This article has been reviewed and edited by Miguel Dar, a CPA and an experienced tax consultant who specializes in tax audits. He provides tax advice to various start-up enterprises and clarified tax concerns of individual taxpayers. This includes assisting clients in registering their businesses, tax and bookkeeping training for start-up businesses, settling open cases, tax planning for future tax compliance and answering tax-related inquiries.
If you hate math, income tax computation can be your worst nightmare.
Unfortunately, you can’t escape from it as determining your taxable income is an essential part of filing your income tax return.
It’s your duty as a Filipino citizen to pay taxes so it goes without saying that knowing how to compute income tax is one of your responsibilities.
But it doesn’t have to be a nightmare. In this guide, we’ll discuss different ways to compute your income tax–from the manual method using the tax table to the easiest option of using online tax calculators.
Disclaimer: This article is for general information only and is not substitute for professional advice.
Table of Contents
- Basics of Income Tax Computation.
- How To Compute Income Tax in the Philippines: 4 Ways.
- Frequently Asked Questions.
Basics of Income Tax Computation.
Before we proceed to the different methods of computing your income tax, it’s important to establish the difference between gross income and taxable income.
Gross income is the total income you’ve earned before deductions are made. It doesn’t just refer to the salary you get as an employee (compensation income) but also to profits from your business or professional practice as well as any passive income that you didn’t actively work for like rents, royalties, prizes/winnings, etc.
Taxable income, on the other hand, is what’s left on your gross income if you less the allowable deductions. The taxable income, not the gross income, is used to determine the amount of annual income tax you must pay.
How To Compute Income Tax in the Philippines: 4 Ways.
This manual computation of your income tax uses the following formula to determine your income tax due:
Taxable income (Gross income – Allowable deductions) x Tax rate – Tax withheld
The tax rate depends on which income range your current annual taxable income falls under. The BIR has issued two tax tables–one will be used until December 31, 2022, while the other one will take effect starting January 1, 2023.
As you can see in the tax tables here, the tax rates will gradually decrease with each passing year, thanks to the Tax Reform for Acceleration and Inclusion (TRAIN) Act.
2. How To Compute Your Income Tax Based on an 8% Preferential Tax Rate.
Using the 8% tax rate is a simpler way to compute, file, and pay income tax. It’s based on gross sales or receipts and other non-operating income (e.g., profits from investments and sales of properties and assets) in excess of Php 250,000.
No need to deduct various expenses when computing income tax with this flat-rate option. Also, the 8% tax rate already covers both graduated income tax and percentage tax, so taxpayers don’t have to file and pay them separately.
However, not all taxpayers can use this optional tax rate. It applies only to the business and professional income of self-employed and mixed-income taxpayers whose gross sales or receipts and other non-operating income for the taxable year don’t exceed Php 3 million.
The 8% tax rate doesn’t apply to the income of a small business if it’s registered as a corporation.
Here’s the formula for computing your income tax based on the 8% tax rate, depending on your taxpayer type:
For self-employed individuals earning income solely from business and/or profession:
Income tax due = 8% x [Gross sales or receipts + Non-operating income – Php 250,000]
For mixed income-earners:
Income tax due = [8% x Gross sales or receipts + Non-operating income] + Tax due on compensation income (based on graduated tax rates)
The Php 250,000 deduction doesn’t apply to the business/professional income of mixed-income earners. It’s already deducted from the compensation income when computing income tax based on graduated rates. This amount can be deducted only once.
Sample income tax computation (for the taxable year 2020).
Scenario 1: Full-time small business owner with total gross sales of Php 480,000 and without any non-operating income for the previous taxable year who availed of the 8% tax rate
- Get the taxable income. Deduct the non-taxable Php 250,000 from the gross sales: Php 480,000 – Php 250,000 = Php 230,000.
- Multiply the difference by 8% to compute the income tax due: Php 230,000 x 0.08 = Php 18,400.
Scenario 2: Call center employee with a gross monthly salary of Php 20,000, receiving 13th-month pay of the same amount, earning Php 15,000 monthly as a freelance photographer, and availed of the 8% tax rate on business income
1. Computation of income tax due on compensation income (Using the graduated tax rates):
a. Get the annual salary: Php 20,000 x 12 months = Php 240,000.
b. Compute the total annual contributions (employee’s share only).
- SSS – Php 800 x 12 months = Php 9,600
- PhilHealth – Php 300 x 12 months = Php 3,600
- Pag-IBIG – Php 100 x 12 months = Php 1,200
- Total annual contributions: Php 14,400
c. Get the taxable income. Deduct the total annual contributions from the annual salary: Php 240,000 – Php 14,400 = Php 225,600.
d. Refer to the BIR’s graduated tax table to find the applicable tax rate. The taxable income of Php 225,600 falls under the first bracket, which means the tax rate is 0%. Since the taxable income is below the Php 250,000 tax exemption, the employee should not pay tax on compensation income.
2. Computation of income tax due on business income (Using the 8% tax rate):
- Get the annual gross income: Php 15,000 x 12 months = Php 180,000
- Multiply the gross income by 8% to compute the income tax due: Php 180,000 x 0.08 = Php 14,400
3. Computation of total income tax due:
Add up the income taxes due on compensation income and business income. Since the mixed-income earner is exempted from paying income tax on compensation, he only has to file and pay the Php 14,400 income tax due on business income.
On the flip side, if the mixed-income earner has opted to use the graduated income tax rates for computing tax based on his business income, then he simply has to combine his taxable compensation and business incomes. Then compute the annual income tax due based on the graduated tax table.
3. How To Compute Tax on Passive Income.
The BIR imposes different tax rates on certain types of passive income. The only exceptions are prizes worth Php 10,000 and below (Tax computation is based on the graduated tax rates) and tax-exempt incomes such as PCSO and lotto winnings worth Php 10,000 or less.
Unlike compensation and business incomes, computing the tax due on passive income is more straightforward. Simply multiply your earnings by the applicable tax rate to determine how much your tax is.
For local and foreign taxpayers living in the Philippines, here’s the BIR tax table showing the tax rates on passive income.
Let’s say you won Php 1 million in the lotto. The tax rate of 20% on prizes over Php 10,000 is automatically deducted before you receive it.
Before you claim your prize, you can compute how much tax is deducted from it. Simply multiply Php 1 million by 20% (Php 1 million x 0.20). Expect to be taxed Php 200,000 and receive the remaining Php 800,000.
No time to compute your income tax manually? Try the online tax calculators instead.
As of this writing, three online tax calculators from three different government agencies are active:
- BIR Withholding Tax Calculator
- DOF Tax Calculator
- NTRC Income Tax Calculator
Take note, however, that the online tools mentioned above can only offer an estimate of how much income tax you’re required to pay. To learn how to use each one of these online tax calculators, go to this article.