Taxation in the Philippines–How To Compute Your Income Tax

We are nearing the end of 2017, we will be facing the challenges of the new year 2018 with renewed hope and enthusiasm. But the final battle for the previous year is in the month of April, which is the dreaded filing of the Income Tax Returns (ITR) to BIR (Bureau of Internal Revenue).

Taxation in the Philippines–How To Compute Your Income Tax

If you are a company employee, then you are spared from the hassle of undergoing this gruelling tasks. However, if you are self-employed, owns a business or just a masochist who wants to experience pain and suffering then you can file the ITRs yourself.

First of all, computing the income tax is not that easy because there are so many variables in the equation. Meaning, there are items that don't have a fixed value from time to time. But one thing is for sure in the equation… it only uses two arithmetic operations; addition (+) and subtraction (-).

The formula:

  • Taxable Income = (Monthly Basic Pay + Overtime Pay + Holiday Pay + Night Differential) – (SSS + Philhealth + Pag-IBIG Deductions + Tardiness + Absences)

Now for a concrete example

MJ, single with no dependents, is earning a monthly salary of Php 23,000. He is a very good employee and is very punctual at work, no late or absences. Unfortunately, he is working on a regular day job which has no Night Differential, Overtime Pay and to top it all, that particular month has no holiday set.

His SSS deduction based on the SSS table of contributions is Php 581.30

His Philhealth deduction based on the PhilHealth table of contributions is Php 287.50

His Pag-IBIG deduction based on the Pag-IBIG table of contributions is Php 100

Using the Formula

  • Taxable Income = (Php 23,000 + Php 0 + Php 0 + Php 0) – (Php 581.30 + Php 287.50 + Php 100 + Php 0 + Php 0)
  • Taxable Income = (Php 23,000) – (Php 968.80)
  • Taxable Income = Php 22,031.20 – This will be MJ's taxable income for that particular month.

His taxable income for that particular month is Php 22,031.20. Now that we have that value, the next step is to compute the Income Tax.  I took a screenshot of the table from the BIR Website. However, if you want further details kindly click the image to view more.

Finding your way around the Tax Table

  1. Since MJ is single with no dependents he falls in the S/ME category.
  2. Across the S/ME category look for the highest value but does not exceed MJ's Taxable income of Php 23,031.20. The resulting value is Php 15,833 which is in Column 6.
  3. Look for the Exemption Category and under Column 6, the value of Php 1,875.00 will be his predefined tax.
  4. The next step is the Status Category which has a +25%over value. This will be used to compute the additional tax.

Tax Computation

The Formula: Exemption + ((Taxable Income – S/ME) x Status)

Tax = Php 1,875.00 + ((Php 23,031.20Php 15,833) x 25%)

Tax = Php 1,875.00 + (Php 7,198.20 x 25%)

Tax = Php 1,875.00 + Php 1,799.55

Tax = Php 3,674.55 – This will be MJ's tax for that particular month.

This value will then be deducted to MJ's basic pay along with other deductions to generate his take-home pay or net pay.

As mentioned above, to get the exact tax values involves a lot of variables in both income and deduction sides of the formula. The examples shown in this article are scaled down for the purpose of simplifying the explanation.

I will create a calculator to help automate the process of computation. Don't forget to Subscribe to Your Life In Perspective!

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