How to Compute Individual Income Tax

Three classifications of Individual Tax Payers:

1. Pure Compensation Earner – Those are having
2. Business Income Earner (Self-employed)
3. Mixed Income Earner – Income comes from both business and employment 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 the employment, earned a total compensation income of P135, 000.00.
The tax payer contributed SSS, Philhealth, and HDMF totaling P5, 000.00 and received 13 th month pay of P11, 000.00.
The income tax liability is computed as follows:

Total Compensation Income P 135,000.00

Less: Mandatory Contributions P 5,000.00
Non-taxable benefits 11,000.00 16,000.00
Taxable Income P 119,000.00
Income Tax Due *NONE
*minimum wage earners are exempt from income tax.

Illustration 2: Ms. JPB operates a convenience store while she offers bookkeeping services to her clients in 2018, her
gross sales amounted to P 800,000. In addition to her receipts from bookkeeping services of P 300,000. She already
signified her intention to be taxed at 8% income tax rate 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 = P 68,000

Illustration 3: Ms. JPB 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 P 600,000 and P
200,000. Respectively, or a total of P 800,000, the total income tax shall be computed as follows:

Gross Sales/Receipts P 1,100,000

Less: Cost of Sales 600,000
Gross Income P 500,000
Less: Operating Expenses 200,000
Taxable Income P 300,000
Tax Due:
On excess (300,000 – 250,000) 20% = P 10,000

Illustration 4: Mr. JMLH signified his intention to be taxed at 8% income tax rate on gross sales in his 1 st Quarter Income
Tax Return. He has no other source of income. His total sales for the first three quarters amounted to P 3,000,000 with
4th quarter sales of P 3,500.000.
 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Total Sales P 500,000 P 500,000 P 2,000,000 P 3,500,000
Less: Cost of Sales 300,000 300,000 1,200,000 1,200,000
Gross Income 200,000 200,000 800,000 2,300,000
Less Operating Expenses 120,000 120,000 480,000 720,000
Taxable Income 80,000 80,000 320,000 300,000

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 Expenses 1,440,000
Taxable Income 2,060,000

Income Tax Due

Tax due under graduated rates P 509,200
Less: 8% income tax previously paid (Q1 to Q3)
(P 3,000,000 – P 250,000) X 8% 220,000
Annual Income Tax Payable P 289,200

Example of mixed income earner:

Mr. MAG, a Finance Comptroller of Job Company, earned annual compensation in 2018 of P 1,500,000, inclusive of 13 th
month pay and other benefits in the amount of P 120,000 but net of mandatory contributions to SSS and Philhealth.
Aside from employment income, he owns a convenience store, with gross sales of 2,400,000. His cost sales and
operating expenses are P 1,000,000 and P 600,000, respectively and with non-operating income of P 100,000.
a. His tax due for 2018 shall be computed as follows if he 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 800,000 P 130,000
On excess (P 1,400,000 – P 800,000) X 30% 183,000
Tax Due on Compensation Income P 313,000
Tax Due:
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 P 200,000
Total Income Tax Due (Compensation & Business) P 513,000

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
th
Less: Non-taxable 13 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 1,400,000
Less: Operating Expenses 600,000
Net Income from Operation 800,000
Add: Non-Operating income 100,000 900,000
Total taxable Income P 2,310,000

Tax Due:
On P 2,000,000 P 490,000
On excess (P 2,310,000 – P 2,000,000) X 32% 99,000
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 P 150,000, 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 P 130,000 (not over P 250,000 P 0.00
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 Business tax Due (Compensation & P 200,000
Business)