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Mixed Income Earners – Sample Tax Computations under TRAIN




Are you a mixed income earner? Do you receive income simultaneously from compensation or from self-employment or business or practice of profession?

If yes, then here are the applicable BIR rules as regards your tax obligation under the approved TRAIN law. The relevant tax rules and sample computations are contained in in Revenue Regulations of the Bureau of Internal Revenue RR 8-2018. We explain them in detail below.

(To view the full Revenue Regulation and to download a PDF copy of BIR RR 8-2018, click here.)


Tax Rules for Individuals Earning Income Both from Compensation and from Self-Employment

The pertinent item on taxation of individuals with income streams both from compensation and from self-employment is explained in Section D of the BIR’s Revenue Regulations No. 8-2018, specifically:

Section (D). Individuals Earning Income Both from Compensation and from Self-Employment (business or practice of profession). 

For mixed income earners, the income tax rates applicable are:

1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; AND

2. The income from business or practice of profession shall be subject to the following:

a. lf the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the individual has the option to be taxed at:

  • a.1 Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; OR
  • a.2 Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating income in lieu of the graduated income tax rates and percentage tax under Section 116 of the Tax Code, as amended.

b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual shall be subject to the graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended.

The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8% income tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is available only to purely self-employed individuals and/or professionals.

The P250,000.00 mentioned is not applicable to mixed-income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. Under the said graduated rates, the excess of the P250,000.00 over the actual taxable compensation income is not deductible against the taxable income from business/practice of profession under the 8% income tax rate option.

The total tax due shall be the sum of:

  • (1) tax due from compensation, computed using the graduated income tax rates; and
  • (2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8% income tax rate with the total of the gross sales / receipts and other non-operating income.

Mixed income earner who opted to be taxed under the graduated income tax rates for income from business/practice of profession, shall combine the taxable income from both compensation and business/practice of profession in computing for the total taxable income and consequently, the income tax due.

* Want to see the official BIR memo? Download here a copy of BIR Revenue Regulations RR 8-2018.


Sample BIR Computations: Taxes of Mixed Income Earners

Sample Computation: Illustration 1

Mr. Madz, a Financial comptroller of JAC Company, earned annual compensation in 2018 of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income tax rate on his gross sales for his income from business:

(1) TAX DUE ON COMPENSATION INCOME:
Total compensation incomeP1,500,000.00
Less: Non-taxable 13th month pay and other benefits (max)90,000.00
Taxable Compensation IncomeP1,410,000.00
Tax due on Compensation:
On P800,000.00P130,000.00
On excess (P1,410,000 - P800,000) x 30%183,000.00
Tax due on Compensation IncomeP313,000.00
(2) TAX DUE ON BUSINESS INCOME:
Gross SalesP2,400,000.00
Add: Non-operating Income100,000.00
Taxable Business IncomeP2,500,000.00
Multiplied by income tax rate8%
Tax Due on Business IncomeP200,000.00
TOTAL INCOME TAX DUE (Compensation and Business)P513,000.00

Option 1 CONCLUSIONS:

  •  The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended.
  • The amount of P250,000.00 allowed as a deduction under the law for taxpayers earning solely from self-employment/practice of profession, is not applicable for mixed-income earner under the 8% income tax rate option.
  • The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates applicable to compensation income.

Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and other non-operating income

His tax due for 2018 shall be computed as follows if he did not opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating income:

Total compensation incomeP1,500,000.00
Less: Non-taxable 13th month pay and other benefits-max90,000.00
Taxable Compensation IncomeP1,410,000.00
Add: Taxable Income from Business -
Gross SalesP2,400,000.00
Less: Cost of Sales1,000,000.00
Gross IncomeP1,400,000.00
Less: Operating Expenses600,000.00
Net Income from OperationP800,000.00
Add: Non-operating Income100,000.00900,000.00
Total Taxable IncomeP2,310,000.00
Tax Due:
On P2,000,000.00P490,000.00
On excess (P2,310,000 - 2,000,000) x 32%99,200.00
Total Income TaxP589,200.00

Option 2 CONCLUSIONS:

  • The taxable income from both compensation and business shall be combined for purposes of computing the income tax due if the taxpayer chose to be subject under the graduated income tax rates.
  • In addition to the income tax, Mr. Madz is likewise liable to pay percentage tax of P72,000.00, which is 3% of P2,400,000.00.

Sample Illustration 1 Continued:

On February 7019, taxpayer tendered his resignation to concentrate on his business. His total compensation income amounted to P150,000.00, inclusive of benefits of P20,000.00. His business operations for the taxable year 2019 remains the same. He opted for the eight percent (8%) income tax rate.

(1) TAX DUE ON COMPENSATION INCOME:
Total compensation incomeP150,000.00
Less: Non-taxable benefits20,000.00
Taxable Compensation IncomeP130,000.00
Tax Due on Compensation:
On P130,000.00 (not over P250,000.00)P 0.00
Tax due on Compensation IncomeP 0.00
(2) TAX DUE ON BUSINESS INCOME:
Gross SalesP2,400,000.00
Add: Non-operating Income100,000.00
Taxable Business IncomeP2,500,000.00
Multiplied by income tax rate8%
Tax Due on Business IncomeP200,000.00
Total Income Tax Due (Compensation and Business)P200,000.00
  • The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended.
  • The amount of P250,000.00 which is allowed as deduction under the law for taxpayers earning solely from self-employment/practice of profession, is not applicable for mixed-income earner under the 8% income tax rate option.
  • The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. The excess of the P250,000.00 over the actual taxable compensation income is not creditable against the taxable income from business/practice of profession under the 80% income tax rate option.

Sample Computation: Illustration 2

Mr. Wayne, an officer of BATS International Corp., earned in 2018 an annual compensation of P1,200,000.00, inclusive of the 13th month and other benefits in the amount of P120,000.00. Aside from employment income, he owns a farm, with gross sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100.000.00.

His tax due for 2018 shall be computed as follows:

Total compensation incomeP1,200,000.00
Less: Non-taxable 13th month pay and other benefits-max90,000.00
Taxable Compensation IncomeP1,110,000.00
Add: Taxable Income from Business -
Gross SalesP3,500,000.00
Less: Cost of Sales1,000,000.00
Gross IncomeP2,500,000.00
Less: Operating Expenses600,000.00
Net Income from OperationsP1,900,000.00
Add: Non-operating Income100,000.002,000,000.00
Total Taxable IncomeP3,110,000.00
Tax Due:
On P2,000,000.00P490,000.00
On excess (P3,110,000 - 2,000,000) x 32%355,200.00
Total Income TaxP845,200.00

CONCLUSION:

The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross sales exceed the VAT threshold. However, he is still not subject to business tax since the nature of his business transactions is VAT exempt.

Source: Bureau of Internal Revenue (BIR www.bir.gov.ph), Department of Finance (DOF www.dof.gov.ph) Philippines

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3 thoughts on “Mixed Income Earners – Sample Tax Computations under TRAIN”

  1. Vhander Ramos says:

    Hello po. Currently, I am a mixed-income earner (compensation and practice of profession). With the implementation of the TRAIN Law, I am confused whether I could also avail of the 8% income tax rate or automatic po ba na graduated income tax rates. Ypu have one paragraph that says applicable lang yung 8% income tax rates ONLY to purely self-employed individuals and/or professionals. But you also have another paragraph that says:

    “Mixed income earner who opted to be taxed under the graduated income tax rates for income from business/practice of profession, shall combine the taxable income from both compensation and business/practice of profession in computing for the total taxable income and consequently, the income tax due.”

    So my question would be, ano po ba talaga applicable or not yung 8% income tax rates with reference sa combined income from compensation and practice of profession?

    Thank you in advance for your response.

  2. mike chan says:

    question lng po, using Option 2 for a mixed income.possible pong maging refund or bawas s tax yung na gegenerate ng business? specially when starting p lng ng business? meaning mas mahal operational expense vs (gross sales – cost of sales)?

  3. butch says:

    hi.I am a mixed earner.medyo nalilito lang po ako if kailangan ko pa po ba na magbayad quarterly as sole proprietor and non VAT nman or as one na po yon sa binabayaran ko as govt employee annually?

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