INDIVIDUAL

TAXATION

Part II

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 MODULE 3

LEARNING OBJECTIVES:

After studying this module, the learners should be able to:

1. Compute the income tax due for individual taxpayer earning purely
compensation income.

2. Compute the income tax due for individual taxpayer earning purely
income from self-employment and/or practice of profession.

Type of Income
------------------

With the advent of TRAIN1 Law, it is important to know the source of

income of the individual taxpayers. Income may come from:
1. Employment (there is employer-employee relationship)
2. Self-employment
3. Practice of profession
4. Or a combination of the aforementioned sources

Compensation income refers to “remuneration for services performed

by an employee for his employer under an employer-employee
relationship,”2 irrespective of how it is being named.

Examples:
Salaries and wages
Honorarium
Commissions

In computing the income tax due for those purely compensation

income earners, the schedule of tax rates below will be used.

1
Tax Reform for Acceleration and Inclusion (R.A. No. 10963)

2
Revenue Regulation No. 8- 2018

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GRADUATED TAX RATES FOR INDIVIDUAL TAXPAYERS

Range of Taxable Income Basic Additional Amount [a x b]

Amount

Over But not over Rate In excess of

(a) (b)

0 250,000 EXEMPT

250,000 400,000 - 20% 250,000

400,000 800,000 30,000 25% 400,000

800,000 2,000,000 130,000 30% 800,000

2,000,000 8,000,000 490,000 32% 2,000,000

8,000,000 - 2,410,000 35% 8,000,000

Note: The figures are in Philippine peso.

Suggested steps in computing income tax due:

1st step : Determine the taxable income

Let’s assume that for the year 2019 the taxable income (purely
compensation) of Mr. Maharlika is Php450,000

2nd step : Determine the pertinent range of the taxable

income. (Refer to the graduated tax rates for individual taxpayers)

For Php450,000 taxable income, the range is 400,000 – 800,000

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 3rd step : note the basic amount

For Php450,000 the basic amount is Php30,000

4th step : Compute the additional amount

= 25% X (excess of Php400,000)

= 25% X (Php450,000 – 400,000)
= 25% X (Php50,000)
= Php12,500

5th step: Add the additional amount to the basic amount to get
the income tax due

Basic Amount Php30,000

Additional amount 12,500
Income tax due Php42,500

Illustration 1:

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 Assuming that the taxable income of Mr. Maharlika for the year 2019 is
Php10,000,000. The computation of his income tax due will be:

Basic amount Php2,410,000

Additional amount
[Php10,000,000 -Php8,000,000] X 35% 700,000
Income tax due Php3,110,000

Illustration 2:
Assuming that the taxable income of Mr. Maharlika for the year 2019 is
Php248,000.

In this case, Mr. Maharlika will not be paying income tax since the
range of his income is 0 – 250,000.

The range 0 – 250,000 is tax exempt.

Minimum wage earner (MWE)

-----------------------------------

Minimum Wage Earner (MWE) is a worker who is paid with a statutory

minimum wage (SMW) rates. “Such statutory minimum wage rates are
exempted from income tax. Likewise, the exemption covers the holiday pay,
overtime pay, night shift differential pay, and hazard pay earned by an
MWE.”3

3
Revenue Regulation No. 8- 2018

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Taxpayers earning income purely
from self – employment and/or
practice of profession
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If the taxpayer is earning income purely from self-employment and/or
practice of profession, the computation of income tax due can be done using
the graduated tax rates for individual taxpayers.
But if his gross sales/receipts and other non-operating income
does not exceed Php3,000,000 [value-added tax (VAT) threshold], he
shall have the option to avail of an eight percent (8%) tax on gross
sales or receipts and other nonoperating income in excess of two
hundred fifty thousand pesos (P250,000.00), in lieu of the
graduated income tax rates and the percentage tax.

Note well:

The option to avail 8% tax rate is not available to:

1. VAT-registered taxpayer regardless of the amount of gross

sales/receipts; and

2. Taxpayer who is subject to Other Percentage Taxes under Title V of

the Tax Code, except those subjects under Section 116 thereof.

3. Partners in a General Professional Partnership (GPP), this is because

their distributive share from GPP is already net of cost and
expenses.4

Note:
The topic Value Added Tax and Percentage Tax will be covered in TAX 2.

Example 1: [Gross sales do not exceed the VAT-threshold]

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Supra

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 Mr. X furnished to you the following information relating to taxable
year 2019.
Gross sales Php2,500,000
Cost of sales 1,100,000
Operating expenses 650,000

Since the gross sales does not exceed Php3,000,000, Mr. X may use
either the graduated tax rates or the 8% tax rate.

Option 1: using the graduated tax rate

Gross sales Php2,500,000

Less: Cost of sales 1,100,000
Gross income 1,400,000
Less: Operating expenses 650,000
Taxable income Php 750,000

Basic Amount Php 30,000

Additional amount
[Php750,000-400,000] x 25% 87,500
Income tax due Php117,500

Aside from Php117,500 income tax due, Mr. X will be required to pay
business tax, VAT or Percentage tax as the case may be.

Option 2: using the 8% tax rate

Gross sales Php2,500,000

Less: Exempt income 250,000

Taxable income Php2,250,000

Tax rate 8%

Gross sales tax Php 180,000

Example 2: [Gross sales exceed the VAT-threshold]

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 Mr. X furnished to you the following information relating to taxable
year 2019.
Gross sales Php3,500,000
Cost of sales 1,100,000
Operating expenses 650,000

Since the gross sales exceeds Php3,000,000, Mr. X should use the
graduated tax rates.

Gross sales Php3,500,000

Less: cost of sales 1,100,000
Gross income 2,400,000
Less: Operating expenses 650,000
Taxable income Php1,750,000

Basic Amount Php 130,000

Additional amount
[Php1,750,000-800,000] x 30% 285,000
Income tax due Php 415,000

Aside from Php415,000 income tax due, Mr. X is required to pay Value
Added Tax.

Notice that in this example, Mr. X cannot avail the 8% tax rate in view
of his gross sales which exceeds Php3,000,000.

Example 3: [The business is VAT registered. Gross sales do not

exceed VAT-threshold]

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 Mr. X, whose business is VAT registered, furnished to you the following
information relating to taxable year 2019.
Gross sales Php2,500,000
Cost of sales 1,100,000
Operating expenses 650,000

Since the business is VAT–registered, Mr. X must only use the

graduated tax rates.

Gross sales Php2,500,000

Less: cost of sales 1,100,000
Gross income 1,400,000
Less: Operating expenses 650,000
Taxable income Php 750,000

Basic Amount Php 30,000

Additional amount
[Php750,000-400,000] x 25% 87,500
Income tax due Php117,500

Aside from Php117,500 income tax due, Mr. X is required to pay Value
Added Tax (VAT).

Example 4: [Gross sales and Gross receipt do not exceed VAT-

threshold. The taxpayer signified intention to be taxed at
8% income tax rate]

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 Mr. X, who already signified his intention to be taxed at 8%, furnished
to you the following information:
Gross sales Php1,500,000
Gross receipts 1,300,000

His income tax due will be computed as follows:

Gross sales Php1,500,000
Gross receipts 1,300,000
Total Php2,800,000
Less: Allowable deductions 250,000
Taxable income Php2,550,000
Income tax rate 8% .
Income tax due Php 204,000

END OF MODULE 3

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