The 14th month bonus, also known as the 13th month pay or Christmas bonus, is an additional payment given to employees at the end of the year on top of their regular salary. It serves as an extra incentive or reward for employees’ hard work throughout the year.
The 14th month bonus is common practice in some Asian countries like the Philippines, Thailand, Vietnam, Indonesia and Malaysia. It was likely adapted from western countries that provide Christmas bonuses around the holiday season in December. However, in Asia it is usually given regardless of any religious holiday and timed to help employees with expenses during the New Year period.
When is the 14th Month Bonus Paid Out?
Most companies pay out the 14th month bonus in November or December, but some pay it out in January/February before the Lunar New Year celebrations. The exact timing depends on the company policy. Some pay it out in one lump sum while others divide it into two payments – one mid year and one at the end of the year.
Who Gets a 14th Month Bonus?
Eligibility for the 14th month bonus depends on company policy. In general, these are the types of employees who receive it:
- Regular full-time employees
- Employees who have worked the full calendar year
- Employees who are still employed and have not resigned at the time of payout
Part-time employees, consultants, newly hired employees who started mid-year and resigned employees typically do not qualify.
How is the 14th Month Bonus Calculated?
The 14th month bonus amount is usually computed based on the employee’s monthly basic salary. Common formulas include:
- 1 month’s salary
- 0.5 month’s salary
- 1 week’s salary per year of service
- A fixed percentage of the monthly salary (for example 20%)
Some companies also pro-rate the bonus for employees who have not completed a full year of service. For example, an employee who joined in June will get 50% of the bonus amount.
Let’s look at some examples of how the 14th month pay is calculated:
Example 1: 1 Month’s Salary
Employee’s monthly basic salary: $2,000
14th month bonus = 1 x monthly salary
= 1 x $2,000
= $2,000
Example 2: 0.5 Month’s Salary
Employee’s monthly basic salary: $4,000
14th month bonus = 0.5 x monthly salary
= 0.5 x $4,000
= $2,000
Example 3: 1 Week’s Salary Per Year of Service
Employee’s weekly salary: $1,000
Years of service: 5 years
14th month bonus = 1 week’s salary x years of service
= 1 x $1,000 x 5 years
= $5,000
What is Included in the Base Salary for Calculation?
The base salary used for computing the 14th month pay typically includes:
- Monthly basic pay
- Fixed allowances that do not vary from month to month
It usually excludes:
- Overtime pay
- Commissions
- Bonuses
- Variable allowances like transportation or phone allowances
However, some companies may have slight variations in what they define as base salary. The policy should be clarified with HR.
Is the 14th Month Bonus Taxable?
In most countries, the 14th month bonus is considered part of taxable income for the year. Employees will need to pay income tax on the bonus amount.
Some countries provide special tax exemptions up to a certain amount of the bonus, beyond which it becomes taxable. For example, in the Philippines the first ₱82,000 is tax exempt.
The company will generally withhold income tax from the bonus payment similar to regular salary. At tax filing time, employees will need to report the bonus amount as part of their total annual income.
Pros of the 14th Month Bonus
Some key advantages of the 14th month bonus for both employees and employers include:
Motivates Employees
The extra payment helps boost employee morale and motivation. It creates a sense of being valued and rewarded by the company.
Recruitment and Retention
A 14th month bonus policy can help attract talented candidates and retain valuable employees who prefer companies with this benefit.
Covers Year-End Expenses
The bonus helps employees cover big expenses like holiday shopping, travel, gifts and celebrations that often come at the end of the year.
Promotes Company Loyalty
Employees feel a stronger bond and loyalty to companies that provide a 14th month bonus on top of their regular pay.
Avoids Salary Creep
Rather than giving big salary raises each year, the bonus allows employers to reward employees separately. This keeps fixed labor costs lower.
Cons of the 14th Month Bonus
Some potential drawbacks to consider include:
Administrative Burden
Calculating and processing the bonus payment creates additional administrative work for payroll and HR teams.
Temporary Boost
Since it is a one-time annual payment, the motivational effects and increase in spending power may be short-term.
Fixed Cost
The 14th month pay becomes an expected fixed cost each year. Some companies may not have flexibility in the budget for this.
Increased Labor Costs
The bonus represents an increase in total labor costs for businesses, especially those with many employees.
Tax Implications
The taxable nature of the bonus means employees don’t get the full net amount. Companies have payroll tax costs as well.
Other Extra Month Bonuses
While the 14th month bonus is the most common, some companies offer variations:
- 13th month bonus – Paid out before Christmas rather than the New Year.
- Half month bonuses – A half month bonus after 6 months and another at the 12 month year end.
- Quarterly bonuses – Equivalent to one week’s pay per quarter rather than consolidating it as a yearly bonus.
- Performance bonuses – An extra month of pay tied specifically to employee or company performance metrics.
Some employers choose to provide these more frequent smaller bonuses rather than a single large 14th month payment.
Is the 14th Month Pay Mandatory?
In most countries, the 14th month bonus is not required by labor laws and regulations. It is up to each company to decide whether to provide it based on their compensation budget and policies.
The Philippines is one exception where the 14th month bonus is mandatory for all employees under the Presidential Decree No. 851. Employers who fail to pay it can be fined or imprisoned.
However, even when not legally mandated, the 14th month bonus has become an expected norm in some Asian business cultures. Not having it can hurt employee satisfaction and retention if peer companies provide the benefit.
Should You Offer a 14th Month Bonus?
Deciding whether to provide a 14th month bonus depends on factors like:
- Company culture and values
- Employee satisfaction and retention objectives
- Compensation budget constraints
- Industry and local market norms
- Tax implications
- Administrative workload to process payments
Some tips if considering implementing a 14th month bonus policy:
- Announce it well in advance so employees can plan for it.
- Have clear eligibility criteria to manage expectations.
- Plan for the budget and payroll processing requirements.
- Make sure employees understand the tax treatment.
- Get senior leadership support to continue the tradition annually.
With careful planning, a 14th month bonus can be an effective and rewarding compensation tool.
Frequently Asked Questions
Here are some common questions about 14th month bonuses:
Do all companies provide a 14th month bonus?
No, it depends on each company’s compensation policies. Many provide it routinely but some do not. Multi-national companies headquartered outside Asia may not have this benefit.
Is the 14th month pay mandatory?
In most countries it is optional, except for the Philippines which legally requires it.
Who qualifies for the 14th month bonus?
Regular full-time employees continuously employed for the full year typically qualify. Part-timers, new hires and resigned staff often do not.
What is included in the bonus calculation?
It is usually based on monthly basic salary. Allowances may be included but overtime and bonuses are typically excluded.
When is the bonus paid out?
Most commonly in November/December but timing can vary. Some companies pay 50% mid-year and 50% in December.
Is the 14th month bonus taxable income?
Yes, employees have to pay income tax on it in most countries. Some countries offer exemptions up to a certain amount.
What if I resign before the bonus is paid?
Most companies require you to be an active employee at the time of payout to receive the bonus. Those who resign earlier forfeit it.
Conclusion
The 14th month bonus remains a valued tradition in many Asian countries to reward employees with extra financial motivation and help them cover year-end expenses. Both local and multinational companies can benefit from offering this perk. With proper planning for costs and administration, it can increase employee satisfaction along with promoting recruitment and retention.