Saint Ferdinand College

College of Business Education

Taxation

INCOME

Gross Income – Means all income derived from whatever source including the following:
 Compensation income
 Income derived from the conduct of trade or business or the exercise of profession
 Gains derived from dealings in properties
 Interests
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partners distributive share from the net income of general professional partnership

General classification of Income

1. Taxable income – refers to earnings of a taxpayer subject to the basic or normal tax ranging from 0% - 35%
a. Compensation
b. Business Income
c. Gains from property
d. Passive income
e. Other taxable income
2. Non-taxable income – refers to earnings of the taxpayer that are excluded from gross income as provided by the
NIRC
a. Life insurance proceeds
b. Return of premium
c. Gifts, bequests and devices
d. Compensation for injuries
e. Retirement benefits
f. Other non-taxable income

Requisites for income to be taxable

1. There must be a profit or gain (return on capital)
2. The profit or gain must be realized
3. The gain or profit must not be excluded by law from income taxation

Classifications of taxable income

1. Compensation income
2. Business income and income from exercise of profession
3. Gains from dealing in properties
4. Passive income
5. Other taxable income

Compensation Income
 All remuneration for services performed by an employee for his/her employer under the employer-employee
relationship, unless expressly excluded by the tax code.
 The name by which remuneration is designated is immaterial. Thus, salaries, wages, emoluments and honoraria,
allowances, commissions, fees including director’s fees, if the director is, at the same time,, an employee of the
employer of the corporation; taxable bonuses and fringe benefits except those which are subject to the fringe
benefits tax; taxable pensions and retirement pay; and other income of similar nature constitutes compensation
income
 The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes
compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits, and may be paid hourly,
daily, weekly, monthly or annually.

Employer – refers to any person for whom an individual performs any service of whatever nature as employee of
such person. An employer is the one who has control over the payment of the employee remuneration.

Employee – refers to any individual who is a recipient of wages and includes officer, employee or elected official of
the government of the Philippines or any political subdivisions, agency or instrumentality thereof. The term also
considered an officer of a corporation.
 Elements of employer-employee relationship under case law
1. Selection and engagement of employees
2. Payment of wages
3. Power of dismissal Must all be present
4. Power of control

Types of employees as to function

1. Managerial employees – those who are given powers or prerogatives to lay down and execute managerial policies
and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees.
2. Supervisory employees – those who effectively recommend such managerial actions if the exercise of such
authority is not merely routinary or clerical in nature but requires use of independent judgement.
3. Rank and file employees – those who hold neither managerial nor supervisory functions.

Types of employees as to taxability

1. Minimum wage earners – exempt
2. Regular employees

Minimum Wage Earner – refer to a worker in the private sector paid the statutory minimum wage, or to an employee in
the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector
where he/she is assigned.

The following types of compensation income, all inclusive, earned by minimum wage earners are also exempted from
income tax:
1. Holiday pay 3. Night shift differential pay
2. Overtime pay 4. Hazard pay

However, minimum wage earners receiving other income, such as income from the conduct of trade or business, or from
the practice of profession, except income subject to final tax, in addition to compensation shall be subject to tax on their
entire income.

Illustration on Minimum Wage Earner

Required: Determine whether the compensation received is taxable or not in the following cases.

1. Mr. Nagka Lhisud receives a monthly salary of P8,300 as an employee of AA Company. The rate was fixed as the
statutory minimum wage by the concerned government agency. In addition, the taxpayer receives an overtime pay
of P1,200 per month.
Ans: The taxpayer is exempt from income tax and from withholding tax. Overtime pay earned by minimum wage
earners is one of the compensation items exempt from income tax.

2. Mr. Tham Bak, an employee of CC Company, receives a monthly salary of P12,400, which is fixed as the
statutory minimum wage in the region. He owns a small merchandising store managed by his wife.
Ans: Though he is classified as a minimum wage earner, the entire income of the taxpayer is subject to income tax
because he has other income subject to tax.

Composition of Gross Compensation Income

1. Salary, wages or fee - Salary is generally paid on regular interval. Wage is paid on an hourly or daily basis. Fees are
payment to an individual who is of authority like director’s fee, legal fee, accountants fee or fee for the conduct of
religious ceremony.

2. Commission - Payment made based on certain percentage of output like salesman commission or underwriter’s
commission. Commission is taxable even if the employee receiving the compensation is a minimum wage earner.
Illustration:
Mr. Buot Tan received a monthly salary of P10,000 that was determined by the Wage Board as the statutory wage in
the region. In addition, Mr. Tan received P45,000 during the year as commission on the sales he made. Is the income
taxable or not?

3. Honoraria - Are earnings derived from services usually undertaken by an individual who is considered an expert in a
particular field. This type of compensation is taxable, regardless if the taxpayer is classified minimum wage
earner.

4. Allowances - An allowance may either be fixed or variable. Allowance is considered fixed when it is attached to the
position or office, and variable when it changes accordingly as influenced by certain factors such as number of
visitors, distance of travels, or frequency of seminars.
 Allowances that are not considered compensation income subject to tax:
1. It is ordinary and necessary traveling and representation, or entertainment expenses paid or incurred by the
employee in the pursuit of the trade, business or profession.
2. The employee is required to account/liquidate for the foregoing expenses in accordance with specific
requirements of substantiation for each category of expenses.
  Most common type of taxable allowances:
1. Cost of Living Allowance (COLA)
2. Representation and travelling allowance (RATA)
3. Personnel Economic Relief Allowance (PERA)
** These allowances are not taxable if received by a government official

5. 13th-month pay and other benefits – it is equivalent to the mandatory one month basic salary of officials and
employees of the government, national or local, including government owned and controlled corporations, and/or
private offices, it is received after the 12th month pay.
 The 13th month pay is computed by dividing the total basic salary during the year by 12 months.
 Other Benefits include:
1. Christmas bonus of private employees
2. Cash gifts of private employees
3. Additional compensation allowance of government employees
4. 14th month pay and 15th month pay
5. Other fringe benefits of rank-and-file employees.
 13th-month pay, and other benefits are exempt from withholding on compensation provided they do not exceed
P90,000. It follows, therefore, that the excess above P90,000 is subject to the withholding tax on compensation.

Illustration
1. A government rank and file employee received the following benefits aside from basic pay in 2021:

Christmas Bonus P70,000

Cash Gift 5,000
Additional compensation allowance 36,000
Personnel Economic Relief Allowance 24,000

Required: Determine the taxable 13th month pay and other benefits.

2. A private rank and file employee working in a remote tower station of Snail Internet Company received the
following benefit during 2021:

13th month pay P62,000

Christmas gift 15,000
Additional compensation allowance 10,000

Required: Determine the taxable 13th month pay and other benefits.

6. Holiday pay, overtime pay, night shift differential pay, and hazard/emergency pay

7. Separation pay – it is taxable if the separation is voluntary.

 Separation pay is not taxable on account of:
Sickness
Disability
Death
Reorganization of the company
Bankruptcy of the company

8. Retirement pay – as a general rule, retirement pay is taxable except the following:
 Retirement pay from SSS or GSIS
 Retirement pay from employer provided the following are complied:
a. The retirement plan of the company has been approved by the CIR
b. The retiree should have been connected with the company for 10 years.
c. The retiree should at least be 50 years old
d. The retiree availed the retirement benefit for the first time
e. The retirement plan is fair and equitable to all employees, regardless of position

9. Sick leave/vacation leave pay – the salary of an employee on vacation or sick leave, which is paid to him/her
notwithstanding his/her absence from work, constitutes taxable compensation income.

10. Fringe benefits – means any good, service or other benefit granted in cash or in kind by an employer to an individual
employee in addition to his/her basic salary

Fringe benefits may be subject to final or basic tax. The guidelines are:
a. If the recipient of the fringe benefit is rank and file employee, the amount is subject to basic tax; hence, it
becomes part of the gross compensation income.
b. If the recipient is occupying supervisory or managerial position, the fringe benefit is subject to final tax.