INCOME TAX OF INDIVIDUALS

1. Resident Citizen (RC)

- a Filipino citizen who stayed permanently in the Philippines or stayed outside the Philippines for less than 183 days during the
taxable year.

2. Nonresident Citizen (NRC)

- a Filipino citizen who stayed outside the Philippines for 183 days or more during the taxable year and has established proof of
definite intention to reside outside the Philippines on a permanent basis as an immigrant or employee

3. Resident Alien (RA)

- persons who are not citizens of the Philippines but are residing within the Philippines

4. Nonresident Alien (NRA)

- are foreign individuals whose residences are not within the Philippines

4a. Nonresident Alien Engaged in Trade or Business (NRAETB)

- those who have stayed within the Philippines for more than 180 days during the taxable year

4b. Nonresident Alien Not Engaged in Trade or Business (NRANETB)

- nonresident foreign individuals who have stayed within the Philippines for only 180 days or less

Normal (Tabular) Tax

- the tax rate to be used in computing income tax due of an individual taxpayer is the normal graduated tax rate as provided in RA
10963 (TRAIN Law) effective January 1, 2018.

Taxable Income
- means the pertinent items of gross income, less the deductions, if any, authorized for such types of income by the NIRC or other
special laws
- basis of income tax rate to arrive at income tax due

Income Tax Due

- the income tax due of an individual taxpayer is based on his/her net taxable income

Taxation of Individuals per Income Source

Pure
Classification of Compensation
Individual Income Earner Business Income Earner Mixed Income Earner

VAT Registration N/A VAT registered Non-VAT registered VAT registered (business) NonVAT registered (business)

Item of Income Compensation Business Income Business Income Compensation Business Income Compensation Business Income Business Income

Graduated Tax Graduated Tax Graduated Tax Graduated Tax Graduated Tax Graduated Tax Graduated Tax
Income Tax Rates
Rates Rates Rates 8% Income Tax Rates Rates Rates Rates 8% Income Tax

Business Tax N/A VAT 3% PT N/A N/A VAT N/A 3% PT N/A

PURE COMPENSATION INCOME EARNERS
Compensation income means all remuneration for services performed by an employee for his employer under an
employer-employee relationship.
Compensation Income is subject to graduated tax rates (0-35%).

Illustration No 1
If a married individual taxpayer is employed, his periodic net pay from salary is computed as follows: (All amounts assumed)

Basic salary per month P 18,000.00

Overtime and holiday pay 6,000.00
Gross taxable income P 24,000.00
Less: Deductions
Absences and tardiness P 1,200.00
SSS, employee’s share 400.00
Philhealth, employee’s share 93.75
Pag-ibig, employee’s share 360.00
Union dues 100.00
Withholding tax ______ __________
Net take home pay

Withholding Taxes on Salaries

- Income taxes that are temporarily based on estimate. The exact amount of taxable salary would only be determined
at the end of the year when the last pay for the year is computed and paid.
- Computed using the following table:

A revenue regulation mandates that on a certain level of periodic employment income of the employee, the employer must
deduct from the employment income a certain amount of income tax and remit such amount to the Bureau of Internal
Revenue. At the end of the year, a computation by the employee in his income tax return to be filed for the year shall show:

Income tax on the income of the year xxx

Less: Withholding income tax by the employer xxx
Equals: Income tax still due (or refundable) xxx

If the income tax withheld is equal to the income tax computed on the taxable compensation income for the year, the
compensation income earner is not required anymore to file an income tax return. If the only source of the taxpayer’s
income is from his sole employment, his Annual Income Tax Return (BIR Form 1700) is no longer necessary. BIR Form 2316
reported by the employer would be enough as compliance. This is called Substituted Filing, i.e. the employer files the
annual ITR in behalf of the employees.

To continue the example in Illustration No 1, assume further that the taxpayer earned equal amounts of income (basic and
other pay) and incurred equal amounts of deductions throughout the year. Compute for the net taxable income, income tax
due, and income tax payable/refundable.
Annual Taxable Compensation Income
- Total taxable compensation of an individual taxpayer for a given year
- The basis for computing the individual taxpayer’s income tax due
- Computed using the following template:

Gross Compensation Income Pxxx

Less: Nontaxable items of Compensation
Statutory benefits (SSS/PHIC/HDMF/Union dues) Pxxx
Premium Payments for Health and Hospitalization Insurance (PPHHI) xxx
Nontaxable 13th month pay and other benefits xxx
Other nontaxable and exempt items xxx xxx
Net Taxable Compensation (subject to graduated income tax rates) Pxxx

Illustration No 2
Mr. Sy had the following data in a year:
Basic salary (annual) P280,000
13th month pay and other benefits 105,000
SSS/PHIC/HDMF contributions 5,000
Taxes withheld by the employer during the year 6,000

The net taxable income, income tax due, and income tax payable/refund shall be computed as follows:

Minimum Wage Earner (MWE)

A minimum wage earner (MWE) is a worker in the private sector who is paid with a statutory minimum wage rate,
or to an employee in a public sector with compensation income of not more than the statutory minimum wage rate in the
non-agricultural sector where the worker-employee is assigned
Such statutory minimum wage rate is exempted from tax. Likewise, the exemption covers the holiday pay, overtime
pay, night shift differential pay, and hazard pay (HONZ).

Illustration No 3
Mr. Dee is a minimum wage earner (MWE) with the following data in a year:
Compensation income (salary) P132,000
Statutory contributions 5,000
13th month pay 11,000

Compute for the net taxable income, income tax due, and income tax payable/refund.

SELF-EMPLOYED INDIVIDUALS
- Pertain to individual taxpayers whose income is derived solely from their own business.
- May be in the form of conduct of trade or practice of profession
- Income from business or profession is subject to either graduated tax rates or 8% income tax rate, depending on the
discretion of the taxpayer.

Illustration No 4
Assume that a single individual taxpayer is a single proprietor of a trading business. His proprietorship has business income
for the year of P1,120,000. The operating expense amounted to P500,000. Compute for the net taxable income and income
tax due using the following assumptions:
1. Graduated tax rates
a. Itemized deductions
b. Optional Standard Deduction
2. 8% income tax
Assume further that the taxpayer in Illustration No 4 earned P3,120,000 during the year and incurred operating expenses
amounting to P2,000,000. Compute for the pertinent requirements in the same illustration.

MIXED INCOME EARNER

A mixed income earner has both compensation income (from employment) and income from business or
profession. Mixed Income is subject to either graduated tax rates or 8% income tax rate, depending on the discretion of the
taxpayer.

The rules are:

(a) If the gross sales/receipts and non-operating income from business or profession do not exceed P3,000,000, the
formulas are:
(a) Tax on compensation income (subject to the graduated rates) Pxxx
(b) The income from business or profession shall be taxed as follows:
Gross sales/receipts Pxxx
Add: Non-operating income xxx
There is no deduction of P250,000 -
Equals: Taxable income from business or profession Pxxx
Income tax at 8% xxx
(c) Total income tax due Pxxx

OR, alternatively,

(a) The compensation income shall be subject to the graduated rates Pxxx
(b) The income from business or profession shall be taxed, as follows:
Gross sales/receipts Pxxx
Add: Non-operating income xxx
Less: Itemized deductions or 40% optional standard deduction xxx
Equals: Taxable income from business or profession Pxxx xxx
(c) Total Taxable income from compensation and business/profession Pxxx
(d) Income tax at graduated rates Pxxx

(b) If the gross sales/receipts and non-operating income from business or profession exceeds P3,000,000, the formula is:
(a) The compensation income shall be subject to the graduated rates Pxxx
(b) The income from business or profession shall be taxed, as follows:
Gross sales/receipts Pxxx
Add: Non-operating income xxx
Less: Itemized deductions or 40% optional standard deduction xxx
Equals: Taxable income from business or profession Pxxx xxx
(c) Total Taxable income from compensation and business/profession Pxxx
(d) Income tax at graduated rates Pxxx

Illustration No 5
Mr. M had the following data for the year:
Compensation income (including 13th month pay and other benefits
Of P120,000, but net of SSS and PHIC) P1,500,000
On his store:
Gross sales 2,400,000
Non-operating income 100,000
Cost of sales 1,000,000
Operating expenses 700,000

Compute for the total income tax due under the following assumptions:
a. 8% income tax
b. Graduated tax rates using itemized deductions
c. Graduated tax rates using OSD

To continue the illustration, assume instead that the total compensation income of Mr. M amounted to P360,000 while the
data for the store operations remain the same. Compute for the same requirements asked in the illustration.