Easy to Understand Step by Step Guide on How to Compute Your Income Tax

There are many kinds of income taxes. There is a tax on the income of businesses and there is also a tax on the income of individuals. But for this article we will only talk about income tax on compensation, particularly the tax on the compensation of employees who are earning purely compensation income.

The processes presented below may also be used in the computation of the income tax of employees who are in the private sector but for purposes of illustration we will use figures pertaining to the compensation of a government employee.

By definition, Income Tax is a tax on a person’s income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if any, authorized for such types of income, by the Tax Code, as amended, or other special laws. [1]

As a general rule, all income received by an employee are taxable except when they are expressly exempted by law. For instance, these 12 compensation income are not taxable and these De Minimis Benefits are likewise not taxable.

Computing your income tax is relatively easy for as long as you know what you need to compute. Here, we give you a step-by-step guide on how to compute income tax on compensation.

Follow these steps:

Step 1: Compute your Annual Salary

To compute this, just get your basic monthly salary and multiply it by 12. For example, if your monthly salary is P42,099.00 then your annual salary is equal to P505,188.00.

Illustration: P42,099 x 12 months = P505,188.00

When you are a new employee and was hired at the middle of the year, for instance, you were hired in June 1, just multiply your monthly basic salary by the remaining months of the year up to December 31. Thus, your total salary from June 1 to December 31 is equal to P294,693.00 or P42,099 multiplied by 7 months equals P294,693.00.

However, for the purpose of this article, we will assume 12 months in our computation.

Step 2: Determine and Compute Compensation Received Other Than Salary

This includes, among others, Mid-Year Bonus, Year-End Bonus, Performance-Based Bonus, Collective Negotiation Agreement (CNA) Incentive, and all other bonuses and allowances that are not exempted from tax, as provided in the link above.

Illustration:

Mid-Year Bonus – P42,099.00

Year-End Bonus – P42,099.00

Performance Based Bonus (PBB) – P23,154.00

Collective Negotiation Agreement (CNA) Incentive – P25,000.00

Total – P132,352.00

Step 3: Compute the Taxable Portion of the Other Compensation Received (as computed in Step 2)

Under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the non-taxable portion of the Other Compensation Received is equal to P90,000.00, as explained in Revenue Memorandum Circular No. 50-2018, the screenshot of which is presented below:

Thus, we deduct P90,000.00 from the total Other Compensation Income which we earlier computed in Step 2.

Illustration: P132,352 – P90,000.00 = P42,352.00

Step 4: Compute Gross Compensation Income

To compute Gross Compensation Income, get the sum of your annual salary (Step 1) and other compensation income, net of the P90,000.00 non-taxable ceiling/threshhold (Step 2 and 3).

Illustration: P505,188.00 + P42,352.00 = P547,540.00

Step 5: Compute Deductible Mandatory Deductions

Under the TRAIN Law, there is no change in the mandatory deductions from gross compensation income of employees. The allowed deductions are the employee’s share in the SSS or GSIS, whichever is applicable, Philhealth, and Pag-IBIG contributions, limited however to compulsory contributions, as well as Union Dues. Deduct personal contributions from the gross compensation income to arrive at the taxable compensation income.

Illustration: 

Monthly Contributions multiplied by 12 months:

GSIS Contributions – P45,466.92 (9% of annual salary)

Philhealth – P6,600 (using latest Philhealth Contribution Table)

Pag-IBIG – P1,200 (P100/month)

Union Dues – P240.00 (for illustration purposes only)

Total: P53,506.92

How about the personal exemption of P50,000.00 and additional exemption of P25,000.00 per qualified dependent, are these still deductible from the gross compensation income just like before?

No. The personal exemption of P50,000.00 and additional exemption of P25,000.00 per qualified dependent are no longer allowed to be deducted from the gross compensation income under the TRAIN Law, as explained in RMC No. 50-2018, screenshot below:

Step 6: Compute Taxable Compensation Income

After computing the amount of deductible mandatory deductions, we can now compute for the taxable compensation income.

Illustration:

Gross Compensation Income: P547,540.00 (Step 4)

Less: Mandatory Deductions: P53,506.92 (Step 5)

Taxable Compensation Income: P494,033.08

Step 7: Compute Annual Tax Due

After computing the taxable compensation income, we can now compute for the annual tax due using the new tax table prescribed under the TRAIN Law:

A. For compensation income earned for taxable years 2018 to 2022, use this table:

B. For compensation income earned for taxable year 2023 and years thereafter, use this table:

Illustration:

Total Tax Due = Fixed Basic Amount + Tax Due on Excess Over Taxable Income

Fixed Basic Amount of Tax: P30,000 (since the taxable compensation income is within the Range of Taxable Income of P400,000.00 to P800,000.00)

Tax Due on Excess Over Taxable Income: P494,033.08 – P400,000 = P94,033.08 x 25% = P23,508.27

Total Annual Tax Due: P30,000 + P23,508.27 = P53,508.27

To arrive at the monthly tax due of the employee concerned for purposes of payroll, the annual tax due of P53,508.27 is simply divided by 12 months or P4,459.02.

Finally, please take note that if the income of the employee, after deducting all mandatory deduction, is equal to P250,000.00, said compensation income is not subject to tax.

References:

[1] Income Tax, Bureau of Internal Revenue;

[2] Revenue Memorandum Circular No. 50-2018;