HOLY CHILD JESUS COLLEGE

Telefax :{042)317-6561;(042)317-4753

COLLEGE DEPARTMENT
San Diego de Alcala Cathedral Compound
Gumaca, Quezon 4307
BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION
Major: Marketing Management
Human Resource Management
Operation Management

BAC 2- INCOME TAX (INCOME TAXATION)

Course Description: This course covers the general ideas and systems of income tax returns and the
continuing program of tax collections and the need for the tax consciousness as a civic responsibility.
The study of the principles and characteristics of taxation to create to create greater awareness of the
benefits and obligations relevant to the payment of taxes.

MODULE I- THE TRAIN LAW

Taxation is a relationship between man and state involving contributions due to the state from
the man. Since biblical times, state authorities have burdened people with impositions of taxes and
history is replete with cases that people rebel if the taxes imposed are very burdensome and they could
not understand the “why” of it. Even in present days, people must understand what is being taken from
them, and the logic in the amount in it in order to pay willingly.

It is fortunate for a student to have subjects in taxation – for he will know what the
impositions are about, and how the amounts are arrived at, so that he can tell himself and advise those
who look to him for counsel, that a tax is correct and should be paid (hopefully to be spent wisely by the
government).

There is mathematics in Taxation woven in the language used by the law imposing the tax. The
student must solve problems. A student who can solve problems in Taxation is a student who has
learned in Taxation.

Merely memorizing the words of a rule in taxation is not knowing what it is… even if it is recited
like a prayer… the rule learned that way (seemingly) is fleeting. Taxation is experiential. The student
should immerse himself in computations.
T R A I N stands for “Tax Reforms for Acceleration and Inclusion

The purposes of implementing this Act

1. To enhance the progressivity of the tax system through the rationalization of the Philippine
internal revenue tax system thereby promoting sustainable and inclusive economic growth.
2. To provide, as much as possible, equitable relief to a greater number of taxpayers and their
families in order to improve levels of disposable income and increase economic activity.
3. To ensure that the government is able to provide for the needs of those under its jurisdiction
and care through the provision of better infrastructure, health, education, jobs, and social
protection for the people.

In Section 24 of the NIRC (National Internal Revenue Code) amended the Income Tax Rates
1. Rates of Income Taxes on Individual Citizen and Individual Resident of the Philippines.
An income tax is hereby imposed on.
a. On the taxable income derived for each taxable year from all sources within and
without the Philippines by every individual citizen of the Philippines residing therein.
b. On the taxable income derived for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines including overseas contract
workers.
c. On the taxable income derived for each taxable year from all sources within the
Philippines by an individual alien who is a resident of the Philippines.

TAX SCHEDULE EFFECTIVE JANUARY 1, 2018 until December 31, 2022.

INCOME RATE
Not over P250,000 0%
Over P250,000 but not over P400,000 20% of the excess over P250,000
Over P400,000 but not over P 800,000 P30,000, + 25% of the excess over P400,00
Over P800,000 but not over P2,000,000 P130,000 + 30% of the excess over P800,000
Over P2,000, 000 but not over P8,000,000 P490,000 + 32% of the excess over P2,000,000
Over P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

TAX SCHEDULE EFFECTIVE JANUARY 1, 2023 AND ONWARDS

INCOME RATE
Not over P250,000 0%
Over P250,000 but not over P400,000 15% of the excess over P250,000
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over P400,000
Over P800,000 but not over P2,000,000 P102,500 + 25% of the excess over P800,000
Over P2,000,000 but not over P8,000,000 P402,500 + 30% of the excess over P2,000,000
Over P8,000,000 P2,202,500 + 35% of the excess over P8,000,000
  For married individuals, the husband and wife shall compute separately their individual
income tax based on their respective total taxable income. Provided, that if any income
cannot be definitely attributed to or identified as income exclusively earned or realized by
either of the spouses, the same shall be divided equally between the spouses for the
purpose of determining their respective taxable income.
 The minimum wage earners shall be exempt from the payment of income tax on their
taxable income. Provided the holiday pay received by such minimum wage earners shall
likewise be exempt from income tax.
 Self-employed individuals and/or professionals shall have the option to avail of an eight
percent ( 8 % ) tax on gross sales or gross receipts and other non-operating income in excess
of Two hundred fifty thousand pesos (P250,000} in lieu of the graduated income tax rates.
 Taxpayers earning both compensation income and income from business or practice of
profession are called Mixed Income Earners.

LLUSTRATION A. Jimmy operates a small convenience store while having practiced as a

bookkeeper offering accounting services to his clients. In 2018, his gross receipts from his store
amounted to P650, 000.00 while earning P450, 000.00 from his accounting services. He opted to
be taxed at 8% income tax rate in his initial income tax return.  Compute the income tax due.

Analysis: Jimmy is a self-employed individual earning purely from business. Under the TRAIN
Law, he has the option to be taxed under the 8% income tax rate or the graduated tax rates. He
opted the 8% income tax rate. Furthermore, his gross receipts for the year did not exceed the P3,
000,000.00 VAT threshold.

Solution:

(1) Income Tax Due:

Gross Sales from Convenience Store P650,000.00
Gross Sales from Accounting Services 450,000.00
Gross Sales/Receipts 1,100,000.00
Less: Amount allowed as deduction (250,000.00)
Taxable Income  P850,000.00

Income Tax Due: 8% of P850,000.00 P68,000.00

(2) Percentage Tax Due:
Percentage Tax Due = P0.00

Jimmy is not liable for any percentage tax because he opted the 8% income tax rate.

ILLUSTRATION B. Mikko is an accountant of a private company and earns P550, 000.0 in

2018. At the same time, he has registered a business under his name that earns him P250, 000.00
in 2018. He opted to be taxed at 8% income tax rate for his business. Compute the income tax
due.

Analysis: Mikko is a mixed income earner. He earns compensation income and at the same
income from business. Under the TRAIN Law, the tax due on compensation income is computed
using the graduated income tax rate. While the tax due on income from business is computed
using the 8% income tax rate because he opted to do so.

Solution:

(1) Income Tax Due:

On income from compensation:

 Total taxable compensation income  - P550,000.00
  Income tax due (based on the table):
 ----- On P400,000.00  -  P30,000.00
 ----- On P150,000.00 x 25% = P37,500.00
 ----- Total income tax due on compensation = P30,000.00 + 37,500.00= P67,500.00

On income from business:

 Total business income - P250,000.00
 Less: Amount allowed as deduction - P0.00 (cannot claim the P250,000.00 deduction because it
was already applied in the taxable compensation income under the graduated income tax rate)
 Total taxable business income - P250,000.00
 Income tax due (8%):
 ----- P250,000.00 x 8% =  P20,000.00

Therefore, Mikko's total income tax due  in 2018 is the sum of tax due from compensation and
tax due from business income that would amount to P87,500.00 in total.

(2) Percentage Tax Due:

Percentage Tax Due = P0.00

Mikko is not liable for any percentage tax on his business income because he opted the 8%
income tax rate.

ILLUSTRATION C. Shirley is a sales clerk in a certain mall. She earns P210, 000.00 in 2018.
Compute the income tax due.

Analysis: Shirley is earning purely compensation income. Therefore, under the TRAIN Law, her
income tax is computed using the graduated income tax rate without any option whatsoever.

Solution:

(1) Income Tax Due:

 Using the graduated income tax table, the income tax rate for P210,000.00 is 0%. Therefore,
Shirley's income tax due for 2018 is P0.00. She is still required to file the income tax return.

(2) Percentage Tax Due:

No percentage tax is required for Shirley's income because percentage tax is a business tax and is
not imposed on income from compensation.

ILLUSTRATION D. Marco started a shoe business last year. At the end 2018, he earned a
taxable income of P350, 000.00 in total. He did not opt the 8% income tax rate. Compute the
taxes due.
Analysis: Marco is earning purely from business, so he has the option to choose between the 8%
and the graduated income tax rates. However, he failed to signify his option. Therefore, his
income tax due is computed based on the graduated income tax rates by default.

Solution:

(1) Income Tax Due:

Using the graduated income tax table, the income tax rate for the first P250,000.00 is 0%. The
excess is subject to 20% income tax rate. Therefore, Marco's income tax due is P20, 000.00 or
(P350, 000.00 - 250,000.00) x 20%.

(2) Percentage Tax Due:

Marco is now subject to the 3% percentage tax on his gross receipts. The illustration above
assumes that Marco did not incur any operating expenses and the gross receipts amounted to
P350, 000.00. Therefore the percentage tax due is P10, 500.00 or (P350, 000.00 x 3%).

In the illustration above, the total tax due to be paid by Marco is the sum of the income tax and
percentage tax due amounting to P30, 500.00 in total.

How to Compute Your Income Tax Based On Graduated Rates.

You can calculate your income tax on your own, whether you’re curious about how your
employer computes it or you need to file and pay your tax by yourself.

Here’s a simple formula for the manual computation of income tax:

Income tax due = Taxable income (Gross income – Allowable deductions) x Tax rate –
Tax withheld

Sample income tax computation (for the taxable year 2020).

Scenario 1 : Employee with a gross monthly salary of Php 30,000 and receiving 13th-month
pay of the same amount.
1. Get the annual salary: Php 30,000 x 12 months = Php 360,000.

2. Compute the total annual contributions (employee’s share only):

 SSS – Php 800 x 12 months = Php 9,600

 Phil Health – Php 450 x 12 months = Php 5,400
 Pag-IBIG – Php 100 x 12 months = Php 1,200
Total annual contributions: Php 16,200

3. Get the taxable income by deducting the total annual contributions from the annual
salary: Php 360,000 – Php 16,200 = Php 343,800.

4. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The
taxable income of Php 343,800 falls under the second bracket, which means the tax
rate is 20% of the excess over Php 250,000.

5. Compute the annual income tax due.

a. Subtract the non-taxable Php 250,000 from the taxable income: Php 343,800 – Php
250,000 = Php 93,800.

b. Multiply the difference by 20%: Php 93,800 x 0.20 = Php 18,760.

If the income tax due is the same as the total amount the employer has withheld from
the employee’s salary (Php 18,760 during the taxable year or Php 1,563.33 per month),
then the employee doesn’t have to pay and file an ITR by the end of the year.

Scenario 2 : Employee with a gross monthly salary of Php 100,000 and receiving 13th-month
pay of the same amount.
1. Get the annual salary: Php 100,000 x 12 months = Php 1,200,000.

2. Since the 13th-month pay is higher than the tax-exempt Php 90,000, the excess of
that amount is taxable. Deduct the tax-exempt Php 90,000 from Php 100,000: Php
100,000 – Php 90,000 = Php 10,000. Then add the difference to the annual salary to
get the gross income: Php 10,000 + Php 1,200,000 = Php 1,210,000.

3. Compute the total annual contributions (employee’s share only):

 SSS – Php 800 x 12 months = Php 9,600

 Phil Health – Php 900 x 12 months = Php 10,800
 Pag-IBIG – Php 100 x 12 months = Php 1,200
Total annual contributions: Php 21,600
4. Get the taxable income by deducting the total annual contributions from the annual
gross income: Php 1,210,000 – Php 21,600 = Php 1,188,400.

5. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The
taxable income of Php 1,188,400 falls under the fourth bracket, which means the tax
rate is Php 130,000 + 30% of the excess over Php 800,000.

6. Compute the annual income tax due.

a. Subtract the non-taxable Php 800,000 from the taxable income: Php 1,188,400 – Php
800,000 = Php 388,400.

b. Multiply the difference by 30%: Php 388,400 x 0.30 = Php 116,520.

c. Add Php 130,000: Php 116,520 + Php 130,000 = Php 246,520.

Since the annual tax due of an employee earning Php 100,000 monthly is Php 246,520,
the employer should have withheld Php 20,543.33 from the monthly salary. If the annual
income tax due is the same as the total amount withheld for the year, the employee is
not required to file an ITR on his/her own.

Scenario 3 : Freelance web developer with total gross receipts worth Php 840,000 who
opted to use the graduated rates and the 40% optional standard deduction in computing his
income tax.
1. Determine the standard deduction by multiplying the gross income by 40%: Php
840,000 x 0.40 = Php 336,000.

2. To get the taxable income, subtract the OSD from the gross income: Php 840,000 –
Php 336,000 = Php 504,000.

3. Refer to the BIR’s graduated tax table to find the applicable tax rate. The taxable
income of Php 504,000 falls under the third bracket, which means the tax rate is Php
30,000 + 25% of the excess over Php 400,000.

4. Compute the annual income tax due.

a. Subtract the non-taxable Php 400,000 from the Php 504,000 taxable income: Php
504,000 – Php 400,000 = Php 104,000.

b. Multiply the difference by 25%: Php 104,000 x 0.25 = Php 26,000.

c. Add Php 30,000: Php 26,000 + Php 30,000 = Php 56,000

This means that the self-employed taxpayer must declare Php 56,000 as income tax
due when paying and filing an ITR.
Assessment: (Computation of Income Tax)

Problems: 10 points each.

1. Mr. A as an Accountant of XYZ Company has a gross annual earning of P950, 000.00. His gross
receipt from his ABC store amounted to P 250,000. He opted to be taxed at 8% on his business.
Compute for the total income tax due on his compensation and business.
2. Robert Santiago is a machine operator of Ever Machineries. He earned an annual income of
P300, 000. Aside from being employed, he has a grocery store with a gross receipt of P280, 000.
He did not avail the 8% optional tax on his grocery. Compute for his total income tax.
3. Dr. Ramon Ursua is a resident physician of Bucacao Medical Hospital. His total compensation for
the year 2018 was P560, 000 inclusive of P90, 000 benefits. Compute for his taxable income for
the year 2018.
4. Juliana Sy is the proprietress of Miracle Drug Store, who has a gross receipt of P 450,000 and has
a salary of 250,000 a year. Compute for her total income tax.
5. Compute for the total income tax of Employee No.2 who has the following data:
Monthly Salary- P 102,500
SSS monthly payment- P 850
Phil health 900
Pag-ibig 120
Compute for the total taxable income.