What Are 13th-Month Salary Payments and How Do They Work?

Clark Hoy | Sales Manager EMEA, CloudPay

If you haven’t heard of 13th-month salary payments or bonuses before, you might think that some countries and businesses are working off of very different calendars. But in some parts of the world, they’re a cultural norm and sometimes even a legal requirement.

A 13th-month salary payment is effectively a bonus worth one month’s salary, paid to employees at a specific time of the year, most commonly around holiday seasons. It started as a Christmas bonus in the Philippines in the 1970s but has now become a core part of payroll in many countries worldwide. In this blog, we’ll take a closer look at how it works, which countries have adopted it, and what it means for you as a business.

Who is entitled to a 13th-month salary payment?

These extra payments are normally for all salaried, contracted employees at all levels of an organization, with the exception of senior management in a few countries. Freelancers and contractors are not normally entitled to the payment.

From an international perspective, all employees in countries where 13th-month salary payments are required should get one, even if the overall business is headquartered in a different country where no such legislation applies.

Which countries have 13th-month salary payments?

It’s important to distinguish between countries where paying a 13th-month salary payment is a legal requirement, and those where it is theoretically optional but is such a strong cultural norm that employees will generally expect the payment. In the latter case, structures around these payments are sometimes agreed upon through collective bargaining.

The payments are most popular in Latin America, where almost all countries specify it as a legal requirement, including major markets like Mexico, Brazil and Argentina. One notable exception is Chile, although it is still customary there and is often paid in two halves in September and December.

Three countries in Asia mandate a 13th-month payment, but all at different times: India at the end of the financial year, Indonesia in time for Ramadan, and the Philippines in the run-up to Christmas. It is, however, a non-binding custom in many Asian countries, especially as a celebration of the Lunar New Year in China, Taiwan and Vietnam.

Some countries in Europe and Africa mandate 13th-month payments, including Angola, Belgium, Greece, Spain, and Portugal, while it is customary in several others. Although some link the bonus to Christmas, other European countries pay them in the early summer so that employees can use them for their holidays.

How is 13th-month pay calculated and taxed?

There are two ways to accommodate these payments, and it depends on how overall pay is structured throughout the calendar year, and how it’s stipulated in employment contracts. Sometimes the bonus is integrated into an employee’s gross pay for the year, meaning pay can be easily broken down into 13 equal installments. If this isn’t the case, payroll teams simply need to divide an employee’s salary by 12 to determine the value of the bonus due.

How these payments are taxed varies widely, particularly because some countries treat them as normal earnings and some treat them as bonuses. This is an area where local payroll expertise is vital in working out requirements on a country-by-country basis.

What is 14th-month pay?

Some countries even go as far as providing two bonuses a year, making both 13th-month and 14th-month salary payments. Major economies that do so include Spain, Italy, Brazil, Japan and the United Arab Emirates. In most cases, one is paid around the end of the year, and the other in the summer in time for holidays.

What are the benefits of offering a 13th-month salary payment?

At face value, it may seem that these bonus payments are an extra financial burden on running an international business. But even from an employer’s perspective, the idea has plenty of upsides:

• Improved staff loyalty and talent acquisition: employees receiving bonuses will feel more valued by their employer, and offering them allows a business to keep up with competitors in the job market

• Strengthen reputation: a business that makes the effort to reward employees with bonuses can improve its perception as a positive, caring employer

• Support employees’ financial management: bonuses at Christmas can help staff manage the expense of Christmas, and avoid financial strain in January

• Demonstrate cultural understanding: even if 13th-month payments aren’t compulsory, making the effort to provide them can help an international business better integrate with a workforce and culture in a particular country

In summary

There are more than 50 countries in the world today where 13th-month payments are either required or offered, and they can be hugely beneficial for employees and businesses alike. But the rules around them vary so much from one country to another that it’s vital to understand how to administer the payments properly before you expand into a particular territory. This is where the expertise of a global payroll provider can be invaluable.

To find out more about 13th-month payments and other country-specific payroll requirements, take a look at our payroll guide library, full of up-to-date information on more than 80 countries around the world.

Clark Hoy | Sales Manager EMEA, CloudPay