Page 1 of 10 NDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2

Income taxation: tax on individuals and corporations

Learning Objectives:
At the end of this modules, students must be able to:
a. Compute for income tax dues of individuals; and
b. Compute for income tax dues of corporations.

TAX ON INDIVIDUALS
The rules in determining the income tax liability of individual taxpayers, both for citizens and aliens, are
provided under Section 24 to Section 26 of the National Internal revenue Code (NIRC). In this module,
the rules in determining the income tax liability of the following will be discussed:
A. Income tax liability from compensation income;
B. Income tax liability from business income;
C. Income tax liability of a mixed income earner; and
D. Final tax on passive incomes.

The tax liability of an individual taxpayer is computed on the basis of his/her computed taxable income as
discussed from the previous module. The tax shall be computed in accordance with the rate provided by
the NIRC:
A. Graduated Tax Rate Effective January 1,2018 until December 31, 2022
Not over ₱250,000 0%
Over ₱250,000 but not over ₱400,000 20% of the excess over ₱250,000
Over ₱400,000 but not over ₱800,000 ₱30,000 + 25% of the excess over ₱400,000
Over ₱800,000 but not over ₱2,000,000 ₱130,000 + 30% of the excess over ₱800,000
Over ₱2,000,000 but not over ₱8,000,000 ₱490,000 + 32% of the excess over ₱2,000,000
Over ₱8,000,000 ₱2,410,000 + 35% of the excess over ₱8,000,000

B. Optional Gross Income Tax/ GIT (Sec. 24,(A)(2)(b) and (c), NIRC):

1. For individuals earning purely business income:

A self-employed individual (Sole Proprietor) and/or professionals shall have the option to avail of an
eight percent (8%) tax on gross sales/ receipts in excess of ₱250,000 in lieu of the graduated income tax
rates.
2. For individuals earning mixed income (Compensation Income & Business Income):

Option A. The combined income (Compensation income & Business Income) shall be taxed using the
graduated tax rates; or
Option B. The Compensation income shall be taxed using the graduated tax rate, and the business income
shall be taxed at eight percent (8%) of the gross sales or gross receipts. Under this option, the tax
liabilities from compensation income and business income shall be determined separately. The total of the
two income taxes shall refer to the total tax liability of the taxpayer.
Note: All income from compensation shall be taxed using the graduated tax rates prescribed under
Section 22 (A) (2) (a) of the NIRC. No GIT shall be applied on compensation income. Further, GIT is
only available as an option if the business income does not exceed the VAT threshold of ₱3,000,000.
Using the same illustrations from the previous module, the income tax liabilities shall be computed as
follows:
Illustration 1. Purely Compensation Income; Individual taxpayer
Uncle Rogers is an employee of WERKWERKWERK Inc. He works as an accounting clerk in the Finance
Department of the Corporation. During the taxable year, the following items appear in his employee records:
 Salary (35,100/ month for 12 mos.) ₱ 421,200
Overtime and Holiday Pay 8,000
Mandatory Contributions:
SSS Contribution (800 x 12 mos.) 9,600
PhilHealth Contribution (495 x 5,940
12)
Pag-IBIG Contribution (100 x12) 1,200
13th Month Pay 35,100
Rice allowance (3,000 x 12) 36,000
15-day monetized unused vacation 17,550
leave
Clothing Allowance 15,000
Christmas Bonus 30,500
Laundry Allowance 6,000

Uncle Roger’s taxable Income is computed as follows:

Basic Salary ₱ 421,200

Overtime and Holiday Pay 8,000
Excess from ₱90,000 Threshold
₱90,000 Threshold ₱ 90,000
Less: 13th Month Pay 35,100
Christmas Bonus 30,500
Monetized unused vacation leave (17,550-(1,170 x 5,850
10))
Clothing Allowance (15,000 – 6,000) 9,000
Rice Allowance (36,000 – 24,000) 12,000
Laundry Allowance (6,000 – 2,400 4,850
3,600)
Gross Compensation Income ₱ 434,050
Less: Mandatory Contributions
SSS Contribution ₱ 9,600
PhilHealth Contribution 5,940
Pag-IBIG Contribution 1,200 16,740
Taxable Income 434,050

The Income tax due is computed as follows:

Tax on 400,000 ₱ 30,000.00

Add: Tax on Excess (434,050 – 8,512.50
400,000) x 25%
Income Tax Due ₱ 38,512.50
Explanation: The graduated tax is used because Uncle Roger is purely earning a compensation income. From
the graduated tax table, his taxable income (₱434,050) is within the 3rd bracket (over ₱400,000 but not over
₱800,000). Any excess of the taxable income from ₱400,000 shall be taxed at a rate of 25%

Illustration 2. Compensation Income; Minimum Wage Earner

Roni Roni works as college secretary in the College of Law in Cordillera Colleges. His daily wage is ₱350/ day,
equivalent to the minimum wage rate in the Cordillera Administrative Region. His total monthly pay is
₱10,500 without any deductions. Determine his tax liability for a 12-month taxable period.

Answer: Roni Roni has no tax liability. A minimum wage earner is tax exempt, provided his only source of
income is his compensation. The only time a minimum wage earner becomes taxable is when he earns an
income, other than the compensation he receives from his employment.

Suppose Roni Roni also owns a barber shop and earns income from the business, his compensation income
and business income will become taxable despite being a minimum wage earner.

Illustration 3. Purely Business Income; Individual taxpayer

Uncle Rogers owns Uncle’s RTW, a business engaged in buying and selling ready-to-wear clothes. The
following information were generated during the taxable year 2019:
Sales ₱ 2,510,000
Cost of Goods Sold 1,115,000
The expenses cannot be substantiated through receipts/ other documents

Uncle Roger’s taxable Income is computed as follows:

Sales ₱ 2,510,000
Less: OSD (40% x ₱2,510,000) 1,004,000
Taxable Income ₱ 1,506,000

The Income tax due is computed as follows:

1. If Uncle Roger opted to use the Graduated Tax Schedule

Tax on ₱800,000 ₱ 130,000
Add: Tax on Excess (₱1,506,000 – 211,180
₱800,000) x 30%
Income Tax Due ₱ 341,800

Explanation: From the graduated tax table, his taxable income (₱1,506,000) is within the 4th bracket (over
₱800,000 but not over ₱2,000,000). Any excess of the taxable income from ₱800,000 shall be taxed at a rate
of 30%.
2. If Uncle Roger opted to use Optional GIT

Gross Sales ₱ 2,510,000

Less: Tax Exempt 250,000
Taxable Income ₱ 2,260,000
x Optional GIT% 8%
Income Tax Due ₱ 180,800

Explanation: Since Uncle Roger purely earns business income, he may opt to apply the 8% Optional GIT on his
gross sales/ receipts net of the tax exemption (₱ 250,000).

Note: Section 34 (L) of the NIRC provides that once the taxpayer elected an option, whether graduated tax rate
or the optional GIT, the option he has elected shall be irrevocable during the taxable year to which the option
is applied

Illustration 4. Mixed Income; Individual Taxpayer

Auntie Mo is employed as a 1st year-resident doctor of a private hospital. She earns compensation from
rendering her services as a medical practitioner. She also owns a mini grocery store; which business is
registered with the DTI under her name as the sole proprietor. The following are information pertinent in
determining her tax liability:

Salary (65,000/ month for 12 mos.) ₱ 780,000

Mandatory Contributions:

SSS Contribution (800 x 12 mos.) 9,600

PhilHealth Contribution (550 x 12) 6,600
Pag-IBIG Contribution (100 x12) 1,200
13th Month Pay 65,000
12-day monetized unused vacation leave @ 2,170 daily wage 26,040
Clothing Allowance 20,000
Christmas Bonus 40,500
Laundry Allowance 10,000

Sales 620,000

Gross Profit Rate 40%

Salaries Expense 90,000

Rent Expense 44,000

Communication Expense 13,900

Utilities Expense 8,000

The taxable income of Auntie Mo is computed as follows:
Salary ₱ 780,000
Excess from ₱90,000 Threshold
₱90,000 Threshold ₱ 90,000
Less: 13th Month Pay 65,000
Christmas Bonus 40,500
Monetized unused vacation leave (2,170 x 2) 4,340
Clothing Allowance (20,000 – 6,000) 14,000
Laundry Allowance (10,000 – 6,400 40,240
3,600)
Gross Compensation Income ₱ 820,240
Less: Mandatory Contributions
SSS Contribution ₱ 9,600
PhilHealth Contribution 6,600
Pag-IBIG Contribution 1,200 17,400
Taxable Compensation Income ₱ 434,050

Gross Sales ₱ 620,000

Less: Cost of Goods Sold (60% x 620,000) 372,000

Gross Profit ₱ 248,000

Less: Allowable Itemized Deductions

Salaries Expense ₱ 90,000

Rent Expense 44,000

Communication expense 13,900

Utilities Expense 8,000 155,900

Taxable Business Income ₱ 92,100

Total Taxable Income (434,050 + 92,100 ₱ 526,150

The Income tax due is computed as follows:

1. Option A. Graduated Tax Schedule is applied to the mixed income.

Tax on ₱400,000 ₱ 30,000.00

Add: Tax on Excess (₱526,150 – ₱400,000) x 25% 31,537.50

Income Tax Due [₱ 61,537.50
.