Compensation Income - Lecture notes 1-5 PDF

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Lesson 1: ​ Compensation Income Duration: 3 hoursObjectives: · Explain compensation income · Analyze compensation income subject to tax · Determine taxable compensation income · Apply income tax rates on taxable compensation incomeLesson: BIR website provides specific examples of what constitutes gr...

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Lesson 1: Duration:

 Compensation Income

3 hours

Objectives: ·

Explain compensation income

·

Analyze compensation income subject to tax

·

Determine taxable compensation income

·

Apply income tax rates on taxable compensation income

Lesson: BIR website provides specific examples of what constitutes gross income: a. Compensation income – Earnings from an employer-employee relationship, including salaries (plus any overtime pay, holiday pay, or night differential pay), fees, commissions, honoraria, taxable bonuses and allowances, and other benefits b. Business and professional income – Earnings from running a business or practicing a profession, including profits from the sale of assets, commissions, service fees, professional fees, rental income, and other incomes not covered by compensation income c. Passive income – Earnings from sources in which the taxpayer is not actively involved, including the following: ·

Profits

from the sale of real properties or shares of stock

·

Interest

earned on bank deposits

·

Interest

and dividends earned on investments

·

Annuities

·

Pensions

·

Rents

·

Royalties

·

Prizes

(e.g., income streams for retirees)

and winnings

·

A

partner’s share from the net income of a general professional partnership

If you’re earning one or more of these types of income, all of them are included in your income tax computation. How to Compute Your Income Tax Based On Graduated Rates. You can calculate your income tax on your own, whether you’re curious about how your employer computes it or you need to file and pay your tax by yourself. Here’s a simple formula for the manual computation of income tax: Income tax due = Taxable income (Gross income – Allowable deductions) x Tax rate – Tax withheld Sample

income tax computation (for the taxable year 2020).

Scenario 1: Employee with a gross monthly salary of Php 30,000 and receiving 13th-month pay of the same amount. 1. Get the annual salary: Php 30,000 x 12 months = Php 360,000. 2. Compute the total annual contributions (employee’s share only): ·

SSS

– Php 800 x 12 months = Php 9,600

·

PhilHealth

·

Pag-IBIG

– Php 450 x 12 months = Php 5,400

– Php 100 x 12 months = Php 1,200

Total annual contributions: Php 16,200 3. Get the taxable income by deducting the total annual contributions from the annual salary: Php 360,000 – Php 16,200 = Php 343,800. 4. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The taxable income of Php 343,800 falls under the second bracket, which means the tax rate is 20% of the excess over Php 250,000. 5. Compute the annual income tax due. a. Subtract the non-taxable Php 250,000 from the taxable income: Php 343,800 – Php 250,000 = Php 93,800.

b. Multiply the difference by 20%: Php 93,800 x 0.20 = Php 18,760. If the income tax due is the same as the total amount the employer has withheld from the employee’s salary (Php 18,760 during the taxable year or Php 1,563.33 per month), then the employee doesn’t have to pay and file an ITR by the end of the year. Scenario 2: Employee with a gross monthly salary of Php 100,000 and receiving 13th-month pay of the same amount. 1. Get the annual salary: Php 100,000 x 12 months = Php 1,200,000. 2. Since the 13th-month pay is higher than the tax-exempt Php 90,000, the excess of that amount is taxable. Deduct the tax-exempt Php 90,000 from Php 100,000: Php 100,000 – Php 90,000 = Php 10,000. Then add the difference to the annual salary to get the gross income: Php 10,000 + Php 1,200,000 = Php 1,210,000. 3. Compute the total annual contributions (employee’s share only): ·

SSS

– Php 800 x 12 months = Php 9,600

·

PhilHealth

·

Pag-IBIG

– Php 900 x 12 months = Php 10,800

– Php 100 x 12 months = Php 1,200

Total annual contributions: Php 21,600 4. Get the taxable income by deducting the total annual contributions from the annual gross income: Php 1,210,000 – Php 21,600 = Php 1,188,400. 5. Refer to the BIR’s graduated tax table above to find the applicable tax rate. The taxable income of Php 1,188,400 falls under the fourth bracket, which means the tax rate is Php 130,000 + 30% of the excess over Php 800,000. 6. Compute the annual income tax due. a. Subtract the non-taxable Php 800,000 from the taxable income: Php 1,188,400 – Php 800,000 = Php 388,400. b. Multiply the difference by 30%: Php 388,400 x 0.30 = Php 116,520. c. Add Php 130,000: Php 116,520 + Php 130,000 = Php 246,520. Since the annual tax due of an employee earning Php 100,000 monthly is Php 246,520, the employer should have withheld Php 20,543.33 from the monthly salary. If the annual income tax

due is the same as the total amount withheld for the year, the employee is not required to file an ITR on his/her own. Scenario 3: Freelance web developer with total gross receipts worth Php 840,000 who opted to use the graduated rates and the 40% optional standard deduction in computing his income tax.

1. Determine the standard deduction by multiplying the gross income by 40%: Php 840,000 x 0.40 = Php 336,000. 2. To get the taxable income, subtract the OSD from the gross income: Php 840,000 – Php 336,000 = Php 504,000. 3. Refer to the BIR’s graduated tax table to find the applicable tax rate. The taxable income of Php 504,000 falls under the third bracket, which means the tax rate is Php 30,000 + 25% of the excess over Php 400,000. 4. Compute the annual income tax due. a. Subtract the non-taxable Php 400,000 from the Php 504,000 taxable income: Php 504,000 – Php 400,000 = Php 104,000. b. Multiply the difference by 25%: Php 104,000 x 0.25 = Php 26,000. c. Add Php 30,000: Php 26,000 + Php 30,000 = Php 56,000 This means that the self-employed taxpayer must declare Php 56,000 as income tax due when paying and filing an ITR....