INCOME TAX – INDIVIDUALS

SAMPLE PROBLEMS

A. COMPENSATION INCOME

1. Mr. A, is the finance manager of XYZ Corp, a corporation engaged in the business of
providing back-office support, accounting outsourcing, payroll and legal administration and
compliance services. The following data were taken from the monthly pay slip of Mr. A:

Monthly salary P100,000

SSS contribution 900
Pag-Ibig contribution 100
PhilHealth contribution 900
Rice subsidy 1,500
Transportation allowance 2,000

At the end of the year, Mr. A received 13th month pay of P100,000 and performance bonus
amounting to P150,000. He also received P20,000 for the 6 unutilized vacation leaves. Total taxes
withheld on compensation by his employer amounted to P174,957.30.

Compute for the annual income tax due and payable.

Solutions:

Annual salary (P100,000 x 12 months) 1,200,000.00

Add:
Transportation allowance (P2,000 x 12) 24,000.00
13th month bonus 100,000.00
Performance bonus 150,000.00 274,000.00
Total compensation income 1,474,000.00
Less: Exclusions
SSS contributions (P900 x 12) 10,800.00
Pag-Ibig contributions (P100 x 12) 1,200.00
PhilHealth contributions (P900 x 12) 10,800.00
Non-taxable bonus and other benefits 90,000.00 112,800.00
Taxable income 1,361,200.00
Less: 800,000.00
Income subject to additional tax 561,200.00
Multiply by tax rate 30%
Income tax on excess income over bracket 168,360.00
Add: Basic tax due 130,000.00
Total income tax due 298,360.00
Less: Total taxes withheld on compensation 174,957.30
Total income tax payable 123,402.70
**Rice subsidy and monetized unused vacation leaves are not included in the computation of
taxable income since both are part of de minimis benefits which are non-taxable for income tax
purposes.
2. Mr. A, is the finance manager of XYZ Corp, a corporation engaged in the business of
providing back-office support, accounting outsourcing, payroll and legal administration and
compliance services. The following data were taken from the monthly pay slip of Mr. A:

Monthly salary P100,000

SSS contribution 900
Pag-Ibig contribution 100
PhilHealth contribution 900
Rice subsidy 3,500
Car allowance 20,000

At the end of the year, Mr. A received 13th month pay of P100,000 and performance bonus
amounting to P150,000. He also received P40,000 for the 12 unutilized vacation leaves. Total taxes
withheld on compensation by his employer amounted to P174,957.30.

Compute for the annual income tax due and payable.

Solutions:

Annual salary (P100,000 x 12 months) 1,200,000.00

Add:
Excess of rice subsidy over threshold (P1,500 x 12) 18,000.00
Excess of VL credits over threshold (P40,000 / 12 * 2) 6,666,67
13th month bonus 100,000.00
Performance bonus 150,000.00 274,666.67
Total compensation income 1,474,666.67
Less: Exclusions
SSS contributions (P900 x 12) 10,800.00
Pag-Ibig contributions (P100 x 12) 1,200.00
PhilHealth contributions (P900 x 12) 10,800.00
Non-taxable bonus and other benefits 90,000.00 112,800.00
Taxable income 1,361,866.67
Less: 800,000.00
Income subject to additional tax 561,866.67
Multiply by tax rate 30%
Income tax on excess income over bracket 168,560.00
Add: Basic tax due 130,000.00
Total income tax due 298,560.00
Less: Total taxes withheld on compensation 174,957.30
Total income tax payable 123,602.70

**Excess of de minimis benefits are considered taxable income subject to graduated income tax.
***Car allowance is subject to Fringe benefits tax.

Note: Fringe benefits that are relatively of small value, if note subject to FBT, shall be subject to
regular income tax (such as transportation allowance).
3. Ms. B, is the accounting staff of LMN Company, a corporation engaged in the manufacturing
of canned tuna. The following data were taken from the monthly pay slip of Ms. B:

Monthly salary P30,000

SSS contribution 300
Pag-Ibig contribution 100
PhilHealth contribution 300

At the end of the year, Ms. B received her 13th month pay of P30,000. Total taxes withheld on
compensation by her employer amounted to P16,932.

Compute for the annual income tax due and payable.

Solutions:

Annual salary (P30,000 x 12 months) 360,000.00

Add: 13th month bonus 30,000.00
Total compensation income 390,000.00
Less: Exclusions
SSS contributions (P300 x 12) 3,600.00
Pag-Ibig contributions (P100 x 12) 1,200.00
PhilHealth contributions (P300 x 12) 3,600.00
Non-taxable bonus and other benefits 30,000.00 38,400.00
Taxable income 351,600.00
Less: 250,000.00
Income subject to additional tax 101,600.00
Multiply by tax rate 20%
Total income tax due 20,320.00
Less: Total taxes withheld on compensation 16,932.00
Total income tax payable 3,388.00
B. BUSINESS INCOME

1. Compairs, a sole proprietor, is engaged in computer sales, reporting the following income and
expenses during the year:

Net sales 1,700,000

Cost of sales 500,000
Salaries expense 90,000
Rent expense 60,000
Representation expense 10,000

a) How much is the income tax due?

b) Assuming Compairs opted to use OSD, what is the income tax due?
c) Supposed Compairs opted to be taxed at 8%, how much is the income tax due?

SOLUTIONS:

Itemized OSD 8%
Net sales 1,700,000 1,700,000 1,700,000
Less: Cost of sales 500,000 500,000 0
Gross profit 1,200,000 1,200,000 1,700,000
Less: Allowable deductions 158,500 680,000 250,000
Salaries 90,000
Rent 60,000
Representation expense 8,500*
Taxable income 1,041,500 520,000 1,450,000
Income tax bracket 800,000 400,000 0
Excess income tax 241,500 120,000 1,450,000
Multiply by 30% 25% 8%
Tax on excess income 72,450 30,000 116,000
Basic tax due 130,000 30,000 0
Total income tax due 202,450 60,000 116,000

*Computation for limitations Goods

Representation expense 10,000
Limit (0.5% x P1,700,000) 8,500
Non-deductible expense 1,500
2. Compairs, a sole proprietor, is engaged in computer repairs and maintenance, reporting the
following income and expenses during the year:

Net revenue 1,300,000

Cost of services 300,000
Salaries expense 90,000
Rent expense 60,000
Representation expense 10,000

a) How much is the income tax due?

b) Assuming Compairs opted to use OSD, what is the income tax due?
c) Supposed Compairs opted to be taxed at 8%, how much is the income tax due?

SOLUTIONS:

Itemized OSD 8%
Net revenue 1,300,000 1,300,000 1,300,000
Less: Cost of services 300,000 300,000 0
Gross profit 1,000,000 1,000,000 1,300,000
Less: Allowable deductions 160,000 520,000 250,000
Salaries 90,000
Rent 60,000
Representation expense 10,000*
Taxable income 840,000 480,000 1,050,000
Income tax bracket 800,000 400,000 0
Excess income tax 40,000 80,000 1,050,000
Multiply by 30% 25% 8%
Tax on excess income 12,000 20,000 84,000
Basic tax due 130,000 30,000 0
Total income tax due 142,000 50,000 84,000

*Computation for limitations Services

Representation expense 10,000
Limit (1% x P1,300,000) 13,000
Non-deductible expense 0
C. MIXED INCOME

1. Ms. Terry Yaki, operates a convenience store while she offers bookkeeping services to her
clients. Her gross sales amounted to P800,000 for the year. In addition, she earned P300,000
from bookkeeping services. She incurred cost of sales and operating expenses amounting to
P600,000 and P200,000, respectively. She already signified her intention to be taxed at 8%
income tax rate in her 1st quarter return.

What is her income tax liability for the year?

SOLUTION:

Gross sales – business income 800,000.00

Gross receipts – professional income 300,000.00
Total gross income 1,100,000.00
Less: Allowable deductions 250,000.00
Taxable income 850,000.00
Multiply by tax rate 8%
Total income tax due and payable 68,000.00

2. Supposed Ms. Terry Yaki failed to signify her intention to be taxed at 8% income tax rate,
what is her income tax liability for the year?

SOLUTION:

Gross sales – business income 800,000.00

Gross receipts – professional income 300,000.00
Total gross revenue 1,100,000.00
Less: Cost of sales 600,000.00
Gross income 500,000.00
Less: Allowable deductions 200,000.00
Taxable income 300,000.00
Less: 250,000.00
Income subject to tax 50,000.00
Multiply by tax rate 20%
Total income tax due and payable 10,000.00

Note: Business income and professional income are the taxed the same way, either graduated
income tax or 8% income tax.
3. Mr. Madz, a comptroller of JAC Company, earned annual compensation of P1,500,000,
inclusive of 13th month and other benefits of P120,000 but net of mandatory contributions.
Aside from the 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) What is his income tax liability using itemized deductions?

b) In case of OSD, what is his income tax liability?
c) Supposed he opted to use 8% income tax, what is his income tax due?

SOLUTIONS:

Compensation income
Annual compensation, including benefits 1,500,000.00
Less: Non-taxable benefits 90,000.00
Total taxable compensation income 1,410,000.000
Less: 800,000.00
Income subject to additional tax 610,000.00
Multiply by tax rate 30%
Income tax on excess income over bracket 183,000.00
Add: Basic tax due 130,000.00
Total income tax due and payable 313,000.00

Business income
Itemized OSD 8%
Gross sales 2,400,000 2,400,000 2,400,000
Less: Cost of sales 1,000,000 1,000,000 0
Gross profit 1,400,000 1,400,000 2,400,000
Less: Allowable deductions 600,000 560,000 0
Taxable income 800,000 840,000 2,400,000
Add: Non-operating income 100,000 100,000 100,000
Total Taxable income - business 900,000 940,000 2,500,000
Add: Total compensation income 1,410,000 1,410,000 0*
Total taxable income 2,310,000 2,350,000 2,500,000
Income tax bracket 2,000,000 2,000,000 0
Excess income tax 310,000 350,000 2,500,00
Multiply by 32% 32% 8%
Tax on excess income 99,200 112,000 200,000
Basic tax due 490,000 490,000 313,000**
Total income tax due and payable
(business and compensation) 589,200 602,000 513,000

*Compensation income is not subject to 8% income tax

**Tax due on compensation
D. 8% INCOME TAX

1. Mr. Ser Yoso signified his intention to be taxed at 8% income tax rate on gross sales in his 1st
quarter ITR. He has no other source of income. His total sales for the 1st 3 quarters amounted
to P3,000,000 with 4th quarter sales of P3,500,000.

Q1 Q2 Q3 Q4
Total sales 500,000 500,000 2,000,000 3,500,000
Cost of sales 300,000 300,000 1,200,000 1,200,000
Operating expenses 120,000 120,000 480,000 720,000

Compute for the income tax due for each quarter and for the year.

SOLUTIONS:

1st Quarter Income Tax

Total sales 500,000
Less: allowable deductions 250,000
Taxable income 250,000
Multiply by tax rate 8%
Total income tax due and payable 20,000

2nd Quarter Income Tax

Total sales 500,000
Total sales – 1st quarter 500,000
Total income for the 2 quarters 1,000,000
Less: allowable deductions 250,000
Taxable income 750,000
Multiply by tax rate 8%
Total income tax due 60,000
Less: Income tax paid – 1st quarter 20,000
Total income tax due and payable – 2nd quarter 40,000

3rd Quarter Income Tax

Total sales 2,000,000
Total sales from previous quarters 1,000,000
Total sales for the 3 quarters 3,000,000
Less: allowable deductions 250,000
Taxable income 2,750,000
Multiply by tax rate 8%
Total income tax due 220,000
Less: Income tax paid in previous quarters 60,000
Total income tax due and payable – 3rd quarter 160,000
4th Quarter /Annual Income Tax
Total sales 3,500,000
Total sales from previous quarters 3,000,000
Total annual sales 6,500,000
Less: Cost of sales (annual) 3,000,000
Gross profit 3,500,000
Less: Operating expenses (annual) 1,440,000
Taxable income 2,060,000
Less: 2,000,000
Excess income subject to additional tax 60,000
Multiply by tax rate on excess income 32%
Tax on excess income 19,200
Add: Basic tax due 490,000
Total income tax due 509,200
Less: Income tax paid in previous quarters 220,000
Total income tax due and payable 289,200
2. Mr. Swabe owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000. His
cost of sales and operating expenses are P1,000,000 and P600,000, respectively, and with non-
operating income of P100,000. Compute for his income tax due using 8%.

SOLUTION:

8% income tax due is not applicable because the nature of business of Mr. Swabe is subject
to Other Percentage Tax under Sec 125 of the Tax Code. Hence, Mr. Swabe is subject to the
graduated income tax rate instead.
E. OTHERS

1. Mr. H and Mrs. W are husband and wife. Mr. H is in business, while Mrs. W is in the practice
of profession. Mr. H and Mrs. W had a gross rent income and expenses related to it. Moreover,
the following data are extracted from their books of accounts:

Gross sales of Mr. H from business 1,500,000

Gross receipts of Mrs. W from practice of profession 900,000
Gross rent income 500,000
Cost and expenses, business of Mr. H 700,000
Cost and expenses, profession of Mrs. W 200,000
Expenses related on the rental property 200,000
Dividend income received by Mr. H from shares of stocks 40,000
Royalties from books published by Mrs. W 80,000
Interest income from joint account, net of final tax 20,000

Compute for the income tax of Mr. H and Mrs. W, respectively.

SOLUTIONS:

Mr. H Mrs. W
Gross sales from business 1,500,000
Gross receipts from profession 900,000
Gross receipt from rental 250,000 250,000
Total gross income 1,750,000 1,150,000
Less:
Cost and expenses from business 700,000
Cost and expenses from profession 200,000
Cost and expenses from rental 100,000 100,000
Taxable income 950,000 850,000
Less: 800,000 800,000
Excess income subject to additional tax 150,000 50,000
Multiply by tax rate on excess income 30% 30%
Tax on excess income 45,000 15,000
Add: Basic tax due on income bracket 130,000 130,000
Total income tax due and payable 175,000 145,000

*Dividend income, royalties and interest income are not included in the computation of
income tax subject to regular tax rate since they are subject to final withholding tax.
2. Mr. Balim Bing was a non-resident citizen in 2017. He returned to the Philippines on June 5,
2018 to reside permanently. He had an income from January 1 to June 4, 2018 of P300,000
from Philippine sources and P200,000 from foreign sources. Moreover, he had an income of
P600,000 from Philippine sources and P400,000 from foreign sources from June 6 to
December 31, 2018. How much is the income tax due of Mr. Bing in 2018?

SOLUTION:

Income from PH sources (Jan 1 – Jun 4) 300,000

Income from PH sources (Jun 6 – Dec 31) 600,000
Income from foreign sources (Jun 6 – Dec 31) 400,000
Total taxable income 1,300,000
Less: 800,000
Excess income subject to additional tax 500,000
Multiply by tax rate for excess income 30%
Tax on excess income 150,000
Add: Basic tax due 130,000
Total tax due and payable 280,000

3. Mr. Arai Nakurot, a Japanese engineer residing in Tokyo, Japan, was contracted by a domestic
corp to assemble in the Philippines an equipment it bought in Japan. He started the work in
Japan and spent 10 days there. The assembling job was completed in the Philippines for
another 20 days. He was paid 300,000 for the job. How much is the income tax due of Mr.
Nakurot?

SOLUTION:

Total income 300,000

Multiply by rate of income attributable to PH (20/30 days) 66.67%
Income from PH sources 200,000
Multiply by tax rate 25%
Total tax due and payable 50,000