Module 2.

4: TAX OF A RESIDENT CITIZEN OF THE PHILIPPINES WHEN INCOME

IS MIXED OR WHEN INCOME IS JOINT WITH SPOUSE

MIXED INCOME
A mixed income earner has both compensation income (from employment) and income
from business or profession.

The rules are:

1. If the gross sales/receipts and non-operating income from bu= ness or profession do
not exceed P3,000,000, the formulas are:

(a) The compensation income shall be subject to the graduated rates P xxx
(b) The income from business or profession shall be taxed, as follows

Gross sales/receipts P xxx

Add: Non-operating income xxx xxx
There is no deduction of P250,000
Equals: Taxable income P xxx
Income tax at 8%% P xxx
(a) Total income tax due P xxx

OR, alternatively,
(a) The compensation income shall be subject to the graduated rates P xxx
(b) The income from business or profession shall be taxed, as follows:

Gross sales/receipts P xxx

Add: Non-operating income xxx
Less: Costs, expenses and losses,
or Optional Standard Deduction at
40% of gross sales/receipts xxx
Equals: Taxable income P xxx
Income Tax at graduated rates xxx
( c ) Total income tax due P xxx

ON THE 8% INCOME TAX OF A MIXED COMPENSATION INCOME EARNER, THE

P250,000 DEDUCTION FROM BUSINESS INCOME IS NOT AVAILABLE SINCE IT IS
ALREADY INCORPORATED IN THE FIRST TIER OF (USED IN) THE GRADUATED
INCOME TAX TABLE.

2. If the gross sales/receipts and non-operating income from business or profession

exceeds P3,000,000, the formula is:

(a) The compensation income shall be subject to the graduated rates P xxx
(b) The income from business or profession shall be taxed, as follows:
Gross sales/receipts P xxx
Add: Non-operating income xxx
Total P xxx
Less: Cost, expenses and losses, or
OSD at 40% of gross sales/receipts xxx
Equals: Taxable Income P xxx
Income tax at graduated rates xxx
Total Income tax P xxx
 For a year, Mr. M had:
Compensation income (including 13th Month pay
And other benefits of P120,000, but net of
SSS and Philhealth P 1,500,000
On his store:
Gross sales 2,400,000
Non-Operating Income 100,000
Cost of Sales 1,000,000
Operating Expenses 700,000
a. If Mr. M opted to pay the 8% income tax, the computations shall be:
Compensation Income P 1,500,000
Less: 13th Month Pay and other exempt benefits 90,000
Taxable Compensation Income P 1,410,000
Income tax at graduated rates P 313,000
On the income from business:
Gross sales P 2,400,000
Add: Non-Operating income 100,000
Taxable business income P 2,500,000
Income tax at 8% P 200,000
Total income tax due P 513,000

*There is no P250,000 deduction from gross sales, because the income tax on compensation income,
with the use of the graduated tax, with the first line of the table, in effect, already provided for an
exempt amount of P250,000

There shall be a percentage tx of 3% of P2,400,000, or P72,000.

b. If Mr. M did not opt to pay the 8%, income tax, and instead pay the graduated tax
after deduction for costs and expenses, the computation shall be:
Compensation Income P 1,500,000
Less: 13th Month Pay and other exempt benefits 90,000
Taxable Compensation Income P 1,410,000
Income tax at graduated rates P 313,000
On the income from business:
Gross sales P 2,400,000
Less: Cost of Sales 1,000,000
Gross business income P 1,400,000
Less: Operating Expenses 700,000
Add: Non-Operating income 100,000
Net Income from business P 800,000
Income tax at graduated rates P 130,000
Total income tax due P 443,000
There shall be a percentage tax of 3% of P2,400,000, or P72,000.

c). If Mr. M did not opt to pay the 8% income tax, and instead pay the graduated tax after
availing of the Optional Standard Deduction, the computations shall be:
Compensation income P1,500,000
Less: 13th Month Pay and other exempt benefits 90,000
Taxable Compensation income P1,410,000
Income tax at graduated rates P 313,000

Gross sales P2,400,000

OSD (40% of P2,400,000) 960,000
Net Income from Operations P1,440,000
Add: Non-Operating Income 100,000
Taxable business income P1,540,000
Income tax at graduated rates 352,000

Total income tax due P 665,000

There shall be a percentage tax of 3% of P2,400,000 or P72,000.
HUSBAND AND WIFE AS INCOME TAXPAYERS

Illustration.
Taxpayers are husband and wife with the following data in a taxable year:

Husband:
Gross receipts from profession, net of
a 10% withholding tax P3,600,000
Cost and expenses, practice of profession 1,200,000
Quarterly income tax paid 100,000
Wife:
Gross compensation income P 800,000

Income tax at the end of the year from husband and wife shall be:

Husband a separate taxpayer, if taking deductions for cost and expenses:

Gross receipts (3,600,000/90%) P4,000,000
Less: Cost and expenses 1,200,000
Taxable income P2,800,000
Income tax at graduated rates P 746,000
Less: Quarterly income tax paid P100,000
Income tax withheld 400,000 500,000
Income tax still due P 246,000

Husband, a separate taxpayer, if taking the Optional Standard Deduction:

Gross receipts (P3,600,000/90%) P4,000,000
Less: Optional Standard Deduction(40% of P4,000,000) 1,600,000
Taxable income P2,400,000

Income tax P 618,000

Less: Quarterly income tax paid P100,000
Income tax withheld 400,000 500,000
Income tax still due P 118,000

Wife, a separate taxpayer:

Taxable compensation income, net of exclusions P 800,000
Income tax P 130,000

If husband and wife both have income from business or profession and there
were income and related deductions which were clearly joint, the items will be
divided between husband and wife, and the one-half of each will go into his/her
separate computation of income tax.

Illustration:
Mr. and Mrs. A, husband and wife, had:
Mr & Mrs A:
Rent Income P 300,000
Expenses 100,000
Income tax withheld by the lessee from
rental payments (5% of P300,000) 15,000

Mr A:
Professional fees – gross income from profession 600,000
Expenses, practice of profession 200,000
Income tax withheld from professional fees(10% of P600,000) 60,000
Income tax paid in 3 quarters 10,000
 Mrs A:
Gross compensation income, after deduction for SSS,
Philhealth, and Pag-ibig contributions and labor union
Dues 204,000
Gain on Sale of bonds held for 6 months 20,000
Income tax withheld on compensation income 6,100

The income tax still due at the end of the year from Mr and Mrs A, both using the graduated
income tax, would have been computed as follows:
Mrs. A Mr. A
Gross income from profession P600,000
Gross Compensation Income P204,000
Gross Income from rent (1/2 each) 150,000 150,000
Gain on sale of bonds 20,000 __
Total P374,000 P750,000
Less:
Expenses on practice of profession ( 200,000 )
Expenses on rental properties(1/2 each) ( 50,000 ) ( 50,000 )
Taxable income P324,000 P500,000

Income tax P 14,800 P 55,000

Less: quarterly tax payments ( 10,000 )
Withholding taxes:
On professional fees ( 60,000 )
On compensation income ( 6,100 )
On rent (1/2 each) ( 7,500 ) ( 7,500 )
Income tax due (refundable) P 1,200 (P 22,500 )

EXERCISES:
1. Mr. A is both earning compensation and business income:
Gross compensation income P 300,000
Gross sales 2,900,000
non-operating income 50,000
costs and expenses 1,450,000
How much is the income tax if at the 8% rate?

2. Mr. B is an employee, with the following data:

Gross compensation income P 500,000
Gross sales 2,900,000
Non-operating income 50,000
Costs and expenses 1,450,000
How much is the income tax at graduated rates
(a) If availing of Itemized Deductions?
(b) If availing of Optional Standard Deduction?

3. The following are data for Mr. B

Gross compensation income P 500,000
Gross sales 4,000,000
Costs and expenses 2,000,000
How much is the income tax at graduated rates
(a) If availing of Itemized Deductions?
(b) If availing of Optional Standard Deduction?

4. Husband and wife have the following data:

Husband Wife
Compensation Income P 600,000
Gross Sales from business P4,800,000
Non-operating income 200,000
Cost and expenses 2,000,000
QUARTERLY AND ANNUAL INCOME TAX RETURN ON INCOME FROM
BUSINESS OR PROFESSION

Individuals engaged in business/practice of profession, regardless of the amount of sales/receipts are

required to file quarterly income tax returns, for the-
First quarter On or before May 15
Second quarter On or before August 15
Third quarter On or before November 15
End of the year On or before April 15.

Unless the taxpayer signifies the intention to elect the 8% income tax rate in
the first quarter income tax return, or the initial quarterly return of the
taxable year after the commencement of the new business/profession, the
taxpayer shall be considered to as having availed of the graduated income
tax. Such election shall be irrevocable and no amendment of the option shall
be made for the said taxable year.

A taxpayer who elected to pay the 8% income tax is not required to attach Financial Statements to
the final income tax return (end of the year). However, existing rules and regulations in bookkeeping and
invoicing/ receipting shall apply.
A taxpayer who elected the graduated income tax, or who is required to be under the graduated
income tax regime, shall be required to attach to the income tax return Financial Statements, and if the
gross sales or receipts for the year exceeded three million pesos (P3,000,000), the financial statements
must be audited financial statements.

Cumulative data (sales for the year did not exceed P3,000,000):
Illustration:
Cumulative data as at the end of:
1st Q 2nd Q 3rd Q Year
Gross sales P800,000 P1,500,000 P2,100,000 P2,950,000
Cost and Expenses 380,000 700,000 920,000 1,400,000

The income tax shall be computed –

If the choice is the 8% income tax:
1st Q 2nd Q 3rd Q Year
Gross Sales P 800,000 P1,500,000 P2,100,000 P2,950,000
A deduction of 250,000 250,000 250,000 250,000
Taxable Income P 550,000 P1,250,000 P1,850,000 P2,700,000

Income tax at 8% P 44,000 P 100,000 P 148,000 P 216,000

Less: Income tax paid:
1st quarter ( 44,000) ( 44,000) ( 44,000)
2nd quarter ( 56,000) ( 56,000)
3rd quarter __ __ ___ ( 48,000)
Tax still due/(refundable) P 44,000 P 56,000 P 48,000 P 68,000

If the choice is the graduated income tax and the deduction was for costs and expenses:
1st Q 2nd Q 3rd Q Year
Gross Sales P 800,000 P1,500,000 P2,100,000 P2,950,000
Less: Cost and Expenses 380,000 700,000 920,000 1,400,000
Taxable Income P 420,000 P 800,000 P1,180,000 P1,550,000
Income tax –graduated rates 35,000 130,000 244,000 355,000
Less: Income tax paid:
1st quarter ( 35,000) ( 35,000) ( 35,000)
2nd quarter ( 95,000) ( 95,000)
3rd quarter ( 114,000)
Tax still due/(refundable) P 35,000 P 95,000 P 114,000 P 111,000
 Cumulative data (sales for the year exceeded P3,000,000):
Illustration:
1st Q 2nd Q 3rd Q Year
Gross Sales P3,500,000 P5,500,000 P8,100,000 P9,900,000
Costs/expenses 1,320,000 2,700,000 3,400,000 4,160,000
How much is the income tax due?

If the choice is the graduated income tax and the deduction was for costs and expenses:

1st Q 2nd Q 3rd Q Year

Gross Sales P3,500,000 P5,500,000 P8,100,000 P9,900,000
Costs/Expenses 1,320,000 2,700,000 3,400,000 4,160,000
Taxable income P1,180,000 P2,800,000 P4,700,000 P5,740,000

Income tax (graduated rates) P 244,000 P 746,000 P1,354,000 P1,686,800

Less: Income tax paid
1st Q ( 244,000) ( 244,000) ( 244,000)
2nd Q ( 502,000) ( 502,000)
3rd Q ( 628,000)
Tax still due/(refundable) P 244,000 P 502,000 P 628,000 P 332,800

GROSS SALES OR RECEIPTS EXCEEDED P3,000,000 WITHIN THE TAXABLE YEAR

Illustration:

EXERCISES:
1. Cumulative data as at the end of:
1st Q 2nd Q 3rd Q Year
Gross sales P 800,000 P1,200,000 P1,800,000 P2,500,000
Costs and expenses 300,000 700,000 900,000 1,200,000
The income tax at the end of each quarter and end of the year if –
a. The choice is the 8% income tax
b. The choice is the graduated income tax and the deduction was for costs and expenses.

2. Data for each of the quarters (non-cumulative)

1st Q 2nd Q 3rd Q Year
Gross sales P 400,000 P 700,000 P2,000,000 P3,500,000
Cost of sales 100,000 400,000 1,300,000 1,600,000