How To Tax An Individual 1

How to Tax an Individual?
Step 1: Determine the Type of Income
Step 2: Determine the Type of Income Tax Liability
Step 3: Compute the Income Tax

Illustration # 1
Mr. Aguado, a financial analyst employed in BDO bank,

received an annual compensation in 2018 of P1,500,000.00 which
is inclusive of his 13th month pay and other benefits in the amount
of P120,000.00, but net of the mandatory contributions to SSS and
PhilHealth.
He also own a computer store with gross sales of
P2,400,000.00. His cost of sales and operating expenses amounted
to P1,000,000.00 and P600,000.00 respectively. His store’s non
operating income amounted to P100,000.00.
His other income for the year consisted of the following
items: Interest from bank deposit: P20,000.00

Sale of a lot in Bulacan:
Selling price P1,000,000.00
Acquisition Cost P200,000.00
Step 1: Determine the type of income
Ordinary Income Passive Income Capital gains

Interest from bank Sale of lot in Bulacan
1. Compensation deposit
Income
2. Income from business
Step 2: Determine the income tax liability
of each type of income
Returnable Income Tax Final Tax Capital Gains Tax

1. Compensation Interest from bank Sale of lot in Bulacan
Income deposit
2. Income from business
Step 3: Actual Computation of the income tax
a) On his ordinary income:
(1) His compensation income shall be subject to the graduated(progressive rates) under
Section 24(A)2(a) of the Tax Code:
Total compensation Income P1,500,000.00

Less: Exclusionary amount of the 13th month pay and other
benefits * (90,000.00)
Taxable compensation Income P1,410,000.00
Tax on 800,000.00 = P130,000.00

Tax on 610,000.00 x 30% = 183,000.00
Tax on P1,410,000.00 P313,000.00
*Under Sec. 32(B)(7)(e) of the Tax Code, the first
P90,000.00 of the 13th month pay and other
benefits received by an employee is exempt from
the income tax
Table 1 (Tax Schedule Effective January 1, 2018 until December 31, 2022)
https://www.bir.gov.ph/index.php/tax-information/income-tax.html
(2)Since his gross sales/receipts from business do not exceed
P3,000,000.00, he has the option to be taxed at the graduated
rate or at the 8% income tax rate based on gross sales plus other
non operating income. Assuming he chooses to avail of the 8%
income tax option:
Gross Sales P2,400,000.00

Add: Non-operating income 100,000.00
Taxable business income P2,500,000.00
Tax Rate x 8%
Tax due on business income P 200,000.00
b) Mr. Aguado’s passive income shall be subject to a 20% final tax:
Interest Income P20,000.00

x Final tax rate 20%
Final Tax on interest income P 4,000.00
Mr. Aguado’s capital gains shall be subject to a 6% capital
gains tax on the higher of the gross selling price or the
current fair market value of the capital asset.
Selling price P1,000,000.00

x Capital gains final tax rate x 6%
Capital Gains(final) tax 60,000.00
Tax Rates of Individuals Earning Purely Compensation Income
Individual earning purely compensation income are those individuals whose source of
income is purely derived from an employer-employee relationship.
Such individuals shall be taxed on their taxable income based on the graduated income tax
rates prescribed in Table 1 of the previous slide.
Taxable income for such individuals is their Gross Compensation Income (all income
received from the employer) less:
a) Non-taxable income or benefits
b) De minimis benefits
c) Their share in SSS, GSIS, PHIC and Pag-ibig contributions
d) And union dues
https://taxacctgcenter.ph/tax-exempt-de-minimis-benefits-to-employees
Tax Rates of Purely Self-Employed Individuals and/or Professionals
A self-employed individual is a sole proprietor or an independent contractor

who reports income earned from self-employment. He control who he works
for, how the work is done, and when it is done. It includes those hired under
a contract of service or job order, and professionals whose income is derived
purely from the practice of profession and not under an employer-employee
relationship.
A. If such individuals’ gross sales/receipts plus other non-operating income

exceeds the VAT threshold of P3,000,000.00 as provided in Section 109(BB)
of the Tax Code, he/she shall be taxed on his net taxable income using the
graduated rates under Section 24(A)(2)(a) of the Tax Code.
B. If such individual’s gross sales/receipts plus other non-operating income does not
exceed the VAT threshold of P3,000,000.00, he/she shall have the option to be taxed at:
1. Eight percent (8%) of gross sales or gross receipts plus other non-operating income
in excess of P250,000.00
Note: This 8% tax on gross sales/receipts plus other non-operating income shall be in
lieu of the (a) the progressive income tax rates under Section 24(A)(2)(a) of the Tax
Code, and (b) the 3% Other Percentage Tax(OPT) under Section 116 of the Tax Code
2. Or The graduated rates under Section 24(A)(2)(a) of the Tax Code.

Notes
✓ The taxpayer must signify his intention to elect the 8% income tax rate
✓ The option to be taxed at the 8% rate is not available to the following individuals:
1. Purely compensation income earners
2. Those whose gross sales/receipts plus other non-operating income
exceeds P3,000,000.00.
3. VAT-registered Taxpayer, regardless of the amount of his gross sales/receipts
4. Taxpayer who is subject to Other Percentage Taxes (OPT) under the Title V of the
Tax Code, except those subject under Sections 116 of the same title
Illustration # 2
Mr. Al Dabog elected the 8% income tax rate option on Feb. 2,

2018 by updating his Registration Information using BIR Form No.
1905. Later a month, before the due date for filing either the First
Quarter Income Tax Return or First Quarter Percentage Tax
Return, he decided that it would be better for him to be taxed at
the graduated rates.
Can he signify his decision to be taxed under the graduated rates in

either his 1st Quarter Income Tax Return or 1st Quarter Percentage
Tax Return, or by filing another BIR Form No. 1905?
Answer to Illustration # 2
NO. The election made on February 2, 2018 is irrevocable. No

amendment of the option shall be made for taxable year 2018.
Beginning 2019, he shall be automatically subjected to the graduated
rates unless he opts to avail the 8% income tax rate by signifying his
intention in BIR Form 1905, in his 1st QITR, or in his 1st QPTR.
Tax Rates of Purely Self-employed Individuals and/or Professionals
Illustration # 3
Lala Vida, a part-time accountant, operates a fashion store while

offering accounting services to clients living in Metro Manila. In
2018, the gross sales of her fashion store amounted to P900,000.00
while her receipts from her accounting services amounted to
P400,000.00. She signified in her 1st QITR her intention to be taxed
at 8% income tax rate.
a) Compute her income tax due in 2018.
b) If Lala failed to signify in her 1st QITR her intention to be taxed at

the 8% tax rate, compute her income tax due. Her cost of sales and
operating expenses amounted to P500,000.00 and P100,000.00
respectively.
Solution to Illustration #3-a
Gross Sales, Fashion Store P 900,000.00

Gross Receipts, Accounting Services
400,000.00
Total Sales Receipts 1,300.000.00
Less: amount allowed as deduction
under Sec. 24(A)(2)(b) (250,000.00)
Taxable Income 1,050,000.00
Tax Rate 8%
Tax Due P 84,000.00
Notes
✓ Lala Vida is qualified for the 8% income tax rate since her annual gross sales /receipts
plus other non-operating income for the year did not exceed the threshold of
P3,000,000.00
✓ Lala Vida is entitled to the amount of P250,000.00 because her source of income is
purely from self-employment
✓ Lala Vida will not pay the 3% OPT on her gross sales/receipts because the 8% tax is
in lieu of the tax under the graduated rates and the 3% OPT under Section 116 of the
Tax Code
Solution to Illustration 3-b
Gross Sales, Fashion Store P 900,000.00

Gross Receipts, Accounting Services 400,000.00 P1,300,000.00
Less: Cost of Sales (500,000.00)
Gross Income 800,000.00
Less: Operating expenses (100,000.00)
Taxable Net Income P 700,000.00
Tax on 400,000.00 30,000.00

Tax on 300,000 x 25% 75,000.00
Tax due P105,000.00
Notes
✓ Lala Vida’s failure to avail of the option to be taxed at the 8% income tax rate results
in income being taxed under the graduated rates.
✓ Being subject to the graduated rates, she is likewise subject to pay the applicable
business tax
✓ The 8% income tax option would not be available to Lala if she was a VAT registered.
Reference:
Llamado, Christopher P. and de Vera Jack L. A., Philippine Income Tax,

Volume One, 2019 Edition.

How To Tax An Individual 1

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How to Tax an Individual?

Step 1: Determine the Type of Income

Step 2: Determine the Type of Income Tax Liability

Step 3: Compute the Income Tax

Mr. Aguado, a financial analyst employed in BDO bank,

His other income for the year consisted of the following

items: Interest from bank deposit: P20,000.00

Ordinary Income Passive Income Capital gains

Returnable Income Tax Final Tax Capital Gains Tax

Total compensation Income P1,500,000.00

Tax on 800,000.00 = P130,000.00

Gross Sales P2,400,000.00

Interest Income P20,000.00

Selling price P1,000,000.00

A self-employed individual is a sole proprietor or an independent contractor

A. If such individuals’ gross sales/receipts plus other non-operating income

2. Or The graduated rates under Section 24(A)(2)(a) of the Tax Code.

Mr. Al Dabog elected the 8% income tax rate option on Feb. 2,

Can he signify his decision to be taxed under the graduated rates in

NO. The election made on February 2, 2018 is irrevocable. No

Lala Vida, a part-time accountant, operates a fashion store while

a) Compute her income tax due in 2018.

b) If Lala failed to signify in her 1st QITR her intention to be taxed at

Gross Sales, Fashion Store P 900,000.00

Gross Sales, Fashion Store P 900,000.00

Tax on 400,000.00 30,000.00

Llamado, Christopher P. and de Vera Jack L. A., Philippine Income Tax,

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