INCOME TAX MIDTERM

Regular income taxation In general, every form of compensation

(Inclusion in Gross Income) income is taxable regardless of how it is
earned, by whom it is paid, or the form in
Taxable income which it is received.
Gross income (Inclusion)
Less: allowable deduction EXCEPTIONS:
Taxable income 1. The fringe benefits of managerial or
supervisory employees are not
Items of Gross Income considered compensation income but
• Gross income subject to Final Tax are subject to final tax.
o 0619-F 2. The compensation of Minimum Wage
• Gross income subject to Capital Gains Earners (MWE) is exempt from tax.
Tax (CGT)
o 1706 Example:
• Gross income subject to Regular Tax
Retirement pay, separation pay, 13th month
o 1701 pay, de minimis benefits
Items of Gross Income 2. Gross Income from Business or
1. Compensation Profession
2. Gross income from the conduct of
trade, business, or exercise of a This includes income from any trade or
profession business, legal or illegal, and whether
3. Gains derived from dealings in registered or unregistered.
property.
4. Interest Gross Income from business or profession
5. Rents is determined as follows:
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions In case of manufacturing, merchandising,
11. Partner's distributive share from the or mining business, gross income shall
net income of General Professional mean gross sales less sales returns and
Partnership allowances and discounts, and cost of
goods sold plus any income from
1. Gross Compensation investment and other incidental or outside
operation or sources.
Gross Compensation income means any
remuneration for rendering personal Extensively, the formula for computing the
gross income is:
services. Generally, compensation income
is obtained from an employer-employee
relationship between payor and recipient.

(salary, honoraria, fixed allowances,

commissions, tips and gratuities, hazard
pay, retirement pay, separation pay)

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 INCOME TAX MIDTERM

Illustration: 3. Business income subject to final tax

• Subcontractors of petroleum service
Robredo’s Store has just gone through its contractors subject to 8% final tax.
initial operation and provided the following • Business income of foreign
data to determine the gross income for the currency deposit units (FCDU) and
current year. expanded FCDU (eFCDU) from
Philippine residents subject to 10%
final tax.

3. Gains derived from dealings in

property.

This refers to the income derived from sale,

and/or exchange of assets, which results in
The gross income of Robredo’s Store would gain because of the excess of the amount or
be: value received by the taxpayer over the
determined value of the property he has
disposed of.

RULE:

1. Gains and losses in dealing ordinary

assets are subject to regular income tax.
2. Dealings in capital assets other than
domestic stocks and real properties
are subject to regular income tax.
3. Ordinary gains are included as items of
gross income.
The following business income shall not be 4. Ordinary losses are items of deductions
included in gross income subject to regular against gross income.
income tax: 5. Net capital gain from other capital
assets after deducting capital losses is
1. Business income exempt from income included as items of gross income.
tax. 6. A net capital loss is not an item of
• Gross income from BMBE deduction against gross income.
• Gross income from enterprises
enjoying tax holiday incentives. 4. Interest Income

2. Business income subject to special tax Interest income is an earning derived from
• PEZA registered entity subject to 5% depositing or lending of money, goods, or
gross income tax (GIT) credits. Unless exempted by law, interest
• Tourism Infrastructure and income received by the taxpayer, whether
Enterprise Zone Authority or not usurious, is subject to income tax.
(TIEZA)-registered entity subject to
5% GIT Tax exempt:
• Income of self-employed who opted
to be taxed under the 8% income tax. Interest earnings received from:
1. Cooperatives
2. BSP prescribed from investments
(more than 5 years)

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 INCOME TAX MIDTERM

3. Expanded FCDU earned by • Not an item of gross income if:

nonresident. − It constitutes a loan.
4. Earned by landowners in disposing − It is a security deposit to
of their lands to their tenants guarantee payment or rent
pursuant to CARL. subject to contingency
which may or may not
Subject to FWT: happen.
3. Leasehold improvements made by the
Interest earnings received from: lessee on the leased property are
1. Financial companies recognized by the lessor as income
2. Not BSPP prescribed from using the spread-out method or outright
investments. method.
3. Expanded FCDU earned by
residents. 6. Royalties

Subject to normal tax: A payment or portion of proceeds paid to

the owner of a right, such as an oil right or
Interest earnings received from: a patent for the use of it, or a portion of the
1. Principal business activity proceeds from the work of an author or
2. Not BSP prescribed form composer.
investments. Incidental interest
earnings not subject to FWT.
3. Interest income from bank deposits
abroad.
4. Interest income from corporate
bonds and promissory notes.
1. Under the regulation, the 10%
preferential royalty final tax on books a
5. Rents literary works pertains to printed
literature.
Refers to earnings derived from leasing real
estate as well as personal property. Royalties on books sold on e-copies or CDs
such as eBooks are subject to 20% final tax.
Rental income is generally determined by
the gross receipts for the year, (earned or 2. Royalties on cinematographic films an
unearned under accrual basis) because the similar works paid to NRA-ETBs, NRA-
nature of business involved is service. NETBs, NRFCs are subject to final tax
of 25%
Special considerations on rent
Royalties earned from sources within the
1. Obligations of the lessor that are Philippines are generally subject to final
assumed by the lessee are additional income tax except when they are active in
rental income to the lessor. nature.
2. Advance rentals are:
• Item of gross income upon receipt if: Note further that active royalty income and
− Unrestricted royalties earned outside the Philippines
− restricted to be applied in are subject to regular income tax.
future years or upon the
termination of the lease.

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 INCOME TAX MIDTERM

7. Dividends
The receipt of the first 10 annual annuity
These pertain to dividends declared by payments is a return of capital. Any further
foreign corporations. Cash, property, and receipt from year 11 onwards is an item of
script dividends from foreign corporations gross income subject to regular income tax.
are generally items of gross income subject
to regular income tax. 9. Prizes and Winning

Tax exempt: Prize – Reward for a contest or competition.

Dividends are tax-exempt if: Winning – Reward for an event that
1. Received from a DOMESTIC depends on chance such as winnings from
CORPORATION by: gambling, lottery etc.
a. Another domestic corp.
b. Resident Foreign corp.
2. Received from a Cooperative
3. Pure stock dividend / Pure
liquidating dividend (return of
capital)

Subject to FWT: Note: The above applies to individual

Dividends are tax-exempt if: taxpayers:
1. Citizen or Resident alien
- 10% final tax Taxable prizes and winnings of
2. NRA – ETB corporations are subject to regular income
- 20% final tax tax.
3. NRA – NETB
- 25% final tax 10. Pensions
4. NRFC
- 15% final tax Stated allowance paid regularly to a person
on his retirement or to his dependents on his
Subject to normal tax: death, in consideration of past services,
Dividends are s.t. regular/normal tax of meritorious work, age, loss, or injury.
individuals/ corporations is such dividends
are: Pension pay is taxable unless the law states
1. Not included as tax-exempt otherwise, or unless the BIR approves the
dividends pension plan of a private company.
2. Not subject to final tax
3. Distributive shares of partner in 11. Partner's distributable share from
GPP the net income of the GPP

8. Annuities The GPPs are not subject to income tax (i.e.,

final tax, capital gains tax, or regular
The excess of annuity payments received income tax) because they are merely
by the recipient over premium paid is viewed as pass-through entities. The
taxable income in the year of receipt. partners are the ones subject to regular tax
Illustration: on their share in the net income of the GPP.

Marcos purchased an annuity contract for

P100,000 which shall pay him P10,000
annually until he dies.

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 INCOME TAX MIDTERM

INDIVIDUAL INCOME TAXATION 6. Fees, including director’s fee (if

director is an employee)
1. Compensation Income 7. Emoluments and honoraria
8. Taxable retirement and separation pay
For individuals earning purely 9. Value of living quarters or meals
compensation income, the only allowable 10. Gains on exercise of stocks options
deductions are the mandatory government 11. Profit sharing and taxable bonuses
contributions (SSS, PAGIBIG and 12. 13th month pay and other benefits
PHILHEALTH), and union dues.
Tax model on compensation income
A taxable income of not exceeding
P250,000 is subject to 0% tax.

Employer-employee relationship
1. Selection and engagement of Illustration 1:
employees
2. Payment of Wages Ms. Pina Palad reported the following
3. Power of dismissal income for the taxable year:
4. Power of control

Types of Employees as to Function

1. Managerial
2. Supervisory
3. Rank and file employees

Types of Employees as to Taxability

ANSWER:
• Minimum wage earners -
recipients of minimum wage Ms. Palad retired at the age of 45 as of Dec.
(EXEMPT) 31, 2021, receiving a retirement pay of
• Regular employees - subject to P1,000,00. What is the gross compensation
regular tax (progressive) income of Miss Palad for 2021?

The regular compensation income includes

fixed renumeration due to be received by
an employee every period such as:

1. Basic salary
2. Fixed allowances such as COLA, fixed
housing allowances, transportation, and
other allowances paid to an employee 2. Business / Professional Income
every payroll period.
In case of manufacturing, merchandising,
Other additional compensation under or mining business, gross income shall
tax rules: mean gross sales less sales returns,
1. Overtime pay discounts and allowances, and cost of
2. Hazard pay goods sold plus any income from
3. Night shift differential pay investment and other incidental or outside
4. Holiday pay operations or sources.
5. Commission

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 INCOME TAX MIDTERM

exceed P3,000,000 and only beginning the

After computing the gross income, the 2018 taxable year.
individual taxpayer may claim itemized
deductions (ID) or the optional standard
deduction (OSD).

Itemized Deductions (ID) - expenses

incurred in conducting business or practice
of profession are allowed as deductions
provided they meet all the requirements.

Optional Standard Deduction (OSD)- In

lieu of allowable ID, the OSD may be
deducted from the gross income.
Illustration:
Optional Standard Deduction
Ms. X operates a convenience store while
1.Individual taxpayers - 40% of total she offers bookkeeping services to her
sales/revenues/receipts/fees clients. In 2021, her gross sales amounted
to P800,000. In addition to her receipts
2.Corporate taxpayers - 40% of gross from bookkeeping services of 300,000 and
income incurred costs and expenses of P300,000
and P100,000, respectively.

How much is her tax due using the 8% tax

rate?

If taxpayer opts to use the OSD in lieu of

the itemized deduction allowed, his/ its net
taxable income shall be as follows:

1. Ms. X's gross sales/receipts from

business and practice of profession did
not exceed P3,000,000. Thus she can
avail of the 85 income tax rate
8% Income Tax Option 2. The tax base is the gross sales/receipts.
Thus, the cos of sales, expenses or even
The TRAIN Law introduced a new tax the OSD is not allowed as deduction.
scheme for individual taxpayers - the 8% 3. Since she is earning purely from such
optional income tax. business and practice of profession, he
first P250,000 is considered non-
The income tax rate applies ONLY to taxable
income from business or practice of
profession where the gross sales or receipts,
including the non-operating income, do not

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 INCOME TAX MIDTERM

Mixed Income Earners

1. Compensation income - is ALWAYS

subject to the graduated tax rate.
2. Business/professional income

i. If the taxpayer's gross sales/receipts,

together with other non-operating
income, do not exceed P3,000,00;
either:
a. 8% income tax rate without the first
P250,000 exempt (since this will be
considered in the application of the
graduated rates for income from
compensation) ANSWER:
b. Graduated rates (taxable income will
be added to the compensation
income).

ii. If the taxpayer's gross

sales/receipts, together with
other non-operating income,
exceeds P3,000,000 - use
graduated rates. 1. Ms. X's gross sales/receipts from
business and practice of profession did
Graduated income tax rate for not exceed P3,000,000. Thus she can
individuals avail of the 8% income tax rate
Referred to as basic income tax / applicable only to such income.
schedular income tax / regular income tax 2. The tax base is the gross sales
for individuals. /receipts. Thus, costs, expenses or even
the OSD is not allowed as a deduction.
3. Income from compensation is always
subject to the graduated tax rates.
4. Since she is a mixed-income earner,
Illustration: there is no first P250,000 considered
non-taxable as to her business
Ms. X operates a convenience store while /professional income since this amount
she offers bookkeeping services to her has already been considered in the
clients. In 2021, her gross sales amounted computation from Compensation
to P800,000 in addition to her receipts income.
from bookkeeping services of 300,000 and
incurred costs and expenses of P300,000
and P100,000, respectively.

Ms. X likewise earned P1,000,000 from

employment with XYZ Company for
which P180,000 was tax withheld and
remitted to the BIR. How much is her
income tax due and payable?

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 INCOME TAX MIDTERM

GRADUATED INCOME TAX RATE Example:

FOR INDIVIDUALS
A earned P100 interest from his deposits
with X Bank, X bank withheld P20 final tax
due on the interest.

In this transaction:
1. the P100 interest is the passive
income of A
2. X bank will remit the P20 final tax
on interest to the BIR
3. A will receive the interest net of the
tax, P80.
4. The P100 interest will no longer be
included in A's taxable income
subject to income tax.

Special Alien & Filipino Counterparts

• Subject to graduated tax rates

NRA-NETB

Except for sale of capital assets (shares of

stock and real property) the entire income
received from all sources within the PH by
NRANE within the PH such as interest,
cash and/or property dividends, rents,
salaries, wages, premium, annuities,
compensation, remuneration, emoluments,
and other income - the applicable tax rate is
25% (Final tax)

3. Passive Income

Subject to final withholding tax. Not

included in the Gross Income of the
Taxpayer for purposes of computing his
taxable income subject to the
graduated/scheduler/basic income tax rate
or the 8%.

The final withholding tax is the amount of

tax which constitutes the full and final
payment of the income tax due from the
payee of the said income.

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 INCOME TAX MIDTERM

PASSICE INCOME (EARNED

WITHIN)

Passive income earned from outside the 2. All prizes and awards granted to
Philippines: athletes on local and international
sports competition and tournaments,
If a resident citizen earns any of the passive whether held in the Philippines or
income items from abroad, it will not be abroad and sanctioned by their
subject to final withholding tax but to respective national sports
Regular Income Tax and will thus form part association.
of his taxable income subject to tax table.

EXEMPT PRIZES Informer's reward

1. Prizes and awards made primarily
in recognition of religious, Reward given to persons instrumental to the
charitable, scientific, educational, discovery of violations of the Tax Code and
artistic, literary or civic in the discovery and seizure of smuggled
achievement. Provided: goods is entitled to 10% of the revenues,
• The individual was selected without surcharges or fees recovered and/or fine or
any action on his part to enter the penalty imposed and collected or
contest or proceeding; and P1,000,000 per case, whichever is lower.
• He/she is not required to render
substantial future services as a The informer's reward shall be subject to 10%
condition to receive the prize/award FWT.

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 INCOME TAX MIDTERM

4, Gains from Disposition of Assets All other capital gains are subjected to regular
income tax.
Ordinary Asset vs. Capital Asset
Sale of shares of stock of a domestic
Ordinary assets mean: corporation not listed and traded through a
1. Stock in trade of the taxpayer or other local stock exchange:
property of a kind which would
properly be included in the inventory CGT rate: 15%
of the taxpayer.
2. Property held by the taxpayer Tax base: is the net capital gain, which is the
primarily for sale to customers in the excess of the selling price/fair market value
ordinary course of his trade or less cost to sell) over the cost of shares.
business.
3. Property used in the trade or business, The fair market value of shares of stock not
of a character which is subject to the listed or traded in local stock exchange are:
allowance for depreciation.
4. Real property used in trade or 1. Common shares - book value based on
business of the taxpayer. the latest available statements.
2. Preferred shares - liquidation value,
Capital assets are those NOT falling which is equal to the redemption price of
within the definition of an ordinary asset. the preferred shares as of balance sheet
date, including any premium and
Determination of Gain/Loss cumulative preferred dividends in arrears.

Gain shall be the excess of the amount Illustration:

realized from the disposition of property
over the basis or adjusted basis for Assume that Mr. A soldP10,000 shares in X
determining the gain. Corporation on June 30, 2021. The
corporation's accounting period is on a
On the other hand, the loss is the excess of calendar year bases.
the basis or adjusted basis for determining
loss over the amount realized. In this case, the book calue as the fair market
value of the shares of stock in X Corporation
Treatment of Capital Gains shall be determined based on its audited FS for
year ending December 31, 2020, since the
Depending on the nature of the property, the audited S for taxable year 2021 is not yet
gains derived from sale or disposition of existent as of the date of sale of shares.
capital assets may be subject to:
1. Capital gains tax; or Assume further that based on the AFS as of
2. Ordinary income tax December 31, 2020, the total assets of X
corporation are P50,000,000 while its
Remember: liabilities are P20,000,000 resulting to an
equity of P30,000,000. Its outstanding shares
Capital Gains Tax is applicable only to: are 200,000/ For thi spurposes, the net book
1. Sale of shares of stock of a value as the FMV of each share shall be
domestic corporation not listed or computed as:
traded through a local stock
exchange held as capital assets; and 30m equity/200k outstanding shares = P150
2. Sale of real property located in the (per share)
Philippines held as a capital asset.

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 INCOME TAX MIDTERM

Sale of real property located in the

Philippines held as a capital asset: Illustration 1:

A 6% CGT is imposed on the presumed gain Mr. F sold his principal residence which he
from sale of real property, based on the gross acquired for P1,000,000 for P3,000,000. At
selling price or the FMV, whichever is higher. the time of sale, the FMV is P2,500,000.
After 1 year, Mr. F bought a house and lot
FMV shall be the higher between: for P3,200,000
1. Zonal Value as determined by the
BIR. Assuming all other requisites are present,
2. FMV per local assessor how much is the CGT due on the sale?

Note: ANSWER:

For individuals, real property subject to P0 – The proceeds of P3,000,000 was fully
CGT consists of ALL real properties utilized to acquire a new principal
(classified as capital assets); residence.

For domestic corporations, the only real Illustration 2:

property subject to CGT is lands and/or
buildings. Mr. F sold his principal residence which he
acquired for P1,000,000 for P3,000,000. At
Sale of REAL PROPERTY located in the
the time of sale, the FMV is P2,500,000.
Philippines held as a capital asset. After 1 year, Mr. F bought a house and lot
• sale of principal residence for P2,000,000
Sale of principal residence of natural How much is the CGT?
persons, the proceeds of which is fully
utilized in acquiring or constructing a new
ANSWER:
principal residence within 18 calendar
months from the date of sale or disposition
= 60,000
is not subject to the 6% CGT. Subject to the
(1m/3m)*3m = 1m*6% = P60,000
following requirements:
1. This historical cost or adjusted basis of
real property sold or disposed is carried
over to the new principal residence.
2. The exemption can only be availed once
every 10 years.
3. The BIR is notified by the taxpayer ANSWER:
within 30 days from the date of sale or
disposition of his intention to avail of = 66,000
the tax exemption. (1/3m)*3.3m = 1.1m*6% = P66,000

If there is no full utilization of the proceeds,

the portion of the gain presumed to have
been realized from the sale or disposition
shall be subject to the 6% CGT as follows:

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Rules Applicable to Capital Gains EXAMPLE:

1. Percentage Taken into Account Mr. Rhad Estoque, a Filipino resident, had
(Holding Period Rule): the following incomes and losses for the
year:
The following percentages of the gain or
loss recognized upon the sale or exchange
of capital assets shall be taken into account
in computing net capital gain, loss or net
income.
The taxable income of Mr. Estoque for the
year is computed as follows:

This rule is NOT applicable to corporations.

Illustration:

Mr. Manila sold various properties as 3. Net Capital Loss Carry-Over

follows in 2021: Compute for the net
capital gain or loss. If the individual sustains in any taxable
income of such year, such loss, in an
amount not to exceed the net income of
such year, shall be treated in the succeeding
taxable year as a loss from the sale or
exchange of asset held not more than 12
months.

This rule is NOT applicable to a

ANSWER: corporation.
Following the previous example, in the next
year, Mr. Estoque had the following income:

2. Limitation on Capital Losses: The taxable income of Mr. Estoque for the
year is computed as follows:
The capital losses realized during the
taxable year are deductible only to the
extent of capital gains from the same type
of transaction during the same period. This
rule likewise applies to sales of shares of
stock subject to 15% CGT.

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 INCOME TAX MIDTERM

4. Sales of shares of stock subject to 15%

CGT:

For sale, barter, exchange, or other forms of

disposition of shares of stock subject to the
15% capital gains tax, if the transferor of
the capital asset is an individual, the rule on
holding period and capital loss carry-over
will NOT apply.

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 INCOME TAX MIDTERM

Exclusions from Gross Income ii. Any amount received by an

employee, or by his heirs from the
Exclusions = exemptions employer due to death, sickness,
or other physical disability or for
Exclusions refer to items or receipts not cause beyond the control of the
included in the determination of the taxable said employee, such as
income because the law or treaty provides retrenchment, redundancy, or
that they are exempt from income tax. cessation of business.

They are not subject to regular tax, capital a. The cause of separation by an
gains tax, or final tax. employee from the service was
beyond his control.
1. Remunerations received as an
incident of employment. b. Amounts received by involuntary
separation remain exempt from
i. Retirement benefits income tax even if the employee, at
the time of separation, had rendered
Received under RA 7641 AND those less than 10 years of service and/or
received by officials and employees of is below 50 years old.
private firms, whether individual or
corporate, under a reasonable private benefit However, any payment made by an
plan. employer to an employee on account of
dismissal constitutes compensation
a. Those received under a reasonable private regardless of legal contract, statute, or
benefit plan: is exempt subject to the otherwise, to make such payment - thus
following requisites: NOT exempt.

• Plan is reasonable. iii. Social security benefits,

• Plan is approved by the BIR. retirement gratuities, pension and
• Retiring employee must have been other similar benefits
in the service of the same employer
for at least 10 years; received by resident and non-resident
• Retiring employee is 50 years old or citizens of the Philippines or aliens who
older at the time of retirement; and reside permanently in the Philippines from
• Retiring employee has not foreign entities, whether private or public.
previously availed of the privilege
under the retirement benefit plan of iv. Payments of benefits due or to
the same or another employer. become due to any person residing in
the Philippines under the law of the
b. Retirement benefits under RA 7641 where: US administered by the US Veterans
Administration
• No private retirement plan or
retirement plan under the Collective v. Payments of benefits made under the
Bargaining Agreement Social Security System Act of 1954
(CBA)/employment contract.
vi. Benefits received from the GSIS Act
• Must have served the company for
of 1937, and the retirement gratuity
at least 5 years.
received by government officials and
• Retiree at least 60 years old but not
employees.
more than 65 years of age at the
time of retirement.
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 INCOME TAX MIDTERM

2. Compensation for services by a 7. Income exempt under treaty

citizen or resident of the PH
performed for a foreign government Income items that are excluded by
or international organization. international agreement to which the
Philippine government is a signatory are
a. Includes remuneration paid for services excluded from income tax. It must be recalled
performed by ambassadors, ministers, that treaty agreements override provision of
and other diplomatic officers and our revenue tax laws in case of conflict under
employees; the exemption doctrine of international
comity.
b. Includes remuneration paid for services
performed a consular or other employee 8. 13th Month pay or other benefits
of a foreign government or a
nondiplomatic representative of such 13th month pay and other benefits such as
government. Christmas bonus, loyalty awards, gifts in cash
or kind, and other benefits of similar nature.
3. Damages
Provided that the total amount shall not
Actual, moral, exemplary, and nominal exceed P90,000
damages received by an employee or heirs
pursuant to a final judgment or compromise 9. GSIS, SSS, Medicare and Other
agreement. Contributions

4. Life Insurance Proceeds GSIS, SSS, Medicare, PAG-IBIG

contributions and union dues of individual
Proceeds of life insurance policies paid to the employees. For purposes of computing
heirs or beneficiaries upon death of the taxable income subject to Income Tax and
insured, whether single sum or otherwise are Withholding Tax on Compensation, the said
exempt. contributions are deducted to arrive at taxable
income. However, for employees, the amount
5. Amount received by the insured as a considered not taxable shall only pertain to
RETURN OF PREMIUM the maximum required by law.

The amount received by the insured, as a

return of premiums paid by him under life 10. De Minimis Benefits
insurance, endowment, or annuity contracts
either during the term or at the maturity of the Are facilities or privileges furnished or
term mentioned in the contract or upon offered by an employer to his employees that
surrender. are of relatively small value and are offered
or furnished by the employer merely as a
6. Compensation for injuries or sickness means of promoting the health, goodwill,
contentment, or efficiency of his employees.
Amounts received through Accident or
Health Insurance or under Workmen's Treatment:
Compensation Act, as compensation for
personal injuries or sickness. De minimis benefits are considered non-
taxable and are not included in the
computation of taxable income and
withholding tax on compensation, as well
as fringe benefits tax.

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 INCOME TAX MIDTERM

How much is his income tax due, if any?

Amount in excess of the above-mentioned
ceiling will form part of other benefits, ANSWER:
which is non-taxable only up to P90,000
together with other benefits received by 0, computed as follows:
the employee including 13th month pay
and other bonuses.

11. Compensation Income of Minimum

Wage Earners

who work in the private sector and being

paid the Statutory Minimum Wage.

Coverage: No income tax and 12. Tips and Gratuities

consequently, withholding tax, shall be
required on: Tips or gratuities paid directly to an
• The Statutory Minimum Wage employee, by a customer of the employer,
(SMW) which are not accounted for by the employee
• Holiday pay to the employer are considered taxable
• Overtime pay income but not subject to withholding tax on
• Night shift differential; and compensation. This should then be included
• Hazard pay by the recipient in his gross income subject
to regular income tax.
Other income earned by MWEs:
Additional compensation such as Illustration:
commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory Mr. Brent Quito is employed by ABC
amount to P90,000, taxable allowances and Corporation. He received the SMW for 2021
other taxable income given to an MWE by in the total amount of P100,000 and 13th
the month pay and other bonuses amounting to
same employer other than those which are P75,000. In the same year, he also received
expressly exempt above shall be subject to overtime pay of P40,000 and nigh shift
income tax and consequently, withholding differential of P25,000/ He also received
tax on compensation. commission income from the same
employer of P20,000, thus, total income
Illustration: received amounted to P260,000. How much
is his income tax due, if any?
Mr. Brent Quito is employed by ABC
Corporation. He received the SMW for ANSWER: 0, computed as follows:
2021 in the total amount of P100,000 and
13th month pay and other bonuses
amounting to P75,000. In the same year, he
also received overtime pay of P40,000 and
nigh shift differential of P25,000/ He also
received commission income from the
same employer of P20,000, thus, total
income received amounted to P260,000.

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 INCOME TAX MIDTERM

13. CoVID 19 Benefits 16. Non-Stock and non-profit Entities

As part of the government's response to the Non-stock entities that are organized for
COVID 19 pandemic crisis, RA 11494 profit are exempt from income tax on their
provides for the following exempt special income from operations.
benefits for health workers:
• COVID 19 Special Risk Allowance However, their income from unrelated
• Actual hazard duty pay sources is taxable
• Compensation to health workers
who contracted COVID 19 in the 17. Qualified Employees' Trust Fund
line of duty
An employees' trust fund which forms part
14. Barangay Micro-Business Enterprise of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some
A BMBE is a business entity engaged in the or all his employees is exempt from any
production, processing or manufacturing of income tax under the NIRC.
products or commodities, including agro-
processing, trading and services, whose 18. Income Subject to Final Tax or
total assets including those arising from Capital Gains Tax
loans but exclusive of the land on which the
business entity's office, plant, and equipment Items of income that are subject to final
are situated, do not exceed P3,000,000 income tax or capital gains tax are not items
of gross income subject to regular income
Income of BMBE from their operation is tax.
exempt; hence, excluded from the gross
income subject to regular income tax.

BMBEs file an Annual Information Return

in lieu of the income tax return. However,
their nonoperating, passive, and capital
gains are subject to the appropriate type of
income tax.

15. Cooperatives

Cooperatives that transact business purely

with members are exempt from all taxes and
fees.

Cooperatives that transact business with

non-members are likewise exempt from all
taxes and fees if their accumulated reserve
and undivided savings do not exceed P10M.

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