This article has been reviewed and edited by Miguel Dar, a CPA and an experienced tax consultant who specializes in tax audits.
When computing your income tax due, make sure to do your due diligence. If you’re not careful enough, you’ll end up paying penalties to the BIR for a mistake in your income tax computation.
Before getting to the hows of tax calculation, it’s important to understand gross income and taxable income—the two terms often used in income tax calculation.
Disclaimer: This article is for general information only and is not substitute for professional advice.
Go back to the main article: How to Compute Income Tax in the Philippines: An Ultimate Guide
Table of Contents
- What Is Gross Income?
- What Is Excluded From Gross Income?
- What Is Taxable Income?
- What Can Be Deducted From Gross Income?
- Income Tax Rates in the Philippines
-
How To Compute Your Income Tax Based on Graduated Rates
-
Sample income tax computation (for the taxable year 2020)
- Scenario 1: Employee with a gross monthly salary of Php 30,000 and receiving 13th-month pay of the same amount.
- Scenario 2: Employee with a gross monthly salary of Php 100,000 and receiving 13th-month pay of the same amount.
- Scenario 3: Freelance web developer with total gross receipts worth Php 840,000 who opted to use the graduated rates and the 40% optional standard deduction in computing his income tax.
-
Sample income tax computation (for the taxable year 2020)
-
Frequently Asked Questions
- 1. Should I file income tax under the 8% special rate or the graduated rates?
- 2. What are itemized deductions?
- 3. Under itemized deduction, what are the specific expenses I can deduct from my gross income?
- 4. Which should I choose: itemized deduction or optional standard deduction?
- 5. What is Minimum Corporate Income Tax (MCIT) and how to compute it?
- 6. Is there a tax refund in the Philippines?
- 7. How is tax refund calculated in the Philippines?
- 8. When should tax refund be given?
- 9. How do you claim a tax refund?
- 10. Is the 13th-month pay taxable under the TRAIN law?
- References
What Is Gross Income?
Gross income is the starting point of computing a taxpayer’s income tax due.
Under the tax code1, gross income means all income derived from whatever source.
While that definition appears too generic, the BIR website provides specific examples of what constitutes gross income:
a. Compensation income – Earnings from an employer-employee relationship, including salaries (plus any overtime pay, holiday pay, or night differential pay), fees, commissions, honoraria, taxable bonuses and allowances, and other benefits
b. Business and professional income – Earnings from running a business or practicing a profession, including profits from the sale of assets, commissions, service fees, professional fees, rental income, and other incomes not covered by compensation income
c. Passive income – Earnings from sources in which the taxpayer is not actively involved, including the following:
- Profits from the sale of real properties or shares of stock
- Interest earned on bank deposits
- Interest and dividends earned on investments
- Annuities (e.g., income streams for retirees)
- Pensions
- Rents
- Royalties
- Prizes and winnings
- A partner’s share from the net income of a general professional partnership
If you’re earning one or more of these types of income, all of them are included in your income tax computation.
What Is Excluded From Gross Income?
According to the tax code2, the following income types are NOT included in a taxpayer’s gross income computation (and are therefore tax-exempt):
- SSS, GSIS, Pag-IBIG, PhilHealth, and other government-mandated contributions
- 13th-month pay and other benefits (e.g., Christmas bonus, performance-based incentives, etc.) worth Php 90,000 and below
- De minimis benefits (e.g., paid vacation leave, medical/meal/clothing allowance, rice subsidy, Christmas gifts and achievement awards given to employees, etc.) not exceeding the prescribed maximum amount
- Union dues from legitimate labor organizations
- Retirement benefits, pensions, gratuities, etc. which have met the requirements of the law3
- Separation pay due to causes beyond the control of the employee
- Proceeds of Life Insurance upon the death of the insured
- Amount paid to the insured as a return of premium
- Compensation for sickness or injuries, including damages received
- Prizes and awards to athletes in local and international sports competitions whether held in the Philippines or abroad and sanctioned by their national sports associations
- Prizes and awards that meet the conditions for gross income exclusion under the Tax Code
- Gifts, bequests, and devises (exempt from income tax but subject to donor’s tax
- Profits from redeeming of shares of stocks in mutual funds
- The income of expats in the Philippines qualified for exemption under tax treaties
- Income derived by foreign governments from their investments in stocks, loans, and other securities or from interest on their bank deposits in the Philippines
- Income derived by the Philippine government or its political subdivision from any public utility or the exercise of any essential government function
- Gain on sale, retirement or exchange of evidence of indebtedness with a maturity of more than 5 years
- Proceeds from the Personal Equity and Retirement Account (PERA)4
- Other payments that do not constitute an increase in wealth by the taxpayer
What Is Taxable Income?
Taxable income is the taxpayer’s gross income less allowable deductions. It’s used to compute how much income tax must be paid in a given year.
If you’re a self-employed or mixed-income taxpayer, subtract the deductions allowed by the BIR from your gross income to get your taxable income.
The basic formula for income tax purposes is:
Gross Sales/Receipts/Fees
Less:
- Sales Discounts/Allowances
- Sales Returns
Equals: Net Sales/Receipts/Fees
Less: Cost of Sales
Equals: Gross Income from operations
Add: Other income not subject to Final tax or tax exemption
Equals: Total Gross Income
Less: Itemized Deductions or OSD
Equals: Taxable Income
What Can Be Deducted From Gross Income?
Self-employed and mixed-income taxpayers can choose between two methods of deduction: itemized deduction and optional standard deduction.
1. Itemized deduction
Itemized deduction5 involves deducting from gross income all legitimate business expenses incurred during the taxable year. The BIR requires these expenses to be directly related to the operation, management, and development of the taxpayer’s business or professional practice.
Learn More: Itemized Deductions: A Comprehensive Guide for Philippine Taxpayers
Itemized deductions include the following:
- Business or professional expenses such as salaries, overhead expenses, and costs of production, travel, entertainment, etc.
- Research and development
- Interest on debts related to the taxpayer’s business or profession
- Tax payments related to the taxpayer’s business or profession, except for the income tax, estate tax, donor’s tax, etc.
- Losses from the normal operation of the business, sale of capital assets, etc.
- Donations to the Philippine government, charitable institutions, religious groups, educational/cultural organizations, etc.
- Actual bad debts (receivables from customers or loss on securities held as capital assets that cannot be collected or recovered)
- Depreciation (decrease in value of property used in business such as vehicles, equipment, etc.)
- Pension trust fund for employees
- Depletion of oil and gas wells and mines
On the other hand, taxpayers CANNOT deduct the following expenses from their gross income6:
- Living, personal, or family expenses
- Expenses for construction, improvement, or renovation of a property to increase its value
- Expenses for property restoration
- Life insurance premium payments covering any employee
- Losses from the sale of property under certain conditions
Related: Which should I choose: itemized deduction or optional standard deduction?
2. Optional standard deduction
The Optional Standard Deduction (OSD)7 is 40% of Gross Income and in lieu of the itemized deductions.
OSD for corporations is in all respects similar to the OSD available to an individual earning business income or income from a profession, EXCEPT that the basis of the 40% OSD is the gross income, which is net of the cost of sales or services (similar to Minimum Corporate Income Tax or MCIT), while for individuals, the basis is gross sales or receipts, before any such costs.
Likewise, Gross Income for OSD purposes does not include income items that have been already subjected to Final Tax or Capital Gains Tax.
The election of the OSD must be communicated in the 1st quarter return. Meaning, if the corporation used the OSD instead of the itemized deduction in its 1st quarter return, it cannot later on use the itemized deductions for the Annual Income Tax Return. (RR No. 2-2010)
The tax base of OSD is Gross Income under Sec. 32 of NIRC (National Internal Revenue Code) and Gross sales/receipt for corporations and individuals, respectively.
Gross income under Section 32 of the NIRC as amended:
- Gross Income from operations
- Sale of ordinary assets
- Distributive share of a partner in GPP
- Rent
- Annuities
- Pension
- Royalties
- Interest
- Prizes and winnings
- Dividends
Provided that items 7 to 10 are not subject to FWT.
Note that net gains on the sale of capital assets are not part of OSD computation but forms part of gross income for other purposes.
Applicability: This is available to all types of taxpayers except non-resident aliens and non-resident foreign corporations
Income Tax Rates in the Philippines
Graduated rates, which are increasing as the taxable income increases, apply to the following types of income:
a. Compensation income of local and foreign employees (mandatory)
b. Compensation income of mixed-income earners (mandatory)
c. Business and/or professional income of mixed-income earners and self-employed individuals
- Mandatory for those whose gross sales or receipts are above Php 3 million
- Optional for those whose gross sales or receipts are equal to or less than Php 3 million
The Tax Reform for Acceleration and Inclusion (TRAIN) Act has lowered the personal income tax since the 2018 taxable year. The tax reform law introduced a new tax structure that has resulted in higher take-home pay for employees in the Philippines.
Income taxes are expected to go down further with the new graduated rates starting January 1, 2023.
a. Graduated income tax rates until December 31, 2022
| Annual Taxable Income | Tax Rate |
| Php 250,000 and below | 0% |
| Over Php 250,000 but not over Php 400,000 | 20% of the excess over Php 250,000 |
| Over Php 400,000 but not over Php 800,000 | Php 30,000 + 25% of the excess over Php 400,000 |
| Over Php 800,000 but not over Php 2 million | Php 130,000 + 30% of the excess over Php 800,000 |
| Over Php 2 million but not over Php 8 million | Php 490,000 + 32% of the excess over Php 2 million |
| Over Php 8 million | Php 2.41 million + 35% of the excess over Php 8 million |
b. Graduated income tax rates for January 1, 2023 and onwards
| Annual Taxable Income | Tax Rate |
| Php 250,000 and below | 0% |
| Over Php 250,000 but not over Php 400,000 | 15% of the excess over Php 250,000 |
| Over Php 400,000 but not over Php 800,000 | Php 22,500 + 20% of the excess over Php 400,000 |
| Over Php 800,000 but not over Php 2 million | Php 102,500 + 25% of the excess over Php 800,000 |
| Over Php 2 million but not over Php 8 million | Php 402,500 + 30% of the excess over Php 2 million |
| Over Php 8 million | Php 2,202,500 + 35% of the excess over Php 8 million |
However, the Philippines is still among the countries with the highest income tax in Southeast Asia.
An ASEAN Briefing report notes that the Philippines, along with Thailand and Vietnam, has the highest maximum tax rate of 35%, as opposed to Cambodia’s and Singapore’s 20% rate.
How To Compute Your Income Tax Based on Graduated Rates
You can calculate your income tax on your own, whether you’re curious about how your employer computes it or you need to file and pay your tax by yourself.
Here’s a simple formula for the manual computation of income tax:
Income tax due = Taxable income (Gross income – Allowable deductions) x Tax rate – Tax withheld
Sample income tax computation (for the taxable year 2020)
Scenario 1: Employee with a gross monthly salary of Php 30,000 and receiving 13th-month pay of the same amount.
1. Get the annual salary: Php 30,000 x 12 months = Php 360,000.
2. Compute the total annual contributions (employee’s share only):
- SSS – Php 800 x 12 months = Php 9,600
- PhilHealth – Php 450 x 12 months = Php 5,400
- Pag-IBIG – Php 100 x 12 months = Php 1,200
Total annual contributions: Php 16,200
3. Get the taxable income by deducting the total annual contributions from the annual salary: Php 360,000 – Php 16,200 = Php 343,800.
4. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The taxable income of Php 343,800 falls under the second bracket, which means the tax rate is 20% of the excess over Php 250,000.
5. Compute the annual income tax due.
a. Subtract the non-taxable Php 250,000 from the taxable income: Php 343,800 – Php 250,000 = Php 93,800.
b. Multiply the difference by 20%: Php 93,800 x 0.20 = Php 18,760.
If the income tax due is the same as the total amount the employer has withheld from the employee’s salary (Php 18,760 during the taxable year or Php 1,563.33 per month), then the employee doesn’t have to pay and file an ITR by the end of the year.
Scenario 2: Employee with a gross monthly salary of Php 100,000 and receiving 13th-month pay of the same amount.
1. Get the annual salary: Php 100,000 x 12 months = Php 1,200,000.
2. Since the 13th-month pay is higher than the tax-exempt Php 90,000, the excess of that amount is taxable. Deduct the tax-exempt Php 90,000 from Php 100,000: Php 100,000 – Php 90,000 = Php 10,000. Then add the difference to the annual salary to get the gross income: Php 10,000 + Php 1,200,000 = Php 1,210,000.
3. Compute the total annual contributions (employee’s share only):
- SSS – Php 800 x 12 months = Php 9,600
- PhilHealth – Php 900 x 12 months = Php 10,800
- Pag-IBIG – Php 100 x 12 months = Php 1,200
Total annual contributions: Php 21,600
4. Get the taxable income by deducting the total annual contributions from the annual gross income: Php 1,210,000 – Php 21,600 = Php 1,188,400.
5. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The taxable income of Php 1,188,400 falls under the fourth bracket, which means the tax rate is Php 130,000 + 30% of the excess over Php 800,000.
6. Compute the annual income tax due.
a. Subtract the non-taxable Php 800,000 from the taxable income: Php 1,188,400 – Php 800,000 = Php 388,400.
b. Multiply the difference by 30%: Php 388,400 x 0.30 = Php 116,520.
c. Add Php 130,000: Php 116,520 + Php 130,000 = Php 246,520.
Since the annual tax due of an employee earning Php 100,000 monthly is Php 246,520, the employer should have withheld Php 20,543.33 from the monthly salary. If the annual income tax due is the same as the total amount withheld for the year, the employee is not required to file an ITR on his/her own.
Scenario 3: Freelance web developer with total gross receipts worth Php 840,000 who opted to use the graduated rates and the 40% optional standard deduction in computing his income tax.
1. Determine the standard deduction by multiplying the gross income by 40%: Php 840,000 x 0.40 = Php 336,000.
2. To get the taxable income, subtract the OSD from the gross income: Php 840,000 – Php 336,000 = Php 504,000.
3. Refer to the BIR’s graduated tax table to find the applicable tax rate. The taxable income of Php 504,000 falls under the third bracket, which means the tax rate is Php 30,000 + 25% of the excess over Php 400,000.
4. Compute the annual income tax due.
a. Subtract the non-taxable Php 400,000 from the Php 504,000 taxable income: Php 504,000 – Php 400,000 = Php 104,000.
b. Multiply the difference by 25%: Php 104,000 x 0.25 = Php 26,000.
c. Add Php 30,000: Php 26,000 + Php 30,000 = Php 56,000
This means that the self-employed taxpayer must declare Php 56,000 as income tax due when paying and filing an ITR.
Related: How to File and Pay Taxes: An Ultimate Guide to Philippine Tax
Frequently Asked Questions
1. Should I file income tax under the 8% special rate or the graduated rates?
2. What are itemized deductions?
3. Under itemized deduction, what are the specific expenses I can deduct from my gross income?
4. Which should I choose: itemized deduction or optional standard deduction?
5. What is Minimum Corporate Income Tax (MCIT) and how to compute it?
6. Is there a tax refund in the Philippines?
7. How is tax refund calculated in the Philippines?
8. When should tax refund be given?
9. How do you claim a tax refund?
10. Is the 13th-month pay taxable under the TRAIN law?
References
- National Internal Revenue Code (1997), Section 32 (A)
- National Internal Revenue Code (1997), Section 32 (B)
- National Internal Revenue Code (1997), Section 32 (B) (6)
- Personal Equity and Retirement Account (PERA) Act of 2008 (RA 9505)
- National Internal Revenue Code (1997), Section 34
- National Internal Revenue Code (1997), Section 36
- National Internal Revenue Code (1997), Section 34 (L)
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