This is tax imposed on Net Taxable Income that is computed from Gross Income derived within and outside the Philippines less Allowable Deductions.

TYPES OF INDIVIDUAL TAXPAYERS

1. Resident Individuals (Whether Filipino Citizens or Alien/Foreign Nationals)

○ ALL INCOME derived whether within or outside the Philippines, are subject to Regular Income Tax Rate, except PASSIVE INCOME, which is subject to Final Tax.

○ Use the Income Tax Table in determine the appropriate tax rate for Income Bracket. (See Income Tax Table)

2. Non-Resident Filipino Citizens

○ ONLY INCOME derived WITHIN the Philippines are subject to Regular Income Tax Rate, except PASSIVE INCOME which is subject to Final Tax.

○ Use the Income Tax Table in determine the appropriate tax rate for Income Bracket. (See Income Tax Table)

3. Non-Resident Aliens Engaged in Trade or Business or Practice of Profession in the Philippines

○ ONLY INCOME derived WITHIN the Philippines are subject to Regular Income Tax Rate, except PASSIVE INCOME which is subject to Final Tax.

4. Non-Resident Aliens Engaged in Trade or Business or Practice of Profession in the Philippines

○ GROSS INCOME derived WITHIN the Philippines are subject to FINAL TAX of 25%.

• Under RR 8-2018, a sole proprietor or an independent contractor who reports income earned from self-employment. She/he controls who he/she works for, how the work is done and when it is done.

• It includes those hired under a contract of service or job order, and professionals whose income is derived purely from the practice of profession and not under an employer-employee relationship.

• Self-Employed/Professionals are normally subject to Graduated Income Tax unless he/she opt for the 8% Option Tax which is a flat rate of payment of income tax. The table below will guide professionals for its proper taxation.

  • • 1. If Gross Sales/Receipts and Other Non-Operating Income exceeds Php 3 Million VAT threshold, taxpayer is subject to graduated income tax.

      2. If Gross Sales/Receipts and Other Non-Operating Income DO NOT EXCEED Php 3 Million VAT threshold, Taxpayer has Two (2) Options:

OPTION 1: Use Graduated Income Tax Table based on NET TAXABLE INCOME

OPTION 2: Avail 8% tax based on Gross Sales/Receipts PLUS other Non-operating income in excess of Php 250,000

Take Note:

• If the taxpayer opted to avail Option 2 (8% tax), he does not need to file and pay Quarterly Percentage Tax (2551M) anymore. Please update BIR Form 2303 Certificate of Registration to remove Percentage Tax tax type.

• He should indicate (tick mark) in the new Quarterly Income Tax Return (Q-ITR) that he will avail the 8% tax based on gross sales/receipts plus other non-operating income.

• FAILURE to indicate such option means the taxpayer has automatically opted to use graduated income tax computation and will have to pay corresponding percentage tax/VAT.

• If the taxpayer with less than Php 3,000,000 Annual Revenue did not opt to avail the 8% OPTION Tax, he/she can pay the corresponding Percentage Tax of 3% on or before June 30, 2020 and 1% starting July 1, 2020 up to June 30, 2023 (under CREATE Law). Starting July 1, 2023, the percentage tax will revert back to 3%.

• Aside from the percentage tax, the taxpayer is also required to pay Income Tax.

• Income Tax will be based on the Net Taxable Income which is Gross Revenue less allowable deduction.

• Allowable deduction can be Itemized Deduction or Optional Standard Deduction. Please see discussion on Allowable Deduction

• In order to avail of the 8% Option Tax, the taxpayer will have to go to respective BIR district office to update his/her registration.

• These are the documents for the update of BIR Registration (2303):

  • 1. BIR For 1905 Application for Update of Information (BIR Supplemental Advisory No. 013429)

    2. Surrender Original Certificate of Registration (COR) BIR 2303

    3. Submit BIR Form 0605 Registration Fee paid during the year

    4. Submit cover letter requesting the BIR to remove the “Percentage Tax” tax type in COR and that the taxpayer is availing the 8% Gross Sales/Receipt.

For individual taxpayers who has Php 3,000,000 or more annual revenue, they cannot avail the 8% Option Tax. The tax code provided two options for the taxpayers:

A. Itemized Deduction

B. Optional Standard Deduction

A. ITEMIZED DEDUCTION

• Individuals engaged in Business/Profession are allowed a reasonable deduction of the following expenses:

1. Salaries, wages, and other forms of compensation for personal services actually rendered

2. Grossed-up monetary value of fringe benefit (Fringe Benefit Tax must be paid first)

3. Travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession;

4. Rentals and/or other payments which are required as a condition for the continued use or possession,

5. Entertainment, amusement and recreation expenses during the taxable year

6. Interest Expense (subject to limitation of Interest Income)

7. Taxes in general

8. Losses incurred in Trade/Business in general ( with no insurance claim)

9. Bad Debts

10. Depreciation/Depletion

11. Charitable & Other Contribution (Subject to Limitation)

12. Research & Development

13. Pension Trusts

14. Premium Payments on Health &/or Hospitalization Insurance of an Individual Taxpayer

• Taxpayer must remember that the breakdown of itemized deductions must be tallied with the expenses presented in the income statement:

1. Cost of Goods Sold and Services

2. Distribution Cost

3. Administrative Expenses

4. Finance Cost

5. Other Expenses

• All deductions must be duly supported by VALID Receipts & Invoices.

B. OPTIONAL STANDARD DEDUCTION

• In lieu of itemized deduction, 40% optional standard deduction (OSD) can be availed of taxpayer in computing its net taxable income.

• Optional Standard Deduction for Individual is computed based on Gross Income/Revenue/Sales.

• If the NON-VAT taxpayer who availed the 8% tax for income tax computation is NOT ALLOWED TO AVAIL OSD.

• Election of OSD must be made in the first quarter income tax return (1701Q) and such is IRREVOCABLE for the taxable year for which the return is made.

• General Professional Partnership (GPP) and the partners comprising the GPP may avail of the OSD only once, either the GPP or the partners comprising the GPP.

• Individual availing OSD must keep records pertaining to his gross sales or gross receipts.

• Mixed Income Earners are individuals earning compensation income from employment, and income from business, practice of profession and/or other sources aside from employment (RR 8-2018).

• In this case, taxpayer must compute separately the income tax based on classification

A. Compensation Income : USE GRADUATED RATES

B. All Income from Business or Practice of Profession:

• • • 1. 1. If Sales/Receipts and other non-operating income do not exceed Php 3 Million – either 8% tax or graduated rates

         2. If Sales/Receipts and other non-operating income EXCEEDED Php 3 Million –graduated rates

• When computing for the income tax on Compensation Income, the first Php 250,000 is not taxable.

• As for the Business & Other Income of Mixed Income Earner, there is no Php 250,000 exemption anymore since you already used the first Php 250,000 exemption in the computation of income tax on compensation.