GROSS INCOME:

Part 2 – Compensation Income

JISRYL H. RAZ
SOURCES OF INCOME
• Before computing income tax, it is necessary to identify first
the items included in the gross income.
• These items are:
• Compensation income
• Business and professional incomes
• Passive income; and
• Capital gains
COMPENSATION INCOME

• All remuneration or payments for services performed by an

employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code.
COMPENSATION INCOME
• The following are examples of compensation income:
1. Salaries and wages
2. Bonuses and Other Benefits – subject to P 90,000 limit
3. Holiday Pay
4. Overtime Pay All these are non-taxable or
5. Night Shift Differential Pay exempt from income tax if the
6. Hazard Pay receiver is a Minimum Wage
Earner!
COMPENSATION INCOME
7. Allowances
a. Representation and Transportation Allowance (RATA)
b. Personal Economic Relief Allowance (PERA)
c. Additional Compensation Allowance (ACA)
d. Living Quarters or Meals Allowances
e. Facilities and Privileges of a relatively small value (De
Minimis)
f. Vacation and Sick Leave Allowance
COMPENSATION INCOME
8. Tips and Gratuities
9. Honoraria and other Emoluments
10. Commissions
11. Retirement pay and similar remunerations, except if:
• The employee is at least 50 years old at the time of retirement;
• The employee has rendered 10 years in the same company;
• The employee availed it for the first time; and
• Such private benefit plan is approved by the BIR.
COMPENSATION INCOME
12. Separation Pay, except if involuntary resignation or separation
13. Proceeds of Life Insurance
14. Fees including director's fees, if the director is, at the same
time, an employee of the employer corporation.
COMPENSATION INCOME
GENERAL RULE:

Every income is generally taxable, unless, specifically

exempted by the law and the requirements to be exempted are
met. The situs or place of compensation income is where the
services are rendered regardless of the residence of payor (Sec.
155, RR 02-40).
COMPENSATION INCOME
GENERAL FORMULA:
Annualized compensation income xxx
Add: Bonuses and other benefits xxx
Total gross compensation Income xxx
Less: Non-taxable Compensation Income
13th Month Pay and Other Benefits subject to limit of P 90,000 (xxx)
Compensation income subject to tax xxx
Less: Mandatory Deductions and Statutory Exemptions (xxx)
Taxable Compensation Income xxx
COMPENSATION INCOME
Danny, a resident of Cebu, is employed as the head accountant of X Company.
During the year 2018, he had the following data pertaining to his income:
Monthly Basic Salary P 29,000
Midyear bonus 20,000
13th Month Pay 29,000
Productivity Bonus received during Christmas 25,000
SSS Monthly Contribution 1,000
PhilHealth Insurance Monthly Contributions 100
Housing Development and Mutual Fund (HDMF) Monthly Contribution 200
Monthly premiums paid on Health and Hospitalization Insurance 3,000
Personal, family and living expenses 200,000
Compute the taxable compensation income of Danny.
COMPENSATION INCOME
Solutions:
In computing the taxable compensation income, remember to multiply the monthly
figures by twelve (12) months since income tax is computed on annual basis.

Monthly Basic Salary (P 29,000 x 12) P 348,000

Midyear bonus 20,000
13th Month Pay 29,000
Productivity Bonus received during Christmas 25,000
Total Compensation Income P 422,000

Includes the taxable and non-

taxable components.
COMPENSATION INCOME
Solutions:
Total Compensation Income P 422,000
Less: Non-Taxable Compensation
Midyear bonus P 20,000
13th Month Pay 29,000
Productivity Bonus 25,000
Total Bonuses and Other Benefits P 74,000 ( 74,000)
Threshold limit P 90,000 ________
Compensation income subject to tax (Taxable Compensation) P 348,000
COMPENSATION INCOME
Solutions:
Compensation income subject to tax (Taxable Compensation) P 348,000
Less: Mandatory Deductions (Exemptions from tax)
SSS Monthly Contribution P 1,000
PhilHealth Monthly Contribution 100
HDMF Monthly Contribution 200
Total Mandatory Contributions P 1,300
Multiplied: Number of Months 12
Total Annual Contributions P 15,600 ( 15,600)
Net Taxable Compensation Income P 332,400
COMPENSATION INCOME
• In computing the total compensation income, the bonuses are
added.
• But in computing the compensation income subject to tax, all
bonuses and other benefits must be subject to limit of P 90,000;
• If the total bonuses and other benefits exceeds P 90,000, the
excess thereof shall be taxable.
• If the total bonuses and other benefits do not exceed P 90,000,
such bonuses and other benefits must not be subject to tax.
COMPENSATION INCOME
Abby is minimum wage earner employed at FCC Company. For taxable year
2018, she had the following data:
• Basic Pay P 200,000
• Holiday and Overtime Pay 30,000
• 13th Month Pay 20,000
• Productivity Incentives 15,000
Annual Mandatory Contributions:
• SSS Contribution 10,000
• PhilHealth Contribution 1,200
• HDMF Contribution 1,000
• Compute the gross compensation income of Abby.
COMPENSATION INCOME
Solutions:
Basic Pay P 200,000
Holiday and Overtime Pay 30,000
13th Month Pay 20,000
Productivity Incentives 15,000
Total Gross Compensation P 265,000
COMPENSATION INCOME
Solutions:
Total Gross Compensation P 265,000
Less: Non-Taxable Compensation
13th Month Pay P 20,000
Productivity Incentives 15,000
Total P 35,000 ( 35,000)
Threshold 90,000 ________
Taxable Compensation Income P 230,000
 Abby is a non-taxable
COMPENSATION INCOME taxpayer because she is a
Minimum Wage Earner!
Solutions:
Taxable Compensation Income P 230,000
Less: Mandatory Contributions
SSS Contribution 10,000
PhilHealth Contribution 1,200
HDMF Contribution 1,000
Total 12,200 ( 12,200)
Net Taxable Compensation Income P 217,800