Global companies hire contractors from the Philippines to tap into the country’s skilled workforce. But when it’s time to pay them, what steps do you need to take to comply with all of the Philippines' complex labor and tax laws?
Before you receive your first invoice, read on to learn what you need to know to correctly classify contractors, onboard them, and pay them according to the Philippines' labor laws. We broke it down in steps.
Step #1: Classify your workers
Classifying Filipino workers correctly is crucial. Misclassifying employees as contractors can result in fines, back taxes, and other harsh penalties from Philippine authorities. Such penalties can include:
- Back pay and benefits reimbursement if a worker was terminated.
- Court-ordered damages of up to PHP 500,000, plus associated attorney fees.
- Separate monetary fines and possible prison sentences to companies who don’t make necessary contributions to entitlement programs such as the Social Security System (SSS), the Home Development Mutual Fund (also known as the Pag-IBIG fund), and the Philippine Health Insurance Corporation (PhilHealth).
- Additional interest fees and fines until the unpaid contributions are settled.
To help employers determine whether a hire meets the criteria for an employee or independent contractor, Philippine courts have created a series of "tests." They look at all aspects of a working arrangement and employee relationship to determine classification. A single misclassification test usually isn't enough to decide one way or the other.
High level of worker control.
Contractors are generally given more autonomy to determine how to complete the work and when to do it.
More direction from the employer. Employees are generally subject to more control and direction from their employer, who will provide guidance on how to perform the work and may set specific hours of work.
Equipment and tools owned by the worker.
Equipment and tools typically provided by the company.
Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment.
Highly integrated. Employees are typically more integrated into the employer's organization, for example, they may work at the employer's premises.
No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees, and they are responsible for paying their own taxes.
Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as minimum wage, overtime pay, and vacation pay. They may also be entitled to benefits like health insurance, retirement plans, and paid sick leave.
Time-bound engagement. Contractors are typically engaged for a specific project or period of time.
Indefinite engagement. Employees are generally hired for an indefinite period of time.
Limited termination protections. Contractors can be terminated due to breaches of their underlying contract.
Disciplinary processes. Employees can only be dismissed for authorized causes and must go through necessary termination procedures.
Non-exclusive services. Contractors cannot be contractually bound to a single company; they can provide their services to more than one organization.
Exclusive services. Employees can be contractually bound to provide services to just one company.
Also, keep in mind that Filipino workers have to pay a PHP 100,000 registration fee to become legally certified as independent contractors. They need to renew this certification every two years.
Step #2: Determine the best way to pay your contractors
The first thing to do before you can pay contractors in the Philippines is to determine how you'll pay them. With the rise of global workforces and remote work, employers now have more choices than ever for sending paychecks to Filipino contractors. Here are some options:
- Bank wires. You can open a bank account in the Philippines and use it for direct deposits into Filipino contractors' accounts, or use your bank to send a global wire transfer.
- International money orders. This long-standing payment method can be slow—especially because the employer needs to physically purchase the money order, and the contractor needs to physically deposit it upon receipt. Money orders can also come with fees and bad exchange rates.
- Digital wallets or payment platforms. Note that not all digital payment platforms are available in the Philippines (for example, Venmo only works within the US) though some employers use platforms like Wise or PayPal to transfer money across borders. Remember that exchange rates can change from day to day, making it difficult to predict your outgoings.
- Global payroll services. Typically, contractors aren't included in payroll, since they aren't subject to the same withholdings as employees—instead, they invoice for their services, which goes through accounts payable for many companies.
Step #3: Use global payroll software to process payments
As you saw in Step #2, there are multiple ways to pay contractors in the Philippines. But the fastest and simplest way is paying contractors through global payroll software.
With Rippling, you can pay contractors across the world. Here’s a preview of how Rippling’s global payroll system works:
Step #4: Ensure your contractor has the right tax information
Employers aren't required to withhold and pay income taxes for contractors in the Philippines. However, some employers make voluntary agreements with their contractors to make tax payments on their behalf. If so, you need to send the contractor a Bureau of Internal Revenue (BIR) form 2307 to specify what you’re withholding.
Self-employed workers need to pay their own taxes if they make more than PHP 250,000 per year, and are also responsible for paying their own premiums for social security agencies. Filipino freelancers making more than PHP 3,000,000 have to pay an additional 12% tax.
Independent contractors in the Philippines need to register with the BIR to get a Tax Identification Number. Then they can file the necessary tax forms, including:
- Form 1701Q for quarterly income taxes
- Form 1701 or 1701A (depending on whether contracting is a worker’s sole source of income) and Form 0605 for annual income tax payments
- Form 2307 if an employer decides to voluntarily withhold tax payments on your behalf
For US employers, it’s also worth noting that if a Filipino contractor travels to the country for work, their trip-based earnings are taxed by the US. So make sure you send them IRS forms W-8BEN or W-8BEN-E.
FAQs about paying contractors in the Philippines
Do you need to withhold taxes when paying contractors in the Philippines?
No, foreign companies don't have to withhold payroll taxes when paying contractors in the Philippines. Contractors are required to pay all of their own taxes. Though companies can voluntarily withhold taxes on a contractor’s behalf, in which case they need to distribute a BIR Form 2307.
Does Filipino minimum wage apply to independent contractors in the Philippines?
No, minimum wage laws don't apply to independent contractors in the Philippines.
Do Filipino contractors get benefits?
No, independent contractors in the Philippines are not entitled to benefits in the same way as employees. Offering employee benefits to independent contractors can even increase the risk that the courts will consider the contractors to have been misclassified.
Can you pay contractors in the Philippines in your home currency?
You should generally aim to pay all international contractors in their local currency. Workers in the Philippines should be paid in Philippine Pesos (PHP).
Can you manually pay contractors in the Philippines?
Yes, and it's common for small business owners to manually process contractor payments in an attempt to cut costs. But this can be time-consuming, especially as your business grows and if you work with multiple contractors in the Philippines or across borders.
It's also important to note that manually processing payments comes with some risks:
- Compliance. Running payroll manually means assuming the risk of human error and omission. Protect yourself and your business with Rippling, which automatically enforces compliance with any applicable local laws—no matter where your contractors live.
- Security. Manual payroll processing also poses security risks, especially if you use spreadsheets or paper records. Sensitive employee information can be lost, stolen, or misused.
How do you turn a contractor into an employee in the Philippines?
While hiring independent contractors over full-time employees can come with financial benefits, sometimes you do need a full-time employee. The challenge is making sure all the legal requirements are in order: Philippine labor laws require payroll deductions, benefits, and more for employees that you don't have to worry about for contractors.
Effortlessly manage contractors, no matter where they are
You can pay international contractors directly through Rippling, meaning you need just one system to pay all types of employees—wherever they are.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.