How To Compute Taxable Income And Tax Due For Individuals Earning Purely Compensation Income?

As part of the implementation of the Income Tax Provisions of Republic Act No. 10963, Otherwise Known as the "Tax Reform for Acceleration and Inclusion (TRAIN)" Act, the bureau has issued Revenue Regulations (RR) No. 8-2018 dated January 25, 2018. 

The implementation of Taxable income for compensation earners is one of the subject matter in these regulations.

In general, Compensation Income means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code.

The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits, except those which are subject to the fringe benefits tax under Sec. 33 of the Code and the allowable "de minimis" benefits; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income.

Compensation Income Earners - individuals whose source of income is purely derived from an employer-employee relationship.

Employee - an individual performing services under an employer-employee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality.

Employer - any person for whom an individual performs or performed any service, whatever nature. under an employer-employee relationship. It is not necessary that services be continuing at the time the wages are paid in order that the status employer may exist. Thus, for purposes of withholding, a person for whom an individual has performed past services and from whom he is still receiving compensation is an "employer".

How to Compute the Taxable Income & Tax Due of Individuals Earning Purely Compensation Income?

Individuals earning purely compensation income shall be taxed based on the income tax rates prescribed under subsection (A) of RR No. 8-2018. 

Taxable income for compensation earners is the gross compensation income less nontaxable income/benefits such as but not limited to the Thirteenth (13th) month pay and other benefits (subject to limitations, see Section 6(G)(e) of these Regulations), de minimis benefits, and employee's share in the SSS, GSIS, PHIC, Pag-ibig contributions and union dues.

Tax Due of Individuals earning purely compensation income is based on the income tax rates prescribed under subsection (A) of RR No. 8-18. If the Taxable Income is Not Over P250,000.00, Tax Due is Nill or Zero.

If Taxable Income is P450,000.00, Income Tax Due is computed as follows:

Tax Due:
On P400,000.00                                                        P22,500.00
On Excess (P450,000.00 - P400,000.00) X 20%     P10,000.00
Income Tax Due                                                      P32,500.00

Husband and wife shall compute their individual income tax separately based on their respective taxable income; 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. 

Minimum wage earners shall be exempt from the payment of income tax based on their statutory minimum wage rates. The holiday pay, overtime pay, night shift differential pay and hazard pay received by such earner are likewise exempt.

Please refer the link: https://www.bir.gov.ph/images/bir_files/internal_communications_1/Full%20Text%20RR%202018/RR%20No.%208-2018.pdf of the full text of RR No. 8-2018.