Income tax is to taxpayers, whether it is an individual, partnerships or corporations, for generating an excess of revenue over expenses in a given period (quarterly or annual). This excess may be generated from practice of profession, business, employee compensation or trade.
Income tax on employees earning purely compensation
Withholding tax (paid to employees) – for individuals earning pure compensation income, withholding tax is usually equivalent to the income tax due for the year. For example, if an employee earns a taxable gross income of P600,000 per year, withholding tax is equivalent to P157,000 based on the graduated income tax table. The drawback of being an employee is that deductions to gross compensation income is limited, unlike a corporation which can deduct several types of expenses as long as these are valid disbursements.
For individuals earning purely from compensation are entitled to the following exemptions:
- For married male employees (as a default) – additional exemption of P25,000 for each dependent, maximum of four dependents.
- P30,000 tax exemption on 13th month bonus, and succeeding bonus if 13th month is less than P30,000
- Premiums paid on medical insurance, not exceeding P2,400/year.
- SSS, Philhealth and Home Development Mutual Fund (HDMF) contributions
- Personal exemption of P50,000
Individuals earning both from compensation and business are entitled to the same benefits as those earning purely from compensation plus deductible business expenses like cost of sales, overhead, rentals, etc., as long as expenses are valid business expenses and are deductible according to our income tax laws.
Individuals may choose between itemized deductions or the 40 percent Optional Standard Deduction (OSD). Once the individual chooses between the two, he will be permanently be under that regime for a year. Employees earning minimum wage is exempted from income tax. However, employers are still obliged to declare their minimum wage earners in the yearly reporting of the employee alpha list (Form 1604CF).
Income tax on various businesses
Income tax is computed based on the Net Income (Sales – Cost of Goods Sold – Operating Expenses)
Income tax is computed based on the Net Income (Service Revenue – Cost of Service/Operating Expenses)
- Ordinary business expenses incurred under the current year
- Interest expense less interest income subjected to final tax
- Taxes paid (e.g. percentage tax), except VAT, donor’s tax, estate tax, income tax, income tax imposed by foreign countries
- Losses that are uninsured and incurred in trade, profession or business, fires, storms, shipwreck, robbery, theft, embezzlement. Declaration of loss should be made within 30-90 days from the time of occurrence.
- Net operating loss carryover (NOLCO)from previous years can be carried up to three years.
- Bad debts
- Depletion of oil and gas wells and mines
- Charitable and other contributions to government, accredited organizations not exceeding 10% of the individuals’ revenue, or 5% of the domestic corporation’s revenue.
- Research and development
- Pension trust (only if paid), a mere accrual of retirement expense is not deductible
- Optional Standard Deduction (OSD)
Income tax rate for regular corporations is 30 percent since 2009, while income tax rate for individuals vary on the gross compensation received (around 5 to 32 percent). Individuals may refer to the graduated income tax table set by the BIR which can be found at the back page of the 1701A Income Tax Return (ITR) form. Income tax rate varies, depending on the nature of business.
Who are required to file ITR
- Those who are resident citizens generating income inside and outside the country
- Employees who have multiple employers
- Employees who have businesses (mixed income)
- Self-employed individuals
- Non-resident citizens who are generating income here in the country
- Corporations and partnerships (whether tax due is zero or not) created here in the country
- Foreign corporations that derives income here in the country.
- Estates and trusts engaged in business.
When and where to file income tax
According to Philippine tax laws, assuming taxpayer’s (whether individual, partnership or corporation) registered year is a calendar year (CY), the same must file an Annual Income Tax Return (ITR) 105 days after the year end. It is also compulsory that the taxpayer should file three quarterly ITRs sixty days after every quarter has ended, except for the last quarter.
For individuals, partnerships and corporations, the place of filing ITR is the Revenue District Office (RDO) where the Tax Identification Number was granted.
Individual taxpayers whose income is derived purely from compensation are not obliged to file an ITR, unless the individual is employed by multiple employers. The employer has the responsibility to file the BIR Form 2316 Certificate of Tax Withheld from Employees every 31st January for the preceding year that has ended. Individual taxpayers earning both from employee compensation and business are required to file an ITR every April 15th.
If a taxpayer is paying a tax due, he can file the ITR through the depository banks of his RDO. If there is no tax to be paid, filing of ITR should be done in the taxpayer’s RDO. Other taxpayers, especially those under the Large Taxpayers group are required to file and pay online (E-filing/E-payment/E-submission).
For companies whose businesses are registered in a fiscal year (FY), filing of income tax return is due 105 days after their FY ends. (e.g. FY is June 30, then filing of ITR is due on October 13). Quarterly ITR is also required to be filed 60 days after the quarter-end (May 31, August 31, and November 30 for CY).
Penalties and fines
Late filing of ITR can be a cause of heavy losses for the company or an individual. Penalty for this is 25 percent of the tax due plus interest of 20 percent per annum plus compromise penalties.
Penalty for fraudulent return or due to willful neglect is 50 percent of the tax due plus interest of 20 percent per annum plus compromise penalties.