Video 1: How to Compute Individual Income Tax (TRAIN LAW)

Three Classifications of Individual Income Taxpayers

1. Purely / Pure Compensation Earners: Those with having employee – employer

relationship
2. Business Income Earners (Self – Employed): Those who set their income on
trade or business. These also include people who practice their professions
(Doctors, Lawyers, Accountants)
3. Mixed Income Earners: Those individuals whose income from both compensation
and business and or practice of profession

Basic Proforma Income Tax Computation

Gross Income xx
Less: Allowable Deductions xx
Taxable Net Income xx
Income Tax Due xx

Illustration 1: A minimum wage earner, who is not engaged in business nor has any
other source of income other than from employment, earned a total compensation
income of P135,000.

The taxpayer contributed SSS, PhilHealth, and HDMF totaling P5,000 and received 13 th
month pay of P11,000. The income tax liability is computed as follows:

Total Compensation Income P 135,000

Less: Mandatory Contributions P 5,000
Non-taxable benefits 11,000 (16,000)______________
Taxable Income P 119,000

Income Tax Due = *NONE

*Minimum wage earners are exempt from the amount of income tax based on the
statutory minimum wage rates. The holiday pay, overtime pay, nightshift differential pay,
and hazard pay received by such earner are likewise exempt.

Illustration 2: Ms. EQB operates a convenience store while she offers bookkeeping
services to her clients. In 2018, her gross sales amounted to P800,000, in addition to
her receipts from bookkeeping services of P300,000. She already signified her intention
to be taxed at 8% income tax rate in her 1st quarter.

Gross Sales – Convenience Store P 800,000

Gross Receipts – Bookkeeping 300,000
Total Sales/Receipts P 1,100,000
Less: Amount allowed as deduction under sec. 24(a)(2)(b) (250,000)
Taxable Income P 850,000
Tax Due: 8% x P850,000 = P68,000
Income tax payment is in lieu of the graduated income tax rate under subsection A here
of N percentage tax due by express provision of the law

Illustration 3: Ms. EQB, failed to signify her intention to be taxed at 8% income tax rate
on gross sales in her initial quarterly income tax return, and she incurred cost of sales
and operating expenses amounting to P600,000 and P200,000 respectively or a total of
P800,000. The total income tax shall be computed as follows:

Gross Sales/Receipts P 1,100,000

Less: Cost of Sales 600,000
Gross Income 500,000
Less: Operating Expense 200,000
Taxable Income P 300,000
Tax Due:
On excess (P300,000 – P250,000) x 20% = P 10,000
 Income Tax Tables under TRAIN LAW (Graduated Income Tax Rates Table)
Applicable for year 2018 to 2022
Annual Income Tax Rate
P250,000 below None (0%)
Above P250,000 to P400,000 20% of excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000

Illustration 4: Mr. JMLH signified his intention to be taxed at 8% income tax rate on
gross sales in his 1st Quarter Income Tax Return. He has no other source of income. His
total sales for the first three (3) quarters amounted to P3,000,000 with 4 th quarter sales
of P3,500,000.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Total Sales P 500,000 P 500,000 P 2,000,000 3,500,000
Less: Cost of (300,000) (300,000) (1,200,000) (1,200,000)
Sales
Gross Income 200,000 200,000 800,000 2,300,000
Less: Operating (120,000) (120,000) (480,000) (720,000)
Expense
Taxable Income P 80,000 P 80,000 P 320,000 P 300,000

Tax due shall be computed as follows:

Total Sales P 6,500,000

Less: Cost of Sales (3,000,000)
Gross Income 3,500,000
Less: Operating Expense (1,440,000)
Taxable Income P 2,060,000

Income Tax due

Tax due under the graduated rates P 509,000
Less: 8% income tax previously paid (Q1 to Q3)
(P3,000,000 – P250,000) x 8% 220,000
Annual Income Tax Payable P 289,200
- The gross receipts exceeded the VAT threshold of 3,000,000. Taxpayers shall be
liable income tax under graduated rates pursuant to Section 24A, 2A of the tax
code as amended. Taxpayer shall be allowed an income tax credit of quarterly
payments initially made under the 8% income tax option, computed net of the
allowable deduction of 250,000 granted for PURELY BUSINESS INCOME
- Taxpayer is likewise liable for business taxes in addition to income tax
- The taxpayer is required to update his registration from Non-VAT to VAT
taxpayer. Percentage taxes pursuant to Section 116 of the tax code as amended
shall be imposed from the beginning of the year until the taxpayer is liable for
VAT. VAT shall be imposed prospectively.
- Percentage tax due on the Non-VAT portion of the sales receipts shall be
collected without penalty if timely paid on the due date immediately following the
month or quarter when taxpayers cease to be a Non-VAT

Illustration 5: Mr. MAG, a financial comptroller of JAB Company, earned annual

compensation in 2018 of P1,500,000 inclusive of 13 th month and other benefits in the
amount of P120,000 but net of mandatory contributions to SSS, PhilHealth. Aside from
employment income, he owns a convenience store with gross sales of P2,400,000. His
cost of sales and operating expenses are P1,000,000 and P600,000 respectively, and
with non-operating income of P100,000.

a) His tax due for 2018 shall be computed as follows if he opted to be taxed at 8%
income tax rate on his gross sales for his income from business:

Total Compensation Income P 1,500,000

Less: Non-taxable 13th month pay and other benefits (max) (90,000)
Taxable Compensation Income P 1,410,000

Tax Due:
1. On Compensation:
On P800,000 P 130,000
On excess (P1,400,000 – P800,000) x 30% 183,000
Tax due on compensation income P 313,000
2. On Business Income:
Gross Sales P 2,400,000
Add: Non-operating income 100,000
Taxable Business Income P 2,500,000
Multiplied by income tax rate *8%_
Tax due on business income P200,000
Total income tax due (Compensation and Business) = P513,000
b) His tax due for 2018 shall be computed as follows if he did not opt for the 8%
income tax based on gross sales/receipts and other non-operating income:

Total compensation income P 1,500,000

Less: Non-taxable 13th month pay and other benefits (max) 90,000
Taxable compensation income P 1,410,000
Add: Taxable Business Income
Gross Sales P 2,400,000
Less: Cost of Sales (1,000,000)
Gross Income P 1,140,000
Less: Operating Expense (600,000)
Net income from operation P 800,000
Add: Non-operating income 100,000 900,000
Total taxable income P 2,310,000
Tax Due
On P2,000,000 P 490,000
On excess (P2,310,000 – P2,000,000) x 32% 99,200
Total Income Tax P 589,200
c) On February 2019, taxpayer tendered his resignation to concentrate on his
business. His total compensation income amounted to P150,000 inclusive of
 benefits of P20,000. His business operations for taxable year 2019 remains the
same. He opted for the 8% income tax rate

Total compensation income P 150,000

Less: Non-taxable benefits (20,000)
Taxable compensation income P 130,000

Tax Due:

1. On Compensation
On P130,000 (not over P250,000) P0
2. On Business Income:
Gross Sales P 2,400,000
Add: Non-operating income 100,000
Taxable Business Income P 2,500,000

Tax Due:

Taxable Business Income P 2,500,000

Multiplied by income tax rate *8%
Tax Due on Business P 200,000
Total income tax due (Compensation and Business) = P200,000

Video 2: How to Compute Income Tax Due

 Taxpayer Tax Base Tax Rate Taxable Source
Resident Citizen Net Income Graduated Within and Without
Non-Resident Citizen Net Income Graduated Within only
Resident Alien Net Income Graduated Within only
Non-Resident Alien Net Income Graduated Within only
(Engaged in Trade)
Non-Resident Alien Gross Income Final Tax of 25% Within only
(Not Engaged in
Trade

Income Tax Tables under TRAIN LAW (Graduated Income Tax Rates Table)
Applicable for year 2018 to 2022
Annual Income Tax Rate
P250,000 below None (0%)
Above P250,000 to P400,000 20% of excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000

Illustration 1: An individual taxpayer provided the following information for 2020:

Gross Business Income, Philippines P 5,000,000

Gross Business Income, Canada 2,000,000

Gross Business Income, Singapore 1,000,000

Business Expenses, Philippines (3,000,000)

Business Expenses, Canada (1,000,000)

Business Expenses, Singapore (500,000)

Question 1: How much is the taxable income and the amount of income tax due if the
taxpayer is a Resident Citizen?
Gross Business Income, Philippines P 5,000,000

Gross Business Income, Canada 2,000,000

Gross Business Income, Singapore 1,000,000

Business Expenses, Philippines (3,000,000)

Business Expenses, Canada (1,000,000)

Business Expenses, Singapore (500,000)

Taxable Income P 3,500,000

Income Tax Tables under TRAIN LAW (Graduated Income Tax Rates Table)
Applicable for year 2018 to 2022
Annual Income Tax Rate
P250,000 below None (0%)
Above P250,000 to P400,000 20% of excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000
Tax Due:
On P2,000,000 P 490,000
On excess (P3,500,000 – P2,000,000) x 32% 480,000
Total Income Tax Due P 970,000

Question 2: How much is the taxable income and the amount of income tax due if the
taxpayer is a Non-Resident Citizen?
Gross Business Income, Philippines P 5,000,000

Business Expenses, Philippines (3,000,000)

Taxable Income P 2,000,000

Income Tax Tables under TRAIN LAW (Graduated Income Tax Rates Table)
Applicable for year 2018 to 2022
Annual Income Tax Rate
P250,000 below None (0%)
Above P250,000 to P400,000 20% of excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000
Tax Due:
Total Income Tax Due P 490,000

Question 3: How much is the taxable income and the amount of income tax due if the
taxpayer is a Resident Alien?

Gross Business Income, Philippines P 5,000,000

Business Expenses, Philippines (3,000,000)

Taxable Income P 2,000,000

Income Tax Tables under TRAIN LAW (Graduated Income Tax Rates Table)
Applicable for year 2018 to 2022
Annual Income Tax Rate
P250,000 below None (0%)
Above P250,000 to P400,000 20% of excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000
Tax Due:
Total Income Tax Due P 490,000
Question 4: How much is the taxable income and the amount of income tax due if the
taxpayer is a Non-Resident Alien Engaged in Trade?
Gross Business Income, Philippines P 5,000,000

Business Expenses, Philippines (3,000,000)

Taxable Income P 2,000,000

Income Tax Tables under TRAIN LAW (Graduated Income Tax Rates Table)
Applicable for year 2018 to 2022
Annual Income Tax Rate
P250,000 below None (0%)
Above P250,000 to P400,000 20% of excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over P8,000,000
Tax Due:
Total Income Tax Due P 490,000

*Note that the Questions number 2, 3, and 4 are all the same because they are identical
on Tax Base, Tax Rate, and Taxable Sources (as given on the first table)

Question 5: How much is the taxable income and the amount of income tax due if the
taxpayer is a Non-Resident Alien Not Engaged in Trade?

Gross Income, Philippines P 5,000,000

Taxable Income P 5,000,000

Income Tax Rate *25%

Income Tax Due P 1,250,000