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How to Compute Income Tax Philippines

17 April 2022
How to Compute Income Tax Philippines

It's no doubt that Filipinos are recognized across the globe for their tenacity and dedication to their jobs. As a third-world nation, the country's severe conditions have hardened the people who live there and helped them unconsciously build an unshakable resolve to show up at work and give their best every day.

 

In spite of their high quality labor, Filipino employees may not always get the wages they are entitled to receive. People who are knowledgeable with tax calculation in the Philippines are aware of this, but those who aren't may only wonder why they aren't making as much money as they think they should be.

 

A large portion of an employee's compensation was taken up by income tax until recently, when the TRAIN Law went into effect. Workers in the Philippines have become used to this and now anticipate at least a few thousand pesos to be taken out of their paychecks, regardless of whether this is the exact amount.

 

What is the TRAIN Law?

TRAIN Law's first package offered residents an increase in their take-home pay by reducing personal income tax, which was a promise fulfilled. After this legislation was passed, 99 percent of taxpayers see a reduction in their effective tax rates.

 

How much more money can one anticipate to earn from the TRAIN Law? Minimum wage earners will remain free from taxation as a result of this change.

 

The new income tax rates also exclude people receiving a yearly salary of P250,000 (approximately P22,000 per month) from paying income tax. This is great news as in the past, persons earning P10,000 or less a year were subject to a 5% income tax rate.

 

Below are the Personal Income Tax Rates from 2018 to 2022:

  • An annual salary of not over Php 250, 000 = 0 %

  • An annual salary of over Php 250, 000 but not over Php 400, 000 = 20 % of the excess over Php 250, 000

  • An annual salary of over Php 400, 000 but not over Php 800, 000 = Php 30, 000 + 25 % of the excess over Php 400, 000

  • An annual salary of over Php 800, 000 but not over Php 2 million = Php 130, 000 + 30 % of the excess over Php 800, 000

  • An annual salary of over Php 2 million but not over Php 2 million = Php 490, 000 + 32 % of the excess over Php 2 million

  • An annual salary of over Php 8 million = Php 2, 410, 000 + 35 % of the excess over Php 8 million

Personal income tax rates would also be further reduced in 2023, according to the Train Law.

 

Below are the Personal Income Tax Rates on 2023 onwards:

  • An annual salary of not over Php 250, 000 = 0 %

  • An annual salary of over Php 250, 000 but not over Php 400, 000 = 15 % of the excess over Php 250, 000

  • An annual salary of over Php 400, 000 but not over Php 800, 000 = Php 22, 500 + 20 % of the excess over Php 400, 000

  • An annual salary of over Php 800, 000 but not over Php 2 million = Php 102, 500 + 25 % of the excess over Php 800, 000

  • An annual salary of over Php 2 million but not over Php 2 million = Php 402, 500 + 30 % of the excess over Php 2 million

  • An annual salary of over Php 8 million = Php 2, 202, 500 + 35 % of the excess over Php 8 million

 

It is true that a basic understanding of how to calculate taxes in the Philippines is rare, at least to some degree.

 

However, while some people are satisfied with just earning a living, others want a deeper understanding of how they came to have the financial resources they have. Because of all the figures and tables, tax calculation might seem to be difficult, but the vast majority of them are used merely as a reference for the actual computing of the tax. The good news is that there are online tax calculators in the Philippines that can simplify the process for you.

 

So, how do the Filipinos go about calculating their taxes?

 

Below is the step by step process on how to compute your income tax in the Philippines:

Step 1. Calculate your monthly take-home pay and subtract your SSS, PhilHealth, and Pag-Ibig Fund contributions.

You're not going to start withholding taxes right now. To begin, you must subtract your contributions from your taxable income, which is equal to your base salary plus any extra compensation, such as holiday and overtime pay. This is the first step in calculating your tax liability.

 

In order for us to help you in figuring out how much do you need to pay for your government contributions, we also included the contribution tables below:

SSS CONTRIBUTION TABLE (For voluntary or self-employed)

  • For a salary range of below Php 3, 250 = Php 390 contribution amount

  • For a salary range of Php 3, 250 - Php 3, 749.99 = Php 455 contribution amount

  • For a salary range of Php 3, 750 - Php 4, 249.99 = Php 520 contribution amount

  • For a salary range of Php 4, 250 - Php 4, 749.99 = Php 585 contribution amount

  • For a salary range of Php 4, 750 - Php 5, 249.99 = Php 650 contribution amount

  • For a salary range of Php 5, 250 – Php 5, 749.99 = Php 715 contribution amount

  • For a salary range of Php 5, 750 – Php 6, 249.99 = Php 780 contribution amount

  • For a salary range of Php 6, 250 – Php 6, 749.99 = Php 845 contribution amount

  • For a salary range of Php 6, 750 – Php 7, 249.99 = Php 910 contribution amount

  • For a salary range of Php 7, 250 – Php 7, 749.99 = Php 975 contribution amount

  • For a salary range of Php 7, 750 – Php 8, 249.99 = Php 1, 040 contribution amount

  • For a salary range of Php 8, 250 – Php 8, 749.99 = Php 1, 105 contribution amount

  • For a salary range of Php 8, 750 – Php 9, 249.99 = Php 1, 170 contribution amount

  • For a salary range of Php 9, 250 – Php 9, 749.99 = Php 1, 235 contribution amount

  • For a salary range of Php 9, 750 – Php 10, 249.99 = Php 1, 300 contribution amount

  • For a salary range of Php 10, 250 – Php 10, 749.99 = Php 1, 365 contribution amount

  • For a salary range of Php 10, 740 – Php 11, 249.99 = Php 1, 430 contribution amount

  • For a salary range of Php 11, 250 – Php 11, 749.99 = Php 1, 495 contribution amount

  • For a salary range of Php 11, 750 – Php 12, 249.99 = Php 1, 560 contribution amount

  • For a salary range of Php 12 ,250 – Php 12, 749.99 = Php 1, 625 contribution amount

  • For a salary range of Php 12, 750 – Php 13, 249.99 = Php 1, 690 contribution amount

  • For a salary range of Php 13, 250 – Php 13, 749.99 = Php 1, 755 contribution amount

  • For a salary range of Php 13, 750 – Php 14, 249.99 = Php 1, 820 contribution amount

  • For a salary range of Php 14, 250 – Php 14 ,749.99 = Php 1, 885 contribution amount

  • For a salary range of Php 14, 750 – Php 15, 249.99 = Php 1, 950 contribution amount

  • For a salary range of Php 15 ,250 – Php 15, 749.99 = Php 2, 015 contribution amount

  • For a salary range of Php 15, 750 – Php 15, 249.99 = Php 2, 080 contribution amount

  • For a salary range of Php 16, 250 – Php 16, 749.99 = Php 2, 145 contribution amount

  • For a salary range of Php 16, 750 – Php 17, 249.99 = Php 2, 210 contribution amount

  • For a salary range of Php 17, 250 – Php 17, 749.99 = Php 2, 275 contribution amount

  • For a salary range of Php 17, 750 – Php 18, 249.99 = Php 2, 340 contribution amount

  • For a salary range of Php 18, 250 – Php 18, 749.99 = Php 2, 405 contribution amount

  • For a salary range of Php 18, 750 – Php 19, 249.99 = Php 2, 470 contribution amount

  • For a salary range of Php 19, 250 – Php 19, 749.99 = Php 2, 535 contribution amount

  • For a salary range of Php 19, 750 and above = Php 2, 600 contribution amount

PHILHEALTH CONTRIBUTION TABLE (For voluntary or self-employed)

  • For a salary range of Php 10, 000 and below = Php 350 contribution amount

  • For a salary range of Php 10, 000.01 to Php 69, 999.99 = Php 350 to Php 2, 449.99 contribution amount

  • For a salary range of Php 70, 000 and above = Php 2, 450 contribution amount

 

Case # 1: An employee earning P25,000 a month, for example, would have P1,025.05 taken from his or her pay, with P581.30 going to SSS, P343.75 to PhilHealth, and P100 to Pag-ibig.

Php 25, 000.00 – Php 1, 025.05 = Php 23, 974.95

 

Case # 2: Employee 2, on the other hand, whose monthly salary is P100,000, would have P1,231.30 taken from his or her pay, which includes P581.30 in SSS, P550 in PhilHealth, and P100 in Pag-ibig.

Php 100, 000.00 – Php 1, 231.30 = Php 98, 768.70

 

Now that you know what your taxable income is, you can then proceed to the income tax computation.

Step 2. Figure out your taxable income

If your monthly salary is more than Php 90, 000, you must remove Php 90, 000 from your monthly income and divide the result by 12 to get your taxable 13th month pay. To determine your monthly taxable income, multiply the amount from step 1 by the number of months in the year.

 

Let's take a look on the two examples below:

 

Case # 1: Due to his low monthly income that doesn't go over Php 90, 000, Employee 1 wouldn't need to go through this process. Taxable income for the month is still P 23, 974.95 for him.

 

Case # 2: On the other hand, Employee 2 would under the Train Law. Because Php 100, 000 – Php 90, 000 = Php 10, 000, which is then divided by 12. He would then add Php 833.33 to the total. The following is a breakdown of his yearly taxable income:

 

Php 98, 768.70 + Php 833.33 = Php 99, 602.03

 

Step 3. Determine your tax withheld bracket by referring to BIR’s withholding tax table

The BIR's withholding tax chart may help you determine where your result from Step 2 falls in relation to the tax bracket. Then figure out how much tax you owe.

Let's again see the two examples given below:

 

Case # 1: P23,974.95 is in bracket 2 for Employee 1 since his compensation exceeds Php 20, 833.33. This implies that we must deduct Php 20, 833.33 from the total and then multiply the resulting amount by 20 percent.

( P23,974.95 – 20,833.33 ) x 0.20 = P628.32

 

Case # 2: In the case of Employee 2, the amount of Php 99, 602.03 is classified as bracket 4, since the compensation exceeds Php 66, 666.67. In order to do this, we must deduct Php 66, 666.67, multiply the difference by 30, and then add Php 10, 833.33 to the total.

[ ( P99,602.03 – 66,666.67 ) x 0.30 ] + 10,833.33 = P20,713.94

 

Meanwhile, if you have a business aside from your monthly salary in the company, you can compute your total income tax due by following these steps:

 

Computation of income tax due on business income using the 8% tax rate

In order to get the yearly gross revenue, multiply your monthly income by 12 months. For example:

Php 15 ,000 x 12 = Php 180, 000

Then, in order to figure out your income tax due, multiply your gross income by 8%:

Php 180, 000 x 0.08 = Php 14, 400

 

Computation of total income tax due

Compute the amount of taxes owed on both compensation and company income. If you have a mixed-income household, you do not have to submit and pay income taxes on compensation, thus you just have to file and pay the Php 14,400 tax on the business income you generate.

 

On the other hand, if the mixed-income earner has chosen to apply the graduated income tax rates for calculating tax based on his business income, then he merely needs to combine his taxable compensation and business earnings. Then, using the graduated tax table, determine the amount of yearly income tax that must be paid.

 

Tax Computation for your Passive Income

Certain forms of passive income are taxed at varying rates by the BIR. Tax-exempt revenues like PCSO and lottery wins worth less than Php 10,000 are the sole exceptions to this rule as tax calculation is based on the graduated tax rates.

 

Calculating the tax owed on passive income is simpler than doing so on compensation income or your business income. To figure out how much tax you owe, you just need to multiply your earnings by the tax rate that applies to you.

 

The Philippines' Bureau of Internal Revenue or BIR has released a tax table detailing the tax rates on passive income for both local and international taxpayers. Below are the details showing the passive income and its corresponding tax rates:

1. Interest from currency deposits, trust funds, and deposit substitutes = 20 %

2. Royalties (on books as well as literary and musical compositions = 10 %

- In general = 20 %

3. Prizes (Php 10, 000 or less) = Graduated income tax rates

- Over Php 10, 000 = 20 %

4. Winnings (except from PCSO and Lotto amounting to Php 10, 000 or less) = 20%

- From PCSO and Lotto amounting to Php 10, 000 or less = exempt

5. Interest Income from a Depository bank under the Expanded Foreign Currency Deposit System = 15 %

6. Cash and / or Property Dividends received by an an individual from a domestic corporation / joint stock company / insurance or mutual fund companies / Regional Operation Headquarter of multinational companies = 10 %

7. Share of an individual in the distributable net income after tax of a partnership (except GPPs) / association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture = 10 %

8. Capital gains from sale, exchange or other disposition of real property located in the Philippines, classified as capital asset = 6 %

9. Net Capital gains from ale of shares of stock not traded in the stock exchange = 15 %

10. Interest Income from long term deposit or investment in form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sental ng Pilipinas (BSP). = Exempt

Upon termination before the fifth year, there should be imposed on the entire income from the proceeds of the long term deposit based on the remaining maturity thereof:

- Four (4) years to less than five (5) years holding period = 5 %

- Three (3) years to less than four (4) years holding period = 12 %

- Less than three (3) years holding period = 20 %

 

For example:

Let's pretend you won a Php 1 million in the lotto. The tax rate of 20% is automatically deducted from rewards exceeding Php 10, 000 before your winnings are delivered to you.

 

Prior to claiming your reward, it is possible to calculate the amount of tax that will be deducted. Simply multiply one million pesos by 20 % of that figure (for example Php 1 million x 0.20). After taxes of Php 200, 000, the remaining Php 800, 000 will be given to you.

 

Annual Income Tax Return

When you submit a tax return to BIR, you're disclosing your earnings, spending, and other important financial data. Returns for taxes are used to assess a taxpayer's tax burden, schedule tax payments, or obtain a refund for an overpayment of tax. Tax returns are required to be submitted on a yearly basis in the Philippines.

 

BIR Form No. 1701: Annual Income Tax Return For Individuals (including MIXED Income Earner), Estates and Trusts

In line with Section 51 of the Code, as amended, people having mixed income (i.e., those engaged in trade/business or profession but also receiving compensation income) must submit BIR Form No. 1701. In order to file an annual income tax return, a taxpayer must include all of their financial transactions for the previous calendar year.

 

The following people, regardless of their gross income, are required to complete this form:

1. A Filipino citizen engaged in commerce, trade, or profession both within and outside of the country.

2. Any foreign national or non-citizen resident working in the Philippines in the course of his or her profession, whether as an employee or as a company owner.

3. A trustee of a trust, guardian of a minor, executor/administrator of an estate, or any person acting in any fiduciary capacity for any person, where such trust, estate, minor, or person is engaged in trade or business.

4. A person who is involved in a trade or company or profession and is also earning compensation money.

 

Filing date: Taxpayers are required to submit this form on or before April 15 of each year, which covers the preceding taxable year's income.

 

BIR Form No. 1701A: Annual Income Tax Return for Individuals Earning Income PURELY from Business/Profession

Individuals using the flat 8 percent income tax rate and those who fall within the graduated income tax rates with OSD as a method of deduction. Individuals who make their money solely via trade, commerce, or the practice of the profession are required to submit a tax return.

1. A resident citizen (within and without the Philippines)
2. A resident alien, non-resident citizen or non-resident alien (within the Philippines)

The return may only be utilized by the following individuals:

  • individuals whose subject to graduated income tax rates and who use the standard deduction as a strategy of tax planning, whether or not they have any sales or receipts or other non-operational revenue; OR

  • anybody earning less than Php 3 million in sales/receipts or other non-operating income but who took advantage of the 8% flat income tax rate

 

Filing date: Taxpayers are required to submit this form on or before April 15 of each year, which covers the preceding taxable year's income.

 

BIR Form No. 1701Q: Quarterly Income Tax Return for Individuals, Estates, and Trusts 

Regardless of gross income, the following persons must submit this return in triplicate:

1. A Filipino citizen who is involved in commerce, trade, or profession both within and outside of the country.

2. Non-citizen, non-resident, or non-resident immigrant who resides in the Philippines and engages in commerce, business, or professional activity there.

3. A trustee of a trust, guardian of a minor, executor/administrator of an estate, or any person acting in any fiduciary capacity for any person, where such trust, estate, minor, or person is engaged in trade or business.

 

Filing date:

1st Quarter = On or before May 15 of the current taxable year

2nd Quarter = On or before August 15 of the current taxable year

3rd Quarter = On or before November 15 of the current taxable year

 

BIR Form No. 1702-EX: Annual Income Tax Return For Corporation, Partnership, and Other Non-Individual Taxpayer EXEMPT Under the Tax Code, as Amended, {Sec. 30 and those exempted in Sec. 27(C)} and Other Special Laws, with NO Other Taxable Income

Taxpayers who are exempt by Section 30 of the Tax Code, as modified [Sec. 27(C)] are required to submit this form, as are corporations, partnerships, and other non-individual taxpayers. Foundations, cooperatives, charity organizations, non-stock and non-profit educational institutions, general professional partnerships (GPPs), and other special laws WITHOUT ANY OTHER TAXABLE INCOME

 

Filing date: This return must be submitted on or before the 15th day of the fourth month after the end of the taxpayer's taxable year.

 

BIR Form No. 1702-MX: Annual Income Tax Return for Corporation, Partnership, and Other Non-Individual with MIXED Income Subject to Multiple Income Tax Rates or with Income Subject to SPECIAL/PREFERENTIAL RATE

If you have a mixed income that is taxed at more than one tax rate, or if your income is subject to special/preferential rates for corporations, partnerships, or other non-individual tax payers, you must submit this return.

 

Filing date: This return must be submitted on or before the 15th day of the fourth month after the end of the taxpayer's taxable year.

 

BIR Form No. 1702-RT: Annual Income Tax Return For Corporation, Partnership and Other Non-Individual Taxpayer Subject Only to REGULAR Income Tax Rate

This return shall be filed by Corporation, Partnership and other Non-Individual Taxpayer Subject Only to REGULAR Income Tax Rate of 30%. Every corporation, partnership no matter how created or organized, joint stock companies, joint accounts, associations (except foreign corporation not engaged in trade or business in the Philippines and joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations), government-owned or controlled corporations, agencies and instrumentalities shall render a true and accurate income tax return in accordance with the provisions of the Tax Code.

 

Filing date: This return must be submitted on or before the 15th day of the fourth month after the end of the taxpayer's taxable year.

 

BIR Form No. 1702Q: Quarterly Income Tax Return for Corporations, Partnerships and Other Non-Individual Taxpayers

Quarterly returns must be filed by every business entity that is not a foreign corporation or joint venture or consortium engaged in construction projects or in the extraction of petroleum, coal, geothermal energy, and other forms of energy (except foreign corporations not engaged in trade or business in the Philippines). This includes all government-owned or controlled businesses.

 

Filing date: It is mandatory for corporations to submit their quarterly income tax returns, whether they paid or not, within sixty (60) days of each quarter's end of the taxation year, regardless of whether it is a calendar or fiscal year.

 

BIR Form No. 1707: Capital Gains Tax Return for Onerous Transfer of Shares of Stocks Not Traded Through the Local Stock Exchange

Natural or legal person, resident or non-resident, who is not exempt under current rules for the sale, barter, exchange, or other onerous disposal intended to transfer ownership of shares of domestic firm categorized as capital assets, which are not listed on the local stock market.

Filing date:

  • A report must be made within thirty (30) days following the sale, barter, exchange, or other disposal of stock not traded on a local stock exchange for cash or in kind.

  • Returns for installment sales must be lodged within 30 days of the receipt of the first down payment and within 30 days of each successive installment payment in the event of installment purchases.

 

BIR Form No. 1709: Information Return on Transactions with Related Party (International and/or Domestic)

As an addendum to the Annual Income Tax Return, you must submit this information return and the accompanying documentation. This is to guarantee that all related-party transactions are properly disclosed and that these transactions are performed at arm's length to safeguard the tax base. The financial statements of a company must contain the disclosures necessary to draw attention to the possibility that the financial position and profit or loss of the company may have been affected by the existence of related parties and transactions and outstanding balances, including commitments, with such parties.

 

Transactions between related parties shall include, but are not limited to:

  1. Purchases or sales of goods (finished or unfinished);

  2. Purchases or sales of property and other assets;

  3. Rendering or receiving of services;

  4. Leases;

  5. Transfers of research and development;

  6. Transfers under license agreements;

  7. Transfers under finance arrangements (including loans and equity contributions in cash or in kind);

  8. Provision of guarantees or collateral;

  9. Commitments to do something if a particular event occurs or does not occur in the future, including executory contracts, i.e., contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent (recognized and unrecognized); and

  10. Settlement of liabilities on behalf of the entity or by the entity on behalf of that related party.

 

Though the process of tax calculation may appear lengthy and complicated, it is yet beneficial to at least have some knowledge of it. In this way, workers are aware of what their expected pay should be and of any discrepancies. Filipino workers ought to be treated correctly, down to the last centavo, for their devotion to the task, no matter how tough it is to accomplish.

 

Aside from this, filing an income tax return or ITR is also essential when you would like to invest in a property in the Philippines. In fact, with Lumina Homes. this is one of the important requirements that you must submit in purchasing a brand new house and lot package.

 

Also Read: A Beginner’s Guide to Estate Tax

 

Paying your taxes and filing of ITR might be a tedious process, especially for working individuals, traders, and business people but this is also a key to a great investment for your future.

 

So, make sure to settle your income tax responsibly and get a smooth investment for your future with Lumina Homes.

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