How to Compute Income Tax in the Philippines (Single Proprietorship)
How to compute annual income tax in the Philippines for self-employed individuals, such as proprietors and professionals? Computing income tax expense and payable is different for individuals and corporations. Taxable corporations may be taxed using a fixed income tax rate. On the other hand, if you are a self-employed professional or an owner of a single proprietorship business, your income tax expense is computed using a graduated tax rate. It is a progressive tax which the tax rate increases as the taxable base amount increases. This means that the higher taxable income you have, the higher your income tax expense is. The following are the requirements, instructions and procedures to compute and file your income tax return.
The tax form you will use
For self-employed individuals such as proprietors, professionals and those with both business and compensation income, you will use BIR Form 1701 (please click here to download form). It must be prepared in 3 copies (one for BIR, one for the Authorized Agent Bank and one for your copy).
Below are the documentary requirements that should be attached with the return, if applicable. For taxpayers earning both business income and compensation income, BIR Form 2316 should be attached.
1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if applicable
2. Certificate of Income Payments not Subjected to Withholding Tax (BIR Form 2304) if applicable
3. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
4. Waiver of the Husband’s right to claim additional exemption, if applicable
5. Duly approved Tax Debit Memo, if applicable
6. Proof of Foreign Tax Credits, if applicable
7. Income Tax Return previously filed and proof of payment, if filing an amended return for the same year
8. Account Information Form (AIF) or the Certificate of the independent CPA with Audited Financial Statements if the gross quarterly sales, earnings, receipts or output exceed P 150,000.00
9. Proof of prior year’s excess tax credits, if applicable
Computation of Income Tax Due and Payable
The following are simple steps to calculate your income tax payable.
1. Compute your taxable Compensation Income (positive) or excess of Deductions over Taxable Compensation Income (negative). Here is how you will compute it.
a. Determine your Gross Taxable Compensation Income. This is the income you earn from your employer during the taxable year. If you are earning purely from your business or you are not employed, then you can leave it blank.
b. Determine your premium paid on Health and or Hospitalization, which should not exceed Php 2,400 per year. If none, then leave it blank. *
c. Determine your Personal and Additional Exemptions as follows:
For single individual or married individual judicially decreed as legally separated with no qualified dependents………………………………………P 50,000.00
For head of family……………………………P 50,000.00
For each married individual *…………P 50,000.00
Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.
* For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents
The additional exemption can be claimed by the following:
* The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife
* The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code.
* The individuals considered as Head of the Family supporting a qualified dependent
d. Add the amounts in (b) and (c), then deduct the total from the amount in (a) to arrive at your taxable Compensation Income (positive) or excess of Deductions over Taxable Compensation Income (negative).
2. Compute your gross taxable business or professional income. Here is how you will calculate it.
a. Determine your sales, receipts or revenues for the taxable year.
b. Determine your cost of sales or cost of services.
c. (a) minus (b) will simply give you your gross taxable or professional income.
3. Compute your total taxable business or professional income by simply adding result in (2) and your other taxable income.
4. Compute your Net Income. Your Net Income is equal to result in (3) minus your allowable deductions. Your allowable deductions can be either:
a) Optional Standard Deduction – an amount not exceeding 40% of the net sales for individuals and gross income for corporations; or
b) Itemized Deductions which include the following:
- Bad Debts
- Depletion of Oil and Gas Wells and Mines
- Charitable Contributions and Other Contributions
- Research and Development
- Pension Trusts
Note: A taxpayer engaged in business or in the practice of profession shall choose either the optional or itemized deduction (described below). He shall indicate his choice by marking with “X” the appropriate box, otherwise, he shall be deemed to have chosen itemized deduction. The choice made in the return is irrevocable for the taxable year covered.
Reminder: There are expenses that have ceilings or limits as deductibles to your taxable income, such as interest expense, representation and entertainment expense, etc. To learn more, please read our article “Deductible Expenses (Allowable Deductions) in the Philippines”.
5. Compute you total taxable income by adding the result in #4 (Net Income) to the result in #1 (taxable Compensation Income or excess of Deductions over Taxable Compensation Income). If the result is negative or it becomes a loss, then you will not have a tax due for the taxable year, otherwise, continue to the next step.
6. Compute your Income Tax Due. This is also your income tax expense incurred during the taxable year. Calculate your tax due for the taxable year using the following tax rate table.
Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal installments, the first installment to be paid at the time the return is filed and the second installment 15 of the same year at on or before July the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered.
7. Compute your Income Tax Payable. This is the tax you are still liable at the end of the year. To calculate your income tax payable, deduct your income tax due with the following tax credit/payments, if available.
-Prior Years’ Excess Credits
-Tax Payments for the First Three Quarters
-Creditable Tax Withheld for the First Three Quarters
-Creditable Tax Withheld Per BIR Form No. 2307 for the 4th Qtr.
-Tax Withheld Per BIR Form No. 2316
-Foreign Tax Credits
-Tax Paid in Return Previously Filed, if you have already file and this is your Amended Return
-Other Payments made
8. Compute your Total Payable. If unfortunately, you fail to pay your income tax on or before the due date, the following penalties will be imposed and will be added to your total amount payable.
1. A surcharge of twenty five percent (25%) for each of the following violations:
a) Failure to file any return and pay the amount of tax or installment due on or before the due dates;
b) Filing a return with a person or office other than those with whom it is required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return, or the full amount of tax due for which no return is required to be filed, on or before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of Assessment (Delinquency Surcharge).
2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the Code or by rules and regulations; or
b) In case a false or fraudulent return is willfully made.
3. Interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, on any unpaid amount of tax, from the date prescribed for the payment.
A simple illustration of computing total income tax payable is shown below:
Gross Income (Gross business income, compensation income and other income)
Less: Allowable Deductions (Itemized or Optional) (refer to # 4)
Equals: Net Income
Less: Personal & Additional Exemptions (see #1)
Equals: Net Taxable Income
Multiply by Tax Rate (5 to 32%) (refer to # 6)
Equals: Income Tax Due
Less: Tax credits & payments (refer to #7)
Equals: Income tax payable
Add: Penalties (Surcharge, interests & compromise) (refer to #8)
Equals: Total amount payable
Procedures for paying and filing
1. Fill-up BIR Form 1701 in triplicate copies.
2. If there is payment:
a. Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701, together with the required attachments and your payment.
b. In places where there are no AABs, proceed to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701, together with the required attachments and your payment.
c. Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer
3. For “No Payment” including refundable/ creditable returns, returns with excess tax credit carry over, and returns qualified for second installment:
a. Proceed to the Revenue District Office where you are registered or to any established Tax Filing Centers established by the BIR and present the duly accomplished BIR Form 1701, together with the required attachments.
b. Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center representative.
Final Adjustment Return or Annual Income Tax Return - On or before the 15th day of April of each year covering income for the preceding year
For more information, such as who are the individuals exempt from income tax and other tax related information, please visit this web page (Tax Info) from the Bureau of Internal Revenue (BIR). Updates to this article will be provided when necessary.
Update 1 (April 28, 2011)
For professionals and freelancers, such as online entrepreneurs, bloggers, web designers, mixed income earners, etc., who keep on asking how to register with the BIR and pay their income taxes, we have published an article titled “How to Register with the BIR (for Professionals)” for your guide.
Update: The BIR issued Revenue Regulation No. 19-2011 on November 2011 requiring self-employed individual taxpayers to use the revised BIR Form 1701 for the income tax return covering and starting December 31, 2011 for filing on or before April 15, 2012. For more information about the instructions and guidelines on filing the said return, please refer to the last page of the new form provided in the link above (in the tax form you will use section).