BASIC FORMAT OF COMPUTATIONS

1. Pure Compensation Income

The elements to determine the existence of an employment relationship are:

(1) the selection and engagement of the employee;
(2) the payment of wages;
(3) the power of dismissal;
(4) the employer’s power to control the employee’s conduct.

Gross Compensation Income xx

Less: Non-Taxable Compensation Income* (xx)
Taxable Income xx
Multiply: Tax Rate %
Taxable Due xx
Less: Withholding Tax on Compensation/Wages (xx)
Tax Payable (Refundable) xx
*non-taxable compensation income includes those benefits provided by the
employer which are considered de minimis or otherwise exempted from income
tax such as mandatory government and other contribution, union dues and
exempt bonuses up to P90,000.

2. Pure Business or Professional Income

A. Availing Graduated Rates

Gross Sales/Receipts from Business/Profession* xx

Less: Costs and Allowable Deductions (OSD or (xx)
Itemized)
Taxable Income xx
Multiply: Tax Rate %
Tax Due xx
Less:
Withholding Tax (xx)
Creditable Tax (xx)
Tax Payable (Refundable) xx
*the amount reported as business/professional income shall be gross of any
applicable withholding taxes. Note that creditable withholding taxes are deducted
from the Tax Due, not as reductions to gross income to arrive at taxable income

B. Availing 8% Optional Income Tax

Gross Sales/Receipts* xx
Add: Other Non-Operating Income xx
Less: First P250,000 exempt from income tax (xx)
Taxable Sales/Receipts xx
Multiply: Tax Rate 8%
Income Tax Due xx
Less:
Withholding Tax (xx)
Creditable Tax (xx)
Tax Payable (Refundable) xx
 *No deduction for costs or any other items of deduction, save for sales returns,
discounts and allowances.

3. Mixed Income
✓ Mixed income (from compensation and income from business or practice of
profession) can be taxed as follows:
A. COMPENSATION INCOME – is always subject to graduated tax rates.
B. INCOME FROM BUSINESS/PRACTICE OF PROFESSION:

B.1. If the taxpayer’s gross sales/receipts, together with other non-operating

income, do not exceed P3,000,000; EITHER

B.1.1. 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)

On Income from Business or Profession

Gross Sales/Receipts* xx
Add: Other Non-Operating Income xx
Taxable Sales/Receipts xx
Tax Rate %
Income Tax Due from Business/Profession xx

On Compensation Income
Gross taxable Compensation Income xx
Less: Non-Taxable Compensation Income* (xx)
Taxable Income xx
Multiply: Graduated Tax Rate %
Income Tax due from compensation xx

AGGREGATE

Income tax due from COMPENSATION xx

Income tax due from BUSINESS/PROFESSION xx
Total Income Tax Due xx
Less: Withholding Taxes/Tax Credits (xx)
Tax Payable (Refundable) xx

B.1.2. Graduated Rates (taxable income from business/profession will be

added to the compensation income before determining applicable bracket)

Gross Compensation Income xx

Less: Non-Taxable Income (xx)
Taxable Income from Compensation xx
Gross Sales/Receipts xx
Less: Costs/Deductions (Itemized/OSD) (xx)
Taxable Income from Business/Profession xx
Total Taxable Income xx
 Multiply: Graduated Tax Rate %
Income Tax Due xx
Less: Withholding Taxes/Tax Credits (xx)
Tax Payable (Refundable) xx

B.2. If the taxpayer’s Gross Receipts/Sales, together with other non-operating

income, exceeds P3,000,000 – graduated rates

The above rates shall apply to:

1. Purely Compensation Income earner
2. Mixed Income Earner as regards their compensation income
3. Those earning income from business or practice of profession whose
sales/receipts and other income EXCEEDS P3,000,000
4. Those earning income from business or practice of profession whose
sales/receipts and other incomes does not exceed P3,000,000 and the
taxpayer opted avail of optional VAT registration.
5. Those who failed to signify that they are availing the 8% flat rate in their 1st
Quarter Income Tax Return
6. Those who are not allowed to avail the 8% Flat Rate if Income Tax
THE 8% OPTIONAL INCOME TAX RATE
✓ This income tax rate applies ONLY to Income from BUSINESS/PROFESSION
where the gross sales/receipts, including non-operating income DO NOT
EXCEED P3,000,000.
Rules Applicable
1. The tax base shall be the gross sales/receipts including other non-operating
income, unlike the graduated rates which are based on taxable income.
2. For those earning PURELY from business or practice of profession, the tax base
shall be that in excess of P250,000.

ILLUSTRATION: Ms. X operates a convenience store while she offers

bookkeeping services to he clients. In 2021, her GS amounted to P800,000., in
addition to her receipts from bookkeeping services of P300,000 and incurred
cost and expenses of P300,000 and P100,000 respectively.

How much is her tax due using the 8% tax rate?

Gross Sales – Convenience Store P800,000
Gross Receipts – Bookkeeping Services 300,000
TOTAL SALES/RECEIPTS 1,100,000
Less: Non-taxable Portion (250,000)
TAXABLE INCOME 850,000
Multiply: Tax Rate 8%
INCOME TAX DUE 68,000
Note: .
I. Ms. X’s GS/GR from business and practice did not exceed P3,000,000, thus
she can avail the 8% optional rate.
II. The tax base is the GS/GR. Thus the COS and expenses or even the optional
standard deduction is not allowed as a deduction.
III. Since she is earning purely from such business and practice, the first
P250,000 is considered non-taxable.

3. If the Taxpayer is a mixed-income earner, i.e., he earns compensation income

too, the first P250,000 is treated as non-taxable is not applicable.

ILLUSTRATION: In the above illustration, 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?
On her business income and income from the
practice of profession
Gross Sales – Convenience Store P800,000
Gross Receipts – Bookkeeping Services 300,000
Total Sales and Receipts 1,100,000
Tax Rate 8%
INCOME TAX DUE 88,000

On her compensation income

Compensation Income

Tax on the first P800,000 P130,000

Tax on the excess – 30% 60,000
 INCOME TAX DUE 190,000

Total Income Tax Liability

Income tax on Business 88,000
Income Tax on Compensation 190,000
TOTAL INCOME TAX DUE 278,000
Tax Withheld (180,000)
INCOME TAX PAYABLE 98,000
Note:
I. Ms. X’s GS/GR from business and practice of profession did not exceed
P3,000,000. Thus she can avail of the 8% income tax rate applicable only
to such income.
II. The tax base is the GR/GS. Thus, costs, expenses or even the optional
standard deduction is not allowed as deduction.
III. Income from compensation is always subject to graduated rates.
IV. Since she is a mixed-income earner there is no first P250,000 considered
non-taxable as to her business income and income from the practice of
profession, since this amount (the non-taxable 250,000) has already been
considered in the graduated rates.
V. Note that Ms. X will not qualify for substituted filing since she has income
other than compensation. Thus, she would need to file her individual
income tax return using BIR form No. 1701.

4. The 8% tax shall be in lieu of the percentage tax under the Sec. 116.
Accordingly, the taxpayer shall not be subject to the 3% Other Percentage Tax
on his GS/GR.
5. Availment of the 8% income tax rate shall be made on the 1st quarter income tax
return or on the initial quarter return of the taxable year after the
commencement of a new business or practice of profession. Such election shall
be irrevocable, and no amendment of option shall be made for the said taxable
year. Accordingly, the taxpayer shall compute for the final annual income tax due
using such rate.
6. Otherwise, if the taxpayer failed to make such election, the taxpayer shall be
considered to have availed of the graduated rates.

ILLUSTRATION: In the above illustration, if Ms. X failed to signify her

intention to be subjected to the 8% income tax rate, she shall be subjected to
the graduated tax and her income tax liability shall be computed as follows:
Total S/R P1,100,000
Less: COS (300,000)
GROSS INCOME 800,000
Less: Operating Expense (100,000)
TAXABLE INCOME 700,000

INCOME TAX DUE 105,0000

NOTE: Aside from being subjected to the graduated tax rates, Ms. X. shall
likewise be liable for the 3% percentage tax on her GS/GR.
7. The FS is not required to be attached to the final income tax return. However,
existing rules and regulations on bookkeeping and invoicing shall still apply.
8. If the taxpayer’s GS/GR and other non-operating income exceeds he/she shall be
automatically be subjected to the graduated rates. In such case, his/her income
tax shall be computed under the graduated income tax rates and shall be
allowed a tax credit for the previous quarter/s income tax payments under the
8% income tax rate option.
ILLUSTRATION: Mr. ABC earned P3,000,000 on his practice of profession for
the first three quarters of 2021 for which he filed quarterly income tax returns
and availed of the 8% income tax rate, and on the 4th quarter, he earned
P3,500,000. For the taxable year, he incurred cost of sales and operating
expenses amounting to P3,000,000 and P1,440,000 respectively. How much is
the tax due and tax still payable for the taxable year 2021?
Total Sales P6,500,000
Less: COS (3,000,000)
Gross Income 3,500,000
Less: Operating Expenses (1,440,000)
Taxable Income 2,060,000

Tax due based on graduated rates 509,200

Less: 8% income tax paid for the first three quarters (220,000)
INCOME TAX PAYABLE 289,200

Since the GR exceeded the P3M threshold, Mr. ABS shall automatically be
subjected to the graduated rates. However, he can claim the 8% income tax
paid for the first three quarters as tax credits.

In addition, Mr. ABC shall be liable to business taxes, as follows:

1. Percentage Tax – on the GS/GR up to P3M.
2. VAT – on the GS/GR after exceeding the P3M threshold.
However, there shall be no penalties for the percentage tax if timely paid on
the due date immediately following the month/quarter when the taxpayer
ceased to be a non-vat taxpayer.

9. The following are not allowed to avail of the 8% flat rate of income tax:
a. Purely compensation income earners
b. VAT-registered taxpayers, regardless of the amount of the gross
sales/receipts and other non-operating income.
c. Non-VAT taxpayers whose GS/GR exceed P3,000,000 VAT threshold.
d. Taxpayers who are subject to percentage taxes other than the 3% OPT
under Sec. 116 (e.g. those subject to common carrier’s tax, amusement
tax, gross receipt tax, etc.)
e. Partners of GPPs as to their share in the net income thereof (note,
however, that they can still claim the 8% flat rate of income tax as to
their own business income, provided the GS/GR thereof do not exceed
P3M). This is because their share is already net of appliable costs and
expenses; and
f. Individuals enjoying income tax exemption such as those registered under
the BMBEs, etc. since taxpayers are not allowed to avail of double or
multiple tax exemptions under different laws unless specifically provided
by law.