MODULE 7: TAX ON INDIVIDUALS

Mirjam Nilsson​
◦ Individual Taxpayer refers to a person who derives income from the
practice of profession, trade or business or receives compensation
as an employee.

◦ He is a natural person classified as a citizen or an alien with

income subject to tax.
NATURE AND CONCEPT
3. Pay as you file or earn system. The amounts of tax liabilities are paid
upon filing the return, or the taxes are withheld on income subject to
withholding tax.

4. Adoption of modified gross income. A compensation income earner shall

be taxed based on his/her taxable compensation income under Sec. 24(A)
(2)(a) of the tax code as amended.
- A mixed income earner on his/her business/professional income, has the
option to be taxed at the graduated rates under Section (23)(A)(2)(a) or
8% income tax rate on gross sales/receipts and other non-operating
income in lieu of the graduated tax rates, provided that the gross
sales/receipts and other non-operating income do not exceed the
P3,000,000 threshold
The income taxation of individual taxpayers has the following
characteristics:
1. Graduated or schedular system of taxation. The system classifies
income and imposes different tax rates depending on the level of
income of the individual taxpayer.

2. Progressive tax rates. The rate of tax increases as the tax base increases,
but such increase is not directly proportional
• A tax system that is progressive applies higher tax rates to higher levels
of income.
GRADUATED TAX RATES
Taxpayers According to Sources of Income
1. Compensation income earner. These are individuals whose source of income is purely
derived from an employer-employee relationship

2. Self-employed individuals. These include sole proprietors, independent contractors, or

professionals who report income earned from self-employment or exercise of
profession.

3. Mixed Income Earners. These are individual taxpayers, earning compensation income
from employment and income from business, practice of profession and or other
sources from employment.
Purely Compensation Income Earner:
- Computation of Net Taxable Compensation Income

Gross Taxable Compensation Income xxxx

Less: Non- Taxable Compensation Income
13th month pay (limit P90,000) xxxx
SSS, Philhealth, Pag-ibig, Union
Dues xxxx xxxxx
Net taxable Compensation Income xxxxx
Purely compensation Income Earner ( Not a Minimum Wage Earner)

Jenny presented the following data for the current taxable year:
o Monthly basic salary P65,000.00
o 13th month pay, Christmas Bonus,
Productivity pay, and other benefits 145,000.00
o Mandatory Contributions 23,000.00

Compute the following:

1. Taxable compensation income
2. Tax due
1. Taxable compensation income:

Compensation income (65,000 x 12) P780,000

Other compensation income
(13th month pay and others) P145,000
Less: limit allowed by law 90,000 55,000
Total 835,000
Less: Mandatory contributions 23,000
P812,000
Using the graduated tax rates, the tax due is as follows:
• On P800,000 P130,000
• On excess (812,000-800,000)x30% 3,600

• Tax due P 133,600.00

Purely Self-Employed or Professional Individual

Option 1
Gross Sales xxxx
Less: Cost of Sales xxxx
Gross Income Pxxxx
Add: Other Income
Total Gross Income Pxxxx
Less: Allowable Deduction xxxx
Net Taxable Business/Professional Pxxxx
Income
Computation of Tax Liability= determined using the graduated tax rules
Purely Self-Employed or Professional Individual

Option 2
Gross Sales/receipts xxxx

Add: Other other non-operating Income xxxx Gross

Income P xxxx
Less: Allowable Deduction xxxx
Net Taxable Business/Professional Pxxxx
Income
Net Taxable Income x .08 = Tax payable
TRAIN LAW
o For this year, we will see various changes in our tax system
brought by the Republic Act (RA) No. 10963, also known as Tax
Reform for Acceleration and Inclusion (TRAIN) Law, and RA No.
11534 or the Corporate Recovery and Tax Incentives for
Enterprises (CREATE) Law.
o Firstly, under the TRAIN Law, individual taxpayers with annual
taxable income amounting to PhP250,000.00 or below are still
exempt from paying income tax, while the rest of taxpayers,
except those with taxable income of more than
PhP8,000,000.00, will have lower tax rates ranging from 15% to
30%, previously 20% to 32%.
o On the other hand, to maintain a progressive form of taxation,
the imposition of an income tax rate of 35% has been
maintained for individual taxpayers whose annual taxable
income exceeds PhP8,000,000.00.
• Compared to the rates imposed at the initial implementation of
the TRAIN Law in 2018, the new income tax rates for individuals
have been decreased by 5% for those with taxable income of
more than PhP250,000.00 up to PhP2,000,000.00,

• While a 2% decrease in the tax rate for those individuals with

taxable income of more than PhP2,000,000.00 up to
PhP8,000,000.00.
8% PREFERENTIAL
RATE
◦ Do they avail of the 8% special tax rate, or follow the regular income tax
rate for individuals?
◦ The 8% tax is applicable only to self-employed individuals (sole
proprietors and professionals) whose gross receipts or gross sales and
other non-operating income for the year do not exceed the three million
pesos (P3,000,000) value-added tax (VAT) threshold and are not subject
to other types of percentage tax. If the small business is owned by a
corporation, the 8% tax will not apply.

◦ The 8% tax is applicable to various types of business activities that can

be undertaken by a sole proprietor, such as the practice of a profession,
consultancy services, or convenience store business.
◦ If the self-employed individual is earning purely business income, he simply
needs to add up his gross sales or receipts, deduct the non-taxable P250,000,
and multiply the difference with the 8% to arrive at his tax payable to the BIR.

• However; the 8% rate should not be an automatic choice for all self-employed
individuals. The 8% tax rate is imposed on the gross sales or receipts; no
deductions for business expenses are allowed.

• Hence, the self-employed individual should do his math and check what option
would benefit him most. He should compare his tax liability under the 8% tax and
the regular income tax of 0% to 35%. However, should he elect to pay under the
regular rate of 0% to 35%, he shall continue to pay the 3% percentage tax in
addition to the income tax.
 • Partners of a general professional partnership are also not allowed to avail of the 8%
tax, as their distributive share from the general professional partnership is already net
of cost and expenses
• In view of the lower income tax rate, the withholding tax collected by clients and
customers from their payments of professional, promotional, talent fees, and similar
payments for services rendered by self-employed professionals availing of the 8%
has also been decreased to 5%.

• The individual must submit to his client a sworn declaration that his gross sales or
receipts for the year do not exceed P3 million, together with a copy of his
Certificate of BIR registration showing that he is not VAT-registered. The sworn
declaration must be submitted no later than Jan. 15 of each year or at least prior to
the initial payment of the fees or commissions subject to 5% withholding tax.
• Failure to comply will result in the payment of a higher rate of 10% withholding
tax.
FORMULA IN COMPUTING
TAXABLE INCOME
CHECKPOINT
!!!
◦ Submit on Monday 3 cases of Individual Taxpayers for
o Compensation Income Earner
o Self-Employed Individuals ( with application of the 8%
preferential rates and a graduated tax rate
o Mixed Income Earners

◦ This is in lieu of your reflection paper.

◦ Write it in a yellow pad paper.