How to Compute Income Tax in the Philippines

Income tax returns in the Philippines are a fundamental civic responsibility for individuals earning income within the country. Understanding the process of computing and filing income taxes is essential for compliance and for fostering economic growth.

This guide aims to clarify the key aspects of individual income taxation in the Philippines. It will provide clarity on what constitutes taxable income, how to account for eligible deductions, and the steps involved in accurately calculating your tax due. The information provided is designed to help individuals fulfill their tax duties effectively.

Understanding Taxable Income and Deductions

Identifying taxable income is the first step in computing your tax liability in the Philippines. For individuals, taxable income generally includes compensation income, business income, professional income, passive income, and capital gains. Compensation income covers salaries, wages, bonuses, and other benefits received from an employer. Business income refers to earnings from any trade or business activity, while professional income is derived from the exercise of a profession.

Passive income, such as interest from bank deposits, royalties, and dividends, is typically subject to a final withholding tax at source and is not included in regular income tax computation. Capital gains, like profits from the sale of real property or shares of stock not traded on the stock exchange, are subject to specific capital gains tax rates. Net taxable income is the amount remaining after allowable deductions.

Individuals can reduce their gross income to arrive at their net taxable income. For self-employed individuals and professionals, common allowable deductions include ordinary and necessary expenses incurred in connection with their trade, business, or profession. These can encompass wages paid to employees, business rentals, interest expenses, taxes, losses, bad debts, and depreciation.

Self-employed individuals and professionals can claim an Optional Standard Deduction (OSD) of 40% of their gross sales or gross receipts, simplifying tax compliance by removing the need for extensive documentation. Purely compensation income earners are generally not allowed to claim business-related deductions.

Personal and additional exemptions for dependents were removed under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, effective January 1, 2018. Instead, a higher tax-exempt threshold of PHP 250,000 for annual taxable income was introduced for all individual taxpayers. Maintaining diligent records, such as Certificates of Compensation Payment/Tax Withheld (BIR Form 2316), invoices, and receipts, is important for substantiating income and claimed deductions, especially for those opting for itemized deductions.

Computing Your Income Tax Due

The computation of income tax due in the Philippines depends on the taxpayer’s income source and classification. Individual taxpayers generally fall into categories such as purely compensation income earners, self-employed individuals or professionals, or mixed-income earners. Each category has specific considerations for calculating the taxable base before applying progressive tax rates.

For purely compensation income earners, the employer typically withholds the tax on wages based on the applicable tax table, aiming for the tax withheld to equal the final tax liability. Self-employed individuals and professionals, as well as mixed-income earners, must compute their tax liability themselves. They determine their net taxable income by deducting allowable expenses, either through itemized deductions or by opting for the 40% Optional Standard Deduction (OSD) from gross sales or receipts.

The Philippine individual income tax system employs a progressive tax rate structure. As of January 1, 2023, annual income tax rates range from 0% for taxable income up to PHP 250,000, and go up to 35% for taxable income exceeding PHP 8,000,000. For example, a net taxable income of PHP 350,000 means the first PHP 250,000 is tax-exempt, and the remaining PHP 100,000 is taxed at 15%, resulting in a tax due of PHP 15,000.

Self-employed individuals and professionals whose gross sales or receipts do not exceed the VAT threshold of PHP 3,000,000 can pay an 8% flat tax on their gross sales or receipts in excess of PHP 250,000, in lieu of the graduated income tax rates and the percentage tax. After calculating the gross tax due, any taxes already withheld by employers or other withholding agents, as evidenced by BIR Form 2316 or Certificate of Creditable Tax Withheld at Source (BIR Form 2307), are credited against this amount. This reduces the final tax payable or may result in a refund if withheld taxes exceed the computed tax liability.

Completing Your Income Tax Return Forms

After income and deductions are identified and tax due calculated, the next step involves transferring these figures onto the correct Bureau of Internal Revenue (BIR) income tax return forms.

For individuals with purely compensation income, BIR Form 1700 is typically used. This form is for employees whose income tax has been fully withheld by their employer and who do not have other income sources requiring separate computation.

Self-employed individuals and professionals, including those with mixed income, generally use BIR Form 1701 or BIR Form 1701A. BIR Form 1701A is for self-employed individuals and professionals opting for the Optional Standard Deduction (OSD) or those whose income is subject to the 8% flat income tax rate. BIR Form 1701 is for those using itemized deductions or with complex income scenarios. These forms can be obtained from the BIR website, particularly through the eBIRForms Package for electronic preparation.

Filling out the chosen form involves entering personal taxpayer information, followed by computed income details. Gross income is entered first, then applicable deductions, leading to net taxable income. The calculated tax due, considering any tax credits for withheld taxes, is then placed in the designated fields.

Certain attachments are required when submitting the income tax return. For employees, the Certificate of Compensation Payment/Tax Withheld (BIR Form 2316) from their employer is a primary attachment, serving as proof of income and taxes already paid. Self-employed individuals and professionals may need to attach Certificates of Creditable Tax Withheld at Source (BIR Form 2307) if taxes were withheld from their income. Those with business operations may need to submit audited financial statements, depending on their gross annual sales.

Filing Your Tax Return and Payment

After completing the income tax return forms, the final stage involves filing the return and settling any tax due. The Bureau of Internal Revenue (BIR) offers several electronic filing options. The most common electronic filing method for individuals is the eBIRForms Package, which allows taxpayers to prepare their returns offline and then submit them online. Another online option is the BIR Electronic Filing and Payment System (eFPS). Manual filing is generally reserved for specific cases, such as senior citizens or persons with disabilities, who may submit hard copies at Authorized Agent Banks (AABs) or Revenue Collection Officers (RCOs).

For those with a tax liability, payment can be made through various channels. Online payment options include authorized agent banks (AABs) that offer online banking facilities, as well as digital payment platforms. Over-the-counter payments can be made at authorized agent banks or directly to BIR Revenue Collection Officers.

The annual deadline for filing and paying individual income tax returns in the Philippines is April 15 of the succeeding year, covering income from the preceding calendar year. If the tax due exceeds PHP 2,000, taxpayers may pay in two equal installments: the first on or before April 15, and the second on or before October 15.

Upon successful filing and payment, secure proof of compliance. For online submissions, this typically involves a confirmation email or a system-generated acknowledgment receipt. For payments, a validated tax return copy or an official payment receipt serves as proof. This documentation is important for record-keeping and future verification by the BIR.