GROSS INCOME from Business or Practice of Profession

Tax Rates Application – INDIVIDUALS (Citizen and Resident Alien, including Non-resident Alien
Engaged in Trade or Business).
1. Income from compensation - Tax Table (Sec 24a)
Compensation subject to Income Tax------------------------ XXX
Less: Employees contribution to Union Dues ……. XXX
Employees contribution to SSS/GSIS ………… XXX
Employees contribution to Phil-Health ……. XXX
Employees contribution to Pag-IBIG ………. XXX XXX
Taxable Income ………………………………………………………….. XXX
Tax Table (Sec 24a)…………………………………………………….. XXX
Income Tax ……………………………………………………………….. XXX

2. Income from Business

Gross Sales is defined as the amount of goods or service received or to be received (RR 3-2024)

Individuals with Income

from Business/Practice of
Profession

8% Gross Sales – if annual

Tax Table (Sec 24a) sales/gross receipts did not
exceed P3M

Optional Standard Gross Sales ……………. XX

Itemized Deduction Deduction (40% of
gross sales/receipts) Less: ……………………….250,000
Taxable Income ………… XX
GR …………………………….. 8%
Sales/GR -------------- XX Sales/GR -------------- XX
Income Tax ………………. XX
Itemized Deduction XX Less: 40% OSD ……. XX

Net Taxable Income XX Net Taxable Income XX

Tax table………………. XX Tax table………………. XX

Income Tax …………. XX Income Tax …………. XX

Requisites for deductibility of business expenses

(Itemized Deductions):
1. It must be ordinary & necessary
2. It must be incurred/paid w/in the taxable year.
3. It must be substantiated w/ adequate proof.
4. It must be not against moral/public order
5. If subject to withholding, the same must have
been applied.
 3. Mixed Income (Income from compensation and business/practice of profession) – Tax Table (Sec 24a) or
8% Gross Sales Tax (if gross receipts did not exceed 3M).

a. The taxpayer opted to use the Tax Table (sec 24a)

Taxable Income from business/practice of profession …………… XXX
Taxable Income from compensation ……………………………………… XXX
Total Taxable Income ……………………………………………………………. XXX
Apply Tax Table (sec 24a) …………………………………………………….. XXX
Income Tax …………………………………………………………………………… XXX

b. Application: The taxpayer opted for 8% GST on business/practice of profession

Gross Sales from Business/Practice of profession ……..……………………. XXX
Multiplied by Gross Receipts Tax ……..…………………………………………….. 8%
Income Tax …………………………………………………………………………………….. XXX
Taxable compensation income ………………………………………... XXX
Apply Tax Table (Sec 24a)……………………………………………….... XXX XXX
Total Income Tax …………………………………………………………………………… XXX

Note: If the taxpayer opted for 8% GST, the 250,000 deduction is not applicable to mixed income earners
since it was already incorporated in the Tax Table.

TAX RULES FOR INDIVIDUALS EARNING INCOME BOTH FROM COMPENSATION AND FROM SELF-EMPLOYMENT
The pertinent item on taxation of individuals with income streams both from compensation and from self-
employment is explained in Section D of the BIR’s Revenue Regulations No. 8-2018, specifically:
Section (D). Individuals Earning Income Both from Compensation and from Self-Employment (business or
practice of profession).
For mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of the Tax
Code, as amended; AND
2. The income from business or practice of profession shall be subject to the following:
a. lf the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the individual
has the option to be taxed at:
a.1. Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; OR
a.2. Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating income
in lieu of the graduated income tax rates and percentage tax under Section 116 of the Tax Code, as
amended.
b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual shall
be subject to the graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as
amended.
The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8% income
tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is available only to
purely self-employed individuals and/or professionals.
The P250,000.00 mentioned is not applicable to mixed-income earners since it is already incorporated in the
first tier of the graduated income tax rates applicable to compensation income. Under the said graduated rates,
the excess of the P250,000.00 over the actual taxable compensation income is not deductible against the
taxable income from business/practice of profession under the 8% income tax rate option.
The total tax due shall be the sum of:
(1) tax due from compensation, computed using the graduated income tax rates; and
(2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8% income
tax rate with the total of the gross sales / receipts and other non-operating income.
Mixed income earner who opted to be taxed under the graduated income tax rates for income from
business/practice of profession, shall combine the taxable income from both compensation and
business/practice of profession in computing for the total taxable income and consequently, the income tax
due.
Note/Warning: Tax rates/table used was the old rate
Sample BIR Computations: Taxes of Mixed Income Earners

Sample Computation: Illustration 1

Mr. Madz, a Financial comptroller of JAC Company, earned annual compensation in 2020 of P1,500,000.00, inclusive of
13th month and other benefits in the amount of P120,000.00 but net of mandatory contributions to SSS and
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 P1,000,000.00 and P600,000.00, respectively, and with non-operating income of
P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2020 shall be computed as follows if he opted to be taxed at eight percent (8%) income tax rate on his
gross sales for his income from business:

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00

Taxable Compensation Income P1,410,000.00

Tax due on Compensation:

On P800,000.00 P130,000.00

On excess (P1,410,000 - P800,000) x 30% 183,000.00

Tax due on Compensation Income P313,000.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

TOTAL INCOME TAX DUE (Compensation and Business) P513,000.00

Option 1 CONCLUSIONS:
 The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is in lieu
of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax
Code, as amended.

 The amount of P250,000.00 allowed as a deduction under the law for taxpayers earning solely from self-
employment/practice of profession, is not applicable for mixed-income earner under the 8% income tax rate
option.
  The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates
applicable to compensation income.

Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and other non-operating income

His tax due for 2020 shall be computed as follows if he did not opt for the eight percent (8%) income tax based on
gross sales/receipts and other non-operating income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other 90,000.00

benefits-max

Taxable Compensation Income P1,410,000.00

Add: Taxable Income from Business -

Gross Sales P2,400,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P1,400,000.00

Less: Operating Expenses 600,000.00

Net Income from Operation P800,000.00

Add: Non-operating Income 100,000.00 900,000.00

Total Taxable Income P2,310,000.00

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

Total Income Tax P589,200.00

Option 2 CONCLUSIONS:
 The taxable income from both compensation and business shall be combined for purposes of computing the
income tax due if the taxpayer chose to be subject under the graduated income tax rates.

 In addition to the income tax, Mr. Madz is likewise liable to pay percentage tax of P72,000.00, which is 3% of
P2,400,000.00.

Sample Illustration 1 Continued:

On February 2020, taxpayer tendered his resignation to concentrate on his business. His total compensation income
amounted to P150,000.00, inclusive of benefits of P20,000.00. His business operations for the taxable year 2020
remains the same. He opted for the eight percent (8%) income tax rate.

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P150,000.00

Less: Non-taxable benefits 20,000.00

Taxable Compensation Income P130,000.00

Tax Due on Compensation:

On P130,000.00 (not over P250,000.00) P 0.00

Tax due on Compensation Income P 0.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

Total Income Tax Due (Compensation and Business) P200,000.00

 The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is in lieu
of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax
Code, as amended.

 The amount of P250,000.00 which is allowed as deduction under the law for taxpayers earning solely from
self-employment/practice of profession, is not applicable for mixed-income earner under the 8% income tax
rate option.

 The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates
applicable to compensation income. The excess of the P250,000.00 over the actual taxable compensation
income is not creditable against the taxable income from business/practice of profession under the 80%
income tax rate option.

Sample Computation: Illustration 2

Mr. Wayne, an officer of BATS International Corp., earned in 2018 an annual compensation of P1,200,000.00, inclusive
of the 13th month and other benefits in the amount of P120,000.00. Aside from employment income, he owns a farm,
with gross sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00,
respectively, and with non-operating income of P100.000.00.

His tax due for 2018 shall be computed as follows:

 Total compensation income P1,200,000.00

Less: Non-taxable 13th month pay and other benefits- 90,000.00

max

Taxable Compensation Income P1,110,000.00

Add: Taxable Income from Business -

Gross Sales P3,500,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P2,500,000.00

Less: Operating Expenses 600,000.00

Net Income from Operations P1,900,000.00

Add: Non-operating Income 100,000.00 2,000,000.00

Total Taxable Income P3,110,000.00

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P3,110,000 - 2,000,000) x 32% 355,200.00

Total Income Tax P845,200.00

CONCLUSION:

The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross sales exceed
the VAT threshold. However, he is still not subject to business tax since the nature of his business transactions is VAT
exempt.

Source: Bureau of Internal Revenue (BIR www.bir.gov.ph), Department of Finance (DOF www.dof.gov.ph) Philippines

Using the data above, If taxpayer opted for OSD:

Gross Sales ……………….. P3,500,000

Less: 40% OSD ………… 1,400,000
TI – Business ………….. 2,100,000
TI – Compensation ….. 1,110,000
Total Taxable Income. 3,210,000
Income Tax
2,000,000 ……………… 490,000
1,210,000 x 32% ….. 387,200
Total Income Tax ……….. 877,200
More Example:

Example : OSD is used (40% of Sales)

Given:
Sales ……………………………………………………….. 2,500,000
COS ………………………………………………………. 1,800,000
Gross Income ………………………………………. 700,000
Opex …………………………………………………… 200,000
NI …………………………………………………………… 500,000

Computation of Income Tax

Sales …………………………………………………. 2,500,000
Less: OSD ……………………………….(40%) 1,000,000
TI ………………………………………………………. 1,500,000
800,000 ……………………………. P 130,000
700,000 x 30% ………………… 210,000
Income Tax ……………………. 340,000