Compensation income is an income which arises from an employer-employee relationship. This includes income such as:
• Salaries
• Wages
• Emoluments and honoraria
• Commissions
• Taxable bonuses and fringe benefits
• Transportation Allowance and like
• Non-monetary compensation
• Director’s Fees
• Taxable Pensions
• Retirement Pay
Compensation income is taxable unless otherwise exempted by the express provisions of laws and regulations or that such income is subject to other tax types (e.g., fringe benefits). The following compensation income are not subject to income tax as they are expressly provided by law to be exempted:
• Compensation Income of Minimum Wage Earners
• De Minimis Benefits subject to limitations
• Retirement Benefits
• Pensions
• 13th month pay and other benefits subject to limitation
To arrive at the amount of compensation income which will be subject to income tax, the following is allowed as a deduction:
1. Contribution to SSS, PHIC, HDMF and other union dues
The allowed deduction of the contribution is only up to the mandatory amount of contribution on SSS, PHIC, HDMF and union dues. Excess of the contribution of more than the mandatory amount is not allowed to be deducted.
2. Personal Exemptions
a. Basic Personal Exemption
The basic personal exemption granted to taxpayers is equal to Php 50,000.
b. Additional Personal Exemption
The additional personal exemption is equivalent to twenty-five thousand pesos (P25,000) for each qualified dependent of an individual taxpayer.
Qualified dependents are the following:
I. Children
Legitimate, illegitimate or legally adopted
Not more than 21 years old, unless incapable of self-support because of mental or physical defect
Chiefly dependent upon and living with the taxpayer
Unmarried
Not gainfully employed
II. Persons with Disability
Filipino citizen
Within the 4th degree of consanguinity or affinity of the taxpayer
Not gainfully employed
Chiefly dependent upon and living with the taxpayer
3. Health and Hospitalization Insurance Premium
The amount of premiums allowed to be deducted should not exceed Php 2,400 per year or P200 per month during a taxable year. Provided, that the said family has a gross income of not more than P250,000.
The taxable compensation income can be computed as follows:
Gross Compensation Income XX
SSS, PHIC and HDMF Contribution (XX)
Net Compensation Income before Personal Exemptions XX
Basic Personal Exemption (XX)
Additional Personal Exemption (XX)
Health and Hospitalization Insurance Premium (XX)
Taxable Compensation Income XX
x Tax Rate (based on tax table) x%
Tax Due XX
Tax Withheld per BIR Form No. 2316 (XX)
Tax Due and Payable XX
Tax Rates
Employees earning purely compensation income from a single employer are not required anymore to file an annual income tax return. The employer’s annual information return filed will be considered as the substitute income tax return of the employee in as much as the information in the employer’s return is exactly the same information contained in the employee’s return. This is called “substituted filing”.
Employees earning compensation income from two or more employers shall file an annual income tax return using BIR Form No. 1700 on or before April 15 of the following years. This is also the same for employees earning other taxable income aside from compensation income.
DISCLAIMER
This article is intended to equip the taxpayers or their bookkeepers in complying with the Bureau of Internal Revenue’s (BIR) and other Government rules and regulations. It is not intended to teach the taxpayers the details of tax planning and avoidance or to commit tax evasion or any fraudulent tax activities. Certain advice, comments and opinions expressed in this article are based on specific situations, limited available definitive tax and other government rulings and the actual experience of the authors, and may not apply to the reader’s specific tax or business concern and should not be used to avoid tax under the National Internal Revenue Code (NIRC) or applicable tax laws and other government regulations without consulting an accountant or lawyer or secure a BIR ruling before using any suggested advice or strategy.
References:
www.bir.gov.ph
Revenue Memorandum Circular No. 1-2003
