Php 250,000 or less are exempt from paying taxes, while higher earners are subject to progressively increasing rates, up to 35%.
• Taxable Income Basis – Withholding Tax on Compensation (WTC) is applied to the employee’s taxable income, which is calculated as the gross salary minus mandatory contributions required by the Philippine government.

Mandatory Contributions: SSS, PhilHealth, Pag-IBIG 

In addition to withholding taxes, employers are required to deduct the following mandatory contributions from their Filipino employees’ gross income.

• Social Security System (SSS) – The law requires employers to deduct approximately 4.5%–9.5% of the employee’s monthly salary as contributions for retirement, disability, sickness, maternity, and death benefits.
• Philippine Health Insurance (PhilHealth) – Employers are required to contribute a portion of the employee’s salary—part of a 5% total contribution, shared between employer and employee—to the Philippine government’s mandatory health insurance program, which covers hospitalization and medical services.
• Home Development Mutual Fund (Pag-IBIG Fund) – An additional 2% of the employee’s basic monthly salary must be contributed to Pag-IBIG, the Philippine government’s affordable housing program, which also provides short-term loans and tax-free savings.

13th Month Pay and Other Statutory Benefits 

The Philippines is one of the few countries that legally requires employers to pay a bonus equivalent to one month’s salary, to be given no later than December 24 each year. 

This bonus is tax-exempt up to Php 90,000; any amount exceeding this threshold is subject to income tax.

In addition to the 13th-month pay, the Philippine government also requires employers to provide the following benefits, subject to certain conditions:

• Service Incentive Leaves (SIL) – Five days of paid leave annually for employees who have rendered at least one year of service; 
• Holiday Pay – Employees are entitled to pay for all regular holidays even if they do not work; 
• Overtime Pay – Work performed beyond 8 hours must be compensated at an additional rate of at least 25% of the regular hourly rate; 
• Night Shift Differential – An additional compensation of at least 10% of the regular rate must be paid for work performed between 10PM and 6AM. 
• Maternity Leave – Female workers are given 105 days of paid leave during or after pregnancy, plus an optional 30 days without pay. There is an additional 15 days if the worker is a solo parent.
• Paternity Leave – Married male employees are also entitled to 7 days of paid leave for the first four deliveries of their legitimate wife. 

Tax Responsibilities for Independent Contractors

Independent contractors, also known as freelancers, handle their own income tax filings and work directly with businesses through service contracts. 

Under this setup, the contractor works independently and is not considered an employee of the company. They generally control the means and methods of their work, while the client only specifies the output they require.

Should Foreign Employers Withhold Tax from Contractors? 

Foreign companies that work with independent contractors are not legally required to withhold taxes on their behalf. 

Since there is no employer–employee relationship and the company has no legal presence in the Philippines, both parties are treated as separate and independent from each other.

However, this does not protect the company from employee misclassification issues, especially since the line between an independent contractor and a regular employee can easily be blurred in many remote work set-ups.

What Happens if Contractors Don’t File Properly? 

Filipino independent contractors are required to file and pay their taxes both quarterly and annually. If a contractor fails to file on time, they may incur a penalty equivalent to 25% of the tax due for late filing or payment.

While the direct penalties fall on the contractor, the foreign employer may still face indirect risks. 

For example, authorities may scrutinise the contractor’s records and discover that they are receiving income from a foreign entity that is not registered in the Philippines – thus leading to further investigation.

PayPal, Wise, and Bank Transfer: Are These Compliant?

Foreign companies typically use international payment platforms such as PayPal, Wise, or direct bank transfers to pay their independent contractors.

Thus, the obligation to pay income taxes arising from legitimate professional and business transactions remains solely with the contractor. 

Still,  AU businesses should take precautions when hiring and/or compensating their remote Filipino workers, which brings us to….

The Problem with Paying Contractors “Off the Books” 

It may be tempting to pay independent contractors without documentation, contracts, or proper tax reporting to avoid withholding obligations. 

However, this “off the books” approach can be far more detrimental and may significantly increase legal and financial risks.

Risks of Misclassification and Non-Compliance

The cost of directly hiring Filipino workers goes beyond the upfront payment of salaries and benefits. For some Australian employers, it can also mean incurring legal costs for failing to properly classify their independent contractors vis-à-vis their regular employees.

A classic example is the infamous case of Joanna Pascua, a Filipino remote worker who was classified by the Doessel Group (her employer) as an independent contractor. 

During a legal dispute that closely examined the nature of their working relationship, the Fair Work Commission ruled in Pascua’s favor. She was declared a regular employee based on her work responsibilities, her relationship with the company, and several other factors.

As a result, the foreign company was heavily fined and faced tax obligations arising from the misclassification. Worse, it suffered reputational backlash — which is arguably even more costly.

Audit Risks and Employer Liability with Regulatory Bodies 

Following the Pascua controversy, the FWC has reminded AU employers about the importance of proper classification of their distributed teams. 

If the FWC deems a remote contractor to be an employee under Australian law, the AU company will be immediately exposed to: 

• Superannuation Liability – The employer would be liable for compulsory Superannuation Guarantee (SG) contributions for the entire period of employment;
• Super Guarantee Charge (SGC)  – If these payments were not made quarterly, the employer is subject to the punitive SGC, which includes:
• • Unpaid superannuation amount; 
  • Nominal interest component; 
  • Administration fee per employer per quarter. 

Business Reputation and Worker Trust Issues 

Failing to comply with labor and tax laws can result in serious consequences for any Australian company. 

For example, in the Pascua case, many disgruntled workers were highly vocal, often sharing negative experiences on social media, which can significantly impact their employer’s reputation.

Left unchecked, this can damage your brand’s reputation, especially in the age of #cancelculture. 

Ultimately, any shady allegations pertaining to how you treat your workers makes it much harder and more costly to attract high-quality talent in the future.

Can Foreign Companies Hire Filipino Workers Without a Local Entity? 

As a general rule, foreign companies must set up local branches or subsidiaries in the Philippines before they can hire Filipino employees. 

Various laws and regulations, such as the Foreign Investments Act, require foreign entities to obtain a License to Transact Business in the Philippines from the Securities and Exchange Commission (SEC) before they can legally operate a branch or representative office.

However, this can be costly, if not time-consuming, especially if you’re only planning to hire one or two Filipino employees. So, what’s the appropriate legal remedy?

Legal Options for Hiring Without Incorporation 

Many Australian companies prefer hiring Filipino workers for their skills and professionalism — even without establishing a local branch in the Philippines — through the following arrangements:

• Independent Contractor Agreement – They directly hire Filipinos through a service contract. In this setup, the worker is paid for a specific deliverable or service, and is responsible for filing and paying their own taxes.
• Employer of Record – Other Australian employers prefer hiring through an Employer of Record (EOR), wherein the latter acts as the legal employer of the Filipino remote workers. In this arrangement, the EOR handles all official responsibilities, including payroll processing, taxes, and other mandatory government contributions.

EOR and COR:  Tax-Compliant and Commitment-Friendly Alternatives

Partnering with an EOR allows foreign companies to hire skilled remote Filipino workers without the risk of legal complications. 

Aside from an EOR, companies may also choose a Contractor-on-Record setup. 

Let’s examine the difference between the two:

What Is a Contractor-on-Record?

A Contractor-on-Record (COR) is another solution for foreign companies looking to hire global talent. While an EOR operates under a statutory employment model, a COR facilitates a service contract. They:

• Ensure the legal compliance of a business-to-business relationship; and
• Manage invoicing and proper tax documentation.

However, unlike an EOR setup, there is no employer–employee relationship between the COR and the remote workers. As a result, the foreign company may still be held liable for employee misclassification.

What Does an EOR Handle for Foreign Employers?

The EOR takes care of the following legal and administrative matters: 

• Legal and Contractual Compliance 

• • Drafting employment contracts; 
  • Ensuring accurate employee status; 
  • Registering the employee with all necessary PH agencies; and 
  • Handling all termination procedures with the mandatory due process. 

• Payroll and Tax Administration

• • Handling payroll; 
  • Withholding and remitting the correct taxes; 
  • Remitting all mandatory contributions; 
  • Issuing the necessary year-end tax forms; and 
  • Ensuring the 13th month pay is correctly calculated and paid. 

• Benefits and HR Administration

• • Managing mandatory employee benefits; 
  • Administering optional benefits; 
  • Constantly monitoring changes in PH labour and tax laws. 

When to Use EOR vs. Contractor-on-Record

Both EORs and CORs have their place, but the right choice depends on your company’s needs. Here’s a quick guide to help you decide.

Contractor Onboarding (1-5 Hires) 

If you’re a small business or a startup still testing the market, it’s best to start with the COR model for greater flexibility and lower upfront costs.

For example, if you’re an Australian startup, you may need two specialised professionals: a freelance graphic designer for a three-month campaign and a part-time marketing consultant. 

With only two remote workers, it’s more practical to use a COR, which can handle invoicing, payment processing, and verifying that each contractor has the proper documents and tax identification.

Full-Time Remote Team Expansion (5+ Hires)

As your workforce grows, roles become more defined throughout the team. Consequently, risk mitigation and stability become increasingly important.

Consider an Australian tech company with 10 full-time software developers and customer success managers based in the Philippines. Given the nature of their work and the company’s growing demands, these roles now require fixed schedules, company-provided equipment, and ongoing supervision.

This is where the EOR model becomes valuable. The EOR assumes the complex employer liabilities for 10 or more staff, including payroll and the remittance of mandatory contributions.

More importantly, this model ensures that your company remains free from legal liability related to compliance, as the EOR is the legal employer of the remote workers on paper.

Hybrid Workforce Models for Growing Businesses 

For hybrid teams, this table shows which option works best.

Workforce Segment	Role Type	Model	Rationale
Core Operations	Full-time managers  Developers Sales staff	EOR	These roles require integration, control, and retention and the EOR will guarantee legal compliance on your behalf.
Special Projects	One-off consultants  Specialised auditors  Translators	COR	The roles are temporary, results-focused, and fully independent, so a COR will generally be sufficient.
Initial Market Entry	First 1-2 hires to gauge market	COR	The COR can help you guarantee compliance to establish legal clarity and attract top talent quickly.

How Remote Staff Manages Payroll Taxes End-to-End 

As an EOR and COR service provider, Remote Staff offers Australian businesses a fast, legally compliant, and hassle-free way to pay their Filipino employees.

Since they are the legal employer, they assume all payroll risk and liability and manage the entire deduction process. They also provide a single, consolidated invoice covering the employee’s salary, benefits, taxes, and service fee.

This streamlines compliance into a single monthly payment so SMBs can focus on managing performance, not paperwork.

Remote Staff’s 18-Year Expertise in Philippine Compliance 

Remote Staff has spent the last 18 years helping Australian companies connect with skilled Filipino professionals remotely.

Designed for AU & US SMEs

Remote Staff understands that most small and medium enterprises (SMEs) don’t have dedicated legal teams to set up local entities for hiring overseas professionals. 

Thus, they handle compliance requirements to protect SMEs from misclassification and other labor and tax-related legal issues.

Legal Infrastructure and Local Payroll Team 

Compliance with Philippine labor and tax laws, in addition to Australian regulations, can be time-consuming and costly if Australian companies have to manage both themselves.

Fortunately, Remote Staff has a dedicated team of Filipino accountants, HR managers, and legal professionals who are well-versed in Philippine labor laws, tax rates, and mandatory contributions.

They handle all statutory requirements, including withholding taxes, statutory benefits, and other legally mandated entitlements for your Filipino remote workers under Philippine law – so you can focus on making the most out of your offshore team without worries.

Transparent Pricing and Fast Setup 

Remote Staff’s EOR services are transparent, with a simple monthly fee that can be fixed or based on a percentage, according to your preference.

This monthly fee covers the employee’s salary, statutory contributions (SSS, PhilHealth, Pag-IBIG), and the EOR service fee. Their upfront pricing also helps you plan and budget according to your requirements.

Frequently Asked Questions (FAQ) 

Here are some frequently asked questions about tax responsibilities when directly hiring remote workers vis-a-vis using an EOR.

#1. Do I Need to Pay Payroll Tax in the Philippines If I Hire a Remote Worker?

No, you don’t have to pay PH payroll taxes when you work with an independent contractor. Under Philippine law, independent contractors are responsible for filing their own taxes quarterly and annually.

#2. Am I Liable for SSS or PhilHealth If My Worker Is A Contractor?

No. Just like filing income tax returns, Filipino independent contractors are required to voluntarily pay their SSS, PhilHealth, Pag-IBIG contributions. 

#3. Can I Deduct Tax From A Contractor’s Pay?

As a foreign company without a local entity (non-resident foreign corporation), you are not legally required to withhold taxes from your Filipino contractor’s pay.

However, if that independent contractor meets the AU labour law definition of a “regular” employee, you will be required to withhold Pay As You Go (PAYG) income tax. 

#4. What Are the Penalties for Non-Compliance?

If the AU courts or the FWC find that your “independent contractor” qualifies as a regular employee, your company may face significant penalties from both the Australian Taxation Office (ATO) and the Fair Work Commission.

Under the ATO rules, aside from PAYG, you will also be liable for the Superannuation Guarantee (SG) charge of 12% of the employee’s earnings for each missed quarter. 

The SGC includes:

• Unpaid SG amount; 
• Nominal interest (10%); and
• Administration fee. 

For FWC-related penalties, the Australian company will be required to pay the difference between the worker’s actual pay and the applicable minimum wage or award rate. 

In addition, the deliberate misclassification of an employee as an independent contractor may result in fines of up to AUD $99,000, and up to AUD $495,000 for major corporations.

#5. How Do I Switch From Freelance for a Compliant Model? 

A lot of AU employers are shifting from direct hiring to partnering with an Employer of Record that becomes the legal employer of their remote workers.

This process is generally faster because there’s no need for vetting or interviews since the employees are already in place. Remote Staff will:

• Assess your need; 
• Provide a quote (fixed monthly fee or a percentage-based rate); and
• Handle all administrative and regulatory responsibilities. 

Ready to Hire in the Philippines Without the Tax Headaches?

The way we work is changing fast. 

Talent is no longer confined by location, giving you the opportunity to work with skilled professionals worldwide at the most competitive rates.

By partnering with Employers of Record like Remote Staff, you can offer opportunities to your remote workers while ensuring compliance with both AU and PH laws. Most importantly, you can do so legally and ethically in both countries.

So, what are you waiting for?

Check out our EOR calculator or book a free consultation now for more information and assistance.