INDIVIDUAL INCOME TAX

SOME OF THE CHANGES…

 Income Tax Table

 No more Personal and Additional Exemption

 Under the new income tax reform, salaried individuals earning gross compensation of
P250,000 or below per year are exempted from paying income taxes. This is a drastic
change from the past, wherein only the minimum wage earners were exempted.

 Premium Payment on Health/Hospitalization Insurance (PPHI) was removed or repealed as

part of statutory deductions (SSS, GSIS, HDMF, Union Dues).

─ PHHI was a deduction of 2,400 php per Family if the gross family income does not exceed
250,000 php in the OLD tax law.

 For Self-Employed and Professional

 NOT earning more than 3 Million

─ Pay a flat rate of 8% tax base on gross sales/receipt and other non-operating income in
EXCESS of 250,000 php, in lieu of the graduated income tax and the percentage tax (3%)

─ Pay Business Tax (Percentage tax) and Regular Income Tax (Graduated Income Tax)

Note: The withholding tax for SEP also adjusted to 8% regardless of the amount.

 For Mixed Income Earner

─ COMPENSATION income- graduated income tax

─ BUSINESS Income- will be taxed like SEP (8% or Tax table- if not more than 3 Million)

 Di minimis Benefits- excess can be part of 13th month pay and other benefits upto 90,000 is not
subject to tax

a) Monetized unused vacation leave credits of private employees not exceeding 10 days during a
year.
b) Monetized value of vacation and sick leave credits paid to government officials and employees
c) Medical cash allowance to dependents of employees not exceeding 1,500 per semester (before
was 750.00) or 250.00 per month (before 125.00)
d) Rice subsidy of 2, 000.00 (replaced the amount of 1, 500.00) or one sack of 50 kg. rice per
month amount to not more than 2, 000.00
e) Uniform and clothing allowance not exceeding 6, 000 per year (replaced the amount of 5, 000)
f) Actual medical assistance e.g. medical allowance to cover medical and healthcare needs,
annual medial/executive check-up, maternity assistance, and routine consultations, not
exceeding 10, 000 per year.
g) Laundry allowance not exceeding 300 per month
h) Employees achievement awards, e.g. for a length of service or safety achievement, which must
be in the form of a tangible personal property other than cash or gift certificate, with an annual
monetary value not exceeding 10,000 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees
i) Gifts are given during Christmas and major anniversary celebrations not exceeding 5, 000 per
employee per year
j) Daily meal allowance for overtime work and nigh/graveyard shift not exceeding 25% of the
basic minimum wage on per region basis
k) Benefits received by an employee by a collective bargaining annual monetary value received
from both CBA and productivity incentive schemes combined do not exceed 10, 000 per
employee per taxable year.
***
Individual Income Tax payers are subject to final income tax, capital gains tax and regular income tax.

Following ate subject to FINAL INCOME TAX:

1. NRA-NETB- 25% Subject to FIT

2. Special Aliens
 -All alien employees of RHQs, ROHOs, and OBUs and Petroleum Service
Contractors/Subcontractors shall be subjected to Regular Income Tax Rate.

CLASSIFICATION OF INDIVIDUAL TAXPAYERS:

1. Citizen

A. Resident Citizen

B. Non-resident Citizen- staying abroad for at least 183 days

2. Alien

A. Resident alien- staying in PH for more than 1 year

B. NRA- less than 1 year

 NRA-ETB- more than 180 days

 NRA-NETB- not exceeding 180 days

C. Special alien- aliens, including qualified filipinos, employed by:

 RHQs, ROHQs, Offshore banking units, Petroleum service contractors and subcontractors

3. Taxable estate- estate under judicial settlement

4. Taxable trust- irrevocably designated by the grantor

Computation:

For purely compensation income:

Total Compensation Income xxx

Less: Non-taxable income/Benefits/Deductions xxx

Taxable Income xxx

On Over (₽₽₽) xxx

Add: On excess (taxable income - over) x % xxx

Income tax due xxx

For SEP

Option 1: 8% and 250,000php deduction

Gross sales/receipt xxx

Less: 250,000 allowed as deduction xxx

Taxable income xxx

Multiply 8% 8%

Income tax due xxx

Option 2: Graduated Income Tax

 Gross Receipts/Sales xxx

Less: COS xxx

Gross income xxx

Less: OPEX xxx

Taxable Income xxx

On Over (₽₽₽) xxx

Add: On excess (taxable income - over) x % xxx For Mixed income earners
(Compensation & Self-Employment)
Income tax due xxx
If the taxpayer opted to be tax at
8% for his or her income from business

-use graduated income tax for compensation income and 8% for the business income,
but the said 250,000php, allowed deduction, is no longer deducted in getting the tax
due in business income because it was already incorporated in the first tier of
graduated income tax rates applicable in the compensation income.

If the taxpayer did not opt to for the 8%

-both compensation and business income will be taxed using graduated income tax.

NEW TAX TABLE

Effective January 1, 2018 until December 31, 2022:

RANGE OF TAXABLE INCOME TAX DUE = A + (B X C)

Over Not Over Basic Additional Of Excess Rate (c)

Amount (a) Rate (b)

- P250,000 - -

P250,000 P400,000 - 20% P250,000

P400,000 P800,000 P30,000 25% P400,000

P800,000 P2,000,000 P130,000 30% P800,000

P2,000,000 P8,000,000 P490,000 32% P2,000,000

P8,000,000 - P2,410,000 35% P8,000,000

Effective January 1,2023 and onwards:

RANGE OF TAXABLE INCOME TAX DUE = A + (B X C)

RANGE OF TAXABLE INCOME TAX DUE = A + (B X C)

Over Not Over Basic Additional Of Excess Rate (c)

Amount (a) Rate (b)

- P250,000 - -

P250,000 P400,000 - 15% P250,000

P400,000 P800,000 P22,500 20% P400,000

P800,000 P2,000,000 P102,500 25% P800,000

P2,000,000 P8,000,000 P402,500 30% P2,000,000

P8,000,000 - P2,202,500 35% P8,000,000

EXCLUSIONS FROM GROSS INCOME:

o Life insurance
o Amount received by insured as return of premium
o Gifts, bequests and devises
o Compensation for injuries or sickness
o Income exempt under treaty
o Retirement benefits, pensions, gratuities, etc.
o Miscellaneous items
 Income derived by foreign government
 Income derived by the government or its political subdivision
 Prizes and awards in sport competition
 Prizes and awards which met the conditions set in the Tax Code
 13th month pay and other benefits not exceeding P90,000
o GSIS, SSS, Medicare and other contributions
o Gains from the sale of bonds, debentures or other certificate of indebtedness with a
maturity of more than five (5) years
o Gains from redemption of shares in mutual fund

What are the allowable deductions from gross income?

a) *Optional Standard Deduction - an amount not exceeding 40% of the gross sales/receipts for
individuals and gross income for corporations; or
b) Itemized Deductions which include the following:
- Expenses
- Interest
- Taxes
- Losses
- Bad Debts
- Depreciation
- Depletion of Oil and Gas Wells and Mines
- Charitable Contributions and Other Contributions- Research and Development
- Pension Trusts

NOTE: *Not allowed to non-resident alien individual

*A General Professional Partnership (GPP) may avail of the OSD only once, either by
the GPP or the partners comprising the partnership

Who are exempt from Income Tax?

a. Income from abroad of a non-resident citizen who is:
i. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein
ii. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis
iii. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year
iv. A citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the year to reside permanently in the
 Philippines will likewise be treated as a non-resident citizen during the taxable year in
which he arrives in the Philippines, with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.

b. Overseas Filipino Worker, including overseas seaman

An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas Filipino worker is taxable only on income from sources within the Philippines; provided,
that a seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international
trade will be treated as an overseas Filipino worker.

NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine

Embassy/consulate is not treated as a non-resident citizen; hence, his income is taxable.

INCOME TAX RATES ON NRA INDIVIDUAL

1. NRA-ETB: Imposed on individual citizen and a resident alien individual on the taxable income derived
within the PH

2. NRA-NETB: 25%

3. Special Aliens: Graduated Income Tax Table

FRINGE BENEFITS

-A final tax of 35% is imposed on the grossed up monetary value of fringe benefits granted to the
employee (except rank and file employees) by the employer, whether an individual or a corporation. Such
tax is payable by the employer.

OPTIONAL STANDARD DEDUCTION (OSD)

-A general professional partnership and the partners comprising such partnership may avail of the OSD
only once, either by the general professional partnership or the partners. (not exceeding 40% of its gross
income)

TAXABLE ESTATES/TRUSTS

Illustration: Estate

The estate of Mr. Barbel has 800,00 gross income before business expenses of 200,000. The estate
administrator distributed 300,000 to the heirs in accordance with the will of Mr. Barbel.

Gross Income 800,000

Less:

Reg. Allow. Deductions 200,000

Special. Allow. Deductions 300,000 500,000

Taxable Income 300,000

Illustration: Trusts

The estate of Mr. Batman designated in irrevocable trust a property in favor of Robin and appointed
Superman as trustee. The property earned 800,00 income before business expenses of 200,000 and trust
fees of 50,000. In accordance with the trusts indenture, superman distributed 100,000 to Robin.

Gross Income 800,000

Less:

Reg. Allow. Deductions 250,000

 Special. Allow. Deductions 100,000 350,000

Taxable Income 450,000

INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN

• An individual earning purely compensation income whose taxable income does not exceed Two
Hundred Fifty Thousand Pesos (250 000)

• An individual w hose income tax has been correctly withheld by his employer, provided that such
individual has only one employer for the taxable year

• An individual whose sole income has been subject to final withholding tax

• A minimum wage earner

TIME OF FILLING OF INDIVIDUAL INCOME TAX RETURN

• to file quarterly income tax return on or before May 15, August 15, and November 15 for the first,
second and third quarters of the current year

• to file an annual income tax return, not later than the fifteenth (15th) day of the fourth month
following the close of the calendar year or April 15

INSTALLMENT PAYMENT OF INDIVIDUAL INCOME TAX

• When the tax due is in excess of two thousand pesos (2,000) the tax payer may elect to pay the tax in
two equal installments.

• First installment shall be paid at the time the annual income tax return is filed.

• Second installment must be paid on or before October 15 following the close of the calendar year.

• If any of the installment is not paid on or before the date fixed for its payment, the whole amount of
the unpaid tax becomes due and payable plus the penalties to be computed on the original date when
the tax is required to be paid.

REGISTRATION UPDATES

• The existing Non-VAT taxpayer who is contemplating to avail of the 8% income tax rate at the beginning
of the taxable year or before the due date for filing and/or payment of the percentage tax shall file an
Application for Registration Information Update or BIR Form No. 1905 to end date the registered tax type
of percentage tax.

• If the taxpayer is unable to update the required registration, he or she shall continue to file the
percentage tax return reflecting a zero amount of tax with a notation that he or she is availing the 8%
income tax rate option fir the taxable year.

• On the other hand, if the non-VAT taxpayer choose to be taxed under the graduated income tax rates
he or she shall continue to pay the required percentage tax under Sec. 116 of the tax code.

•A taxpayer who presumed that the gross sales/receipts and other non-operating income for the taxable
year will not exceed the 3,000,000 VAT threshold but has actually exceeded the same during the taxable
year, shall immediately update his/her registration to reflect the change in tax profile from Non-VAT to
VAT taxpayer.

• He or she is required to update registration immediately within the month following the month he or
she exceeded the VAT threshold.

• A VAT taxpayer who did not exceed the VAT threshold within the immediately preceding three year
period may opted to be a Non-VAT taxpayer and avail the 8% income tax rate.

• A Non-VAT taxpayer who volunteers to be a VAT taxpayer knowing that sales/receipts and other
non-operating income will exceed the VAT threshold within the taxable year shall update the registration
records.

• In this case the taxpayer shall automatically be subject to the graduated income tax rates if the 8%
income tax rate option is initially selected.
 • Any income tax paid under the said flat 8% income tax shall be deducted from the income tax due
under graduated income tax rates.

•However, if the graduated income tax rates is chosen from the beginning ten taxpayer ceases to be
liable to percentage tax upon registration updates and instead is now liable to VAT.

TRANSITORY PROVISIONS

• All existing VAT r e gister ed taxpayer s w hose g r oss sales/receipts and other non-operating income in
the preceding year did not exceed the VAT threshold of 3,000,000 shall have the option to update their
registration to Non-VAT until March 31,2018.

• After the above mention date, existing VAT registered taxpayers who have not exceeded the threshold
for the immediately preceding three years, may update their registration Non-VAT following rules and
regulations in registration updates, verification and the inventory and cancellation of VAT
invoices/receipts.

SAMPLE ILLUSTRATIONS:

A. Individuals Earning purely compensation income

The following year, Mr. X earned, aside from his basic wage, additional pay of P140,000.00 which consists
of the overtime pay (P80,000.00), night shift differential (P30,000.00), hazard pay (P15.000.00) and
holiday pay (P15,000.00). He has the same benefits and contributions as in Example (a) above.

Total Compensation lncome P135,000.00

Add: Overtime, night shift differential, hazard, and holiday pay 140,000.00

Total Income P275,000

Less: Mandatory contributions P5,000.00

Non-taxable benefits 11,000 16,000.00

NET TAXABLE INCOME P259,000.00

TAX DUE EXEMPT

CONCLUSION: Taxpayer is tax-exempt as an MWE. The statutory minimum wage as well as the holiday
pay, overtime pay, night shift differential pay and hazard pay received by such MWE are specifically
exempted from income tax under the law.

B. Self Employed or Professional

Sample Computation: Illustration 1

Ms. Terry operates a convenience store while she offers bookkeeping services to her clients. In 2018, her
gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of
P300,000.00. She already signified her intention to be taxed at 8% income tax rate in her 1st quarter
return.
 Gross Sales - Convenience Store P800,000.00

Gross Receipts - 300,000.00

Bookkeeping

Total Sales/Receipts P1,100,000.00

Less: Amount allowed as deduction 250,000.00

TAXABLE INCOME P850,000.00

TAX DUE (8% of P850,000.00) P68,000.00

CONCLUSIONS:

 The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.

 Taxpayer’s source of income is purely from self-employment, thus she is entitled to the
amount allowed as deduction of P250,000.00 under Sec. 24(A)(2)(b) of the Tax Code, as amended.

 Income tax imposed herein is based on the total of gross sales and gross receipts.

 Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof
and percentage tax due, by express provision of law.

Sample Computation: Illustration 4

Ms. RSVP is a prominent independent contractor who offers architectural and engineering services. Since
her career flourished, her total gross receipts amounted to P4,250,000.00 for taxable year 2018. Her
recorded cost of service and operating expenses were P2,150,000.00 and P1,000,000.00, respectively.

Gross Receipts P4,250,000.00

Less: Cost of Service 2,150,000.00

Gross Income P2,100,000.00

Less: Operating Expenses 1,000,000.00

TAXABLE INCOME P1,100,000.00

INCOME TAX DUE:

On P800,000.00 P130,000.00

On excess (P1,100,000.00 - P800,000.00) x 30%) 90,000.00

INCOME TAX DUE P220,000.00

CONCLUSION: The gross receipts exceeded the VAT threshold of P3,000,000.00; subject to graduated
income tax rates; liable for business tax – VAT, in addition to income tax.
C. Mixed Income Earners (Compensation&Self Employment)

Sample Computation: Illustration 1

Mr. Madz, a Financial comptroller of JAC Company, earned annual compensation in 2018 of
P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience
store, with gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income
tax rate on his gross sales for his income from business:

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00

Taxable Compensation Income P1,410,000.00

Tax due on Compensation:

On P800,000.00 P130,000.00

On excess (P1,410,000 - P800,000) x 30% 183,000.00

Tax due on Compensation Income P313,000.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

TOTAL INCOME TAX DUE (Compensation and Business) P513,000.00

Option 1 CONCLUSIONS:

 The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the
same is in lieu of the income tax under the graduated income tax rates and the percentage tax
under Section 116 of the Tax Code, as amended.
  The amount of P250,000.00 allowed as a deduction under the law for taxpayers earning solely from
self-employment/practice of profession, is not applicable for mixed-income earner under the 8%
income tax rate option.

 The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income
tax rates applicable to compensation income.

Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and other non-operating income

His tax due for 2018 shall be computed as follows if he did not opt for the eight percent (8%) income tax
based on gross sales/receipts and other non-operating income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00

Taxable Compensation Income P1,410,000.00

Add: Taxable Income from Business -

Gross Sales P2,400,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P1,400,000.00

Less: Operating Expenses 600,000.00

Net Income from Operation P800,000.00

Add: Non-operating Income 100,000.00 900,000.00

Total Taxable Income P2,310,000.00

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

Total Income Tax P589,200.00

Option 2 CONCLUSIONS:

 The taxable income from both compensation and business shall be combined for purposes of
computing the income tax due if the taxpayer chose to be subject under the graduated income tax
rates.

 In addition to the income tax, Mr. Madz is likewise liable to pay percentage tax of P72,000.00, which
is 3% of P2,400,000.00.