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Gross Income
Definition

Gross income means the pertinent items of income referred to in Section 32(A) of the Tax Code. It includes all
income from whatever source (unless exempt from tax by law) including, but not limited to the following items
(Valencia & Roxas, 2017):
1. Compensation of services in whatever form paid including fees, salaries and wages, commissions, and
similar items;
2. Gross income derived from the conduct of a trade or business or the exercise of a profession;
3. Gains from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partners’ distributive share from the net income of the general professional partnership.

Accordingly, the definition of gross income includes a catch-all clause, from whatever source, to supplement
the enumeration by including any non-enumerative items which can adequately be defined as ‘income’ (Valencia
& Roxas, 2017).

Concept of Compensation Income

Gross compensation income means any remuneration for rendering personal services. Generally,
compensation income is obtained from an employer-employee relationship between payor and recipient
(Valencia & Roxas, 2017).

The basis upon which the remuneration is paid is immaterial in determining whether the remuneration
constitutes compensation. Thus, it may be paid by piecework, or a percentage of profits and may be paid hourly,
daily, weekly, monthly, or annually (Valencia & Roxas, 2017).

Classification of Gross Compensation Income

The gross compensation income may be classified as follows:

1. Basic salary or wage
- Salary refers to earnings received periodically for regular work other than manual labor, such as a
monthly salary of an employee (Valencia & Roxas, 2017).
- Wages are earnings received usually according to specified intervals of work, as by the hour, day, or
week. An example is a carpenter’s daily wage (Valencia & Roxas, 2017).
- Back wages are subject to income tax and the withholding tax on wages (Valencia & Roxas, 2017).

2. Honoraria are payments given in recognition for services performed for which established practice
discourages charging a fixed fee. The honorarium of a guest lecturer is an example (Valencia & Roxas,
2017).

3. Fixed or variable allowances

In general, fixed or variable transportation, representation, cost of living allowances (COLA) and other
allowances that are received by a public officer or employee or officer or employee of a private entity, in
addition to the regular compensation fixed for his position or office, are compensations subject to withholding
tax (Valencia & Roxas, 2017).

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Any amount explicitly paid, either as advances or reimbursements for traveling, representation and other
bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee
in the performance of his duties are not compensation subject to withholding tax if the following conditions
are satisfied:
a. It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred
by the employee in the pursuit of the employer’s trade, business, or profession; and
b. The employee is required to account/liquidate for other expenses under the substantiation requirements
of the Tax Code.
The excess of actual expenses over advances made shall constitute taxable income if such amount is not
returned to the employer.

4. Commission is usually a percentage of total sales or on a certain quota of sales volume attained as part
of the incentive, such as sales commission.

5. Fees are received by an employee for the services rendered to the employer including a director’s fee of
the company, fees paid to the public officials, such as clerks of court or sheriffs for services rendered in the
performance of their official duty over and over their regular salaries. Legal fees paid by a union on behalf
of its president constitute compensation. Marriage fees, baptismal offerings, sums paid for conducting
masses for the dead, and other contributions received by a clergyman, evangelist, or religious worker for
services rendered are considered compensation (Valencia & Roxas, 2017).

6. Tips and gratuities paid directly to an employee, which are not accounted for, by the employee to the
employer, are considered taxable income, but not subject to withholding tax (Valencia & Roxas, 2017).

7. Hazard or emergency pay is an additional payment received due to workers’ exposure to danger or harm
while working. This is normally added to the basic salary together with the overtime pay and night differential
pay to arrive at gross salary. Hazard, overtime, night shift differential, and holiday pay of a minimum wage
earner (MWE) are non-taxable (as long as the MWE has no other reportable income) (Valencia & Roxas,
2017).

8. Retirement pay refers to a lump sum payment received by an employee who has served a company for a
considerable period and has decided to withdraw from work into privacy. In general, retirement pay is
taxable except in the following instances:
a. SSS or GSIS retirement pays
b. Retirement pay due to old age provided that the following requisites are met:
i. The BIR Commissioner approves the retirement program;
ii. It must be a reasonable benefit plan. Its implementation must be fair and equitable for the benefit
of all employees;
iii. The retiree should have been 50 years old at the time of retirement; and
iv. It should have been availed of for the first time.

9. Separation pay is taxable if voluntary availed of. It shall not be taxable if involuntary. Examples of
involuntary separation are:
a. Death;
b. Sickness;
c. Disability;
d. Reorganization/merger of the company; and
e. Company at the brink of bankruptcy.

When a company is at the brink of bankruptcy, the sequence of satisfying the company’s indebtedness
should be in this order: (1) BIR, (2) Employee, and (3) Creditors.

10. Pension is a stated allowance paid regularly to a person on his retirement or his dependents on his death,
in consideration of past services, exemplary work, age, loss, or injury. Pension pay is taxable unless the

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law states otherwise, or unless the BIR approves the pension plan of a private company (Valencia & Roxas,
2017).

11. Vacation and sick leave

The following rules shall be observed in determining whether the money received for vacation and sick
leave are taxable or not:
a. If paid or availed of, a salary of an employee who is on vacation or sick leave notwithstanding his
absence from work constitutes taxable compensation income;
b. Monetized value of unutilized vacation leave credits of 10 days or less which were paid to private
employees during the year is not subject to tax and the withholding tax; and
c. Monetized value of vacation and sick leave credits paid to government officials and employees are not
subject to income tax and the withholding tax.

12. Thirteenth (13th) month pay and other benefits are not taxable if the amount is P90,000 or less. Any
amount more than P90,000 shall be taxable. The new law (R.A. 10963) increased the threshold for non-
taxable 13th month pay and other benefits from P82,000 to P90,000.

13. Fringe benefits and de minimis

- Fringe Benefits are any good, service, or other benefit furnished or granted by an employer, in cash or
kind, in addition to basic salaries of an individual employee.
- De minimis benefits are privileges of relatively small value as given by the employer to his employees.

14. Overtime pay refers to premium payment received for working beyond regular hours of work, which is
included in the computation of gross salary of the employee. Back pay and overtime pay constitute
compensation.

15. Profit sharing is the proportionate share in the profits of the business received by the employee in addition
to his wages.

16. Awards for special services is the amount received as an award for special services of employee, or
suggestions to employer resulting in the prevention of theft or robbery. Awards for past services and the
like are also compensations.

17. Beneficial payments are payments where an employer pays the income tax owed by an employee are
additional compensation income.

18. Other forms of compensation are other forms received due to service rendered are compensation paid
in kind. It is to be noted that compensation can be paid in kind, but taxes are generally paid in money.

Rationale for the Exclusions

‘Exclusion,’ as used in income taxation, refers to items or receipts not included in the determination of the
taxable income because the law or treaty provides that they are exempt from income tax. The law specifically
excludes certain items from gross income. Items excluded from gross income are generally nontaxable. They
are not included in the income tax return unless information regarding them is specifically called for (Valencia
& Roxas, 2017).

Exclusions from Gross Income

The following items shall not be included in gross income and shall be exempt from taxation (Bureau of Internal
Revenue, 2018):
a. Life insurance - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of
the insured, whether in a single sum or otherwise, but if the insurer holds such amounts under an agreement
to pay interest thereon, the interest payments shall be included in gross income.

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b. The amount received by the insured as a return of premium - The amount received by the insured, as
a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the
term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
c. Gifts, bequests, and devises - The value of property acquired by gift, bequest, devise, or descent:
Provided, however, that income from such property, as well as gift, bequest, devise or descent of income
from any property, in cases of transfers of divided interest, shall be included in gross income.
d. Compensation for injuries or sickness - Amounts received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts
of any damages received, whether by suit or agreement, on account of such injuries or sickness.
e. Income exempt under the treaty - Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
f. Retirement benefits, pensions, gratuities, etc. (Bureau of Internal Revenue, 2018)
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, that the retiring official or employee has been in the
service of the same employer for at least 10 years and is not less than 50 years of age at the time of
his retirement: Provided, further, that the benefits granted under this subparagraph shall be availed of
by an official or employee only once. For purposes of this Subsection, the term 'reasonable private
benefit plan' means a pension, gratuity, stock bonus, or profit-sharing plan maintained by an employer
for the benefit of some or all of his officials or employees, wherein such employer makes contributions
for the officials or employees, or both, for the purpose of distributing to such officials and employees
the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at
no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of
the separation of such official or employee from the service of the employer because of death, sickness,
or other physical disability or for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement
gratuities, pensions, and other similar benefits received by a resident or nonresident citizens of the
Philippines or aliens who come to reside permanently in the Philippines from foreign government
agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of
the United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System (SSS) by the provisions of Republic
Act No. 8282.
(f) Benefits received from the Government Security Insurance System (GSIS) under Republic Act No.
8291, including retirement gratuity received by government officials and employees.
g. Miscellaneous items
(a) Income derived by foreign government - Income derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by
(i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions established by foreign governments.
(b) Income derived by the government or its political subdivisions - Income derived from any public utility
or the exercise of any essential governmental function accruing to the Government of the Philippines
or any political subdivision thereof.
(c) Prizes and awards - Made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if: (i) the recipient was selected without any action on his part to
enter the contest or proceeding; and (ii) the recipient is not required to render substantial future services
as a condition to receiving the prize or award.
(d) Prizes and awards in sports competition - All prizes and awards granted to athletes in local and
international sports competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations.

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(e) 13th month pay and other benefits - Gross benefits received by officials and employees of public and
private entities: Provided, however, that the total exclusion under this subparagraph shall not exceed
P90,000 which shall cover (Congress of the Philippines, 2017):
a. Benefits received by officials and employees of the national and local government under Republic
Act No. 6686;
b. Benefits received by employees under Presidential Decree No. 851, as amended by Memorandum
Order No. 28, dated August 18, 1986;
c. Benefits received by officials and employees not covered by Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986; and
d. Other benefits such as productivity incentives and Christmas bonus.
(f) GSIS, SSS, Medicare, and other contributions - GSIS, SSS, Medicare and Pag-Ibig contributions, and
union dues of individuals.
(g) Gains from the sale of bonds, debentures, or other certificate of indebtedness - Gains realized from the
same or exchange or retirement of bonds, debentures, or another certificate of indebtedness with a
maturity of more than five (5) years.
(h) Gains from redemption of shares in mutual fund - Gains realized by the investor upon redemption of
shares of stock in a mutual fund company as defined in Section 22 (BB) of the Code.

Illustration 1:

Miss Pina Palad, single, reported the following income for the taxable year 200a:

Salary for the year P384,000

13th month pay 33,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Availed vacation leave pay (included in the salary) 12,000
Cost of living allowances 9,000
Interest income from time deposit in BPI 3,000
Royalty income from mining, net of final tax 70,000

Miss Palad retired at the age of 45 as of December 31, 200a, receiving a retirement pay of P1,000,000. What
is her gross taxable compensation income for 200a?

The gross taxable compensation income of Miss Palad for 200a would be:

Salary for year 200a P384,000

Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Cost of living allowances 9,000
Retirement pay 1,000,000
Gross taxable compensation income 1,450,000

NOTE:
1. The retirement pay of Miss Palad is subject to tax even though her employer complied with the
retirement requirements because she retired at the age of 45.
2. With regard to the vacation leave pay, the scenario revealed that the vacation leave pay is availed of
and included as salary; hence, it is taxable.
3. Cost of living allowance is taxable.
4. Interest and royalty incomes are subject to final withholding tax.
5. The non-taxable 13th month pay is P90,000.

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Illustration 2: Minimum Wage Earner

Total compensation income P135,000

Add: Overtime pay, night shift differential, hazard and holiday pay 140,000
Gross Income P275,000
Less: Mandatory contributions P 5,000
Non-taxable benefits 11,000 16,000
Net Taxable Income P 259,000
TAX DUE EXEMPT

NOTE: Net taxable income is still exempt from income tax even if it exceeded the P250,000 non-taxable income
threshold.

References
Bureau of Internal Revenue. (2018). 2018 Revenue regulations. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations/2018-revenue-
regulations.html
Bureau of Internal Revenue. (2018). Tax information. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-information.html
Bureau of Internal Revenue. (2018). Computation of gross income. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-code.html#title2
Congress of the Philippines. (2017, July 24). Republic Act No. 10963. Metro Manila, Philippines.
De Leon, H. S. & De Leon, H. M. (2016). The law on income taxation. Quezon City: REX Printing Company,
Inc.
Valencia, E. G. & Roxas, G. F. (2017). Income taxation: Principles and laws with accounting applications. Baguio
City: Valencia Educational Supply.

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