LESSON 4 – GROSS INCOME 9.
Separation Pay – TAXABLE if Voluntarily Availed, NOT
A. Gross Income Defined
- Pertinent items of income referred in the Tax Code.
- ALL Income from WHATEVER source (unless exempt from
tax by law)
B. Gross Compensation Income
- Remuneration for rendering personal services.
- Employer-employee relationship (payor-receipient).
**Basis of payment is immaterial.
**There is no compensation until service is rendered.
General Rule:
Every form of compensation income is TAXABLE
**EXCEPTION: The compensation income including
overtime pay, holiday pay, night shift differential pay, &
hazard pay earned by MINIMUM WAGE EARNERS (MWE),
who has NO other returnable income, are NOT TAXABLE,
NO SUBJECT TO WITHOLDING TAX on wages.
*******MWE – Not Taxable, No subject to Withholding Tax.
GROSS COMPENSATION xxx
Less: Non Taxable Compensation ( xxx )
Gross Taxable Compensation xxx
Less: Deductions ( xxx )
TAXABLE COMPENSATION XXX
** No business and personal EXPENSES are allowed as
DEDUCTIONS from GROSS COMPENSATION INCOME.
** Only to RC, RA, NRC, NRA w/ business in PH.
Not on NRA w/o business.
Not on CORPO, ESTATE, TRUST because compensation is
a personal service.
C. CLASSIFICATION OF GROSS COMPENSATION INC.
1. Basic Salary Wages
2. Honoraria
3. Fixed or Variable Allowances/RATA /COLA
-General: subject to WITHOLDING TAX.
-Exceptions: In performance of duties, pursuit of
employer’s trade, employee liquidation, is
NOT SUBJECT TO WITHHOLDING TAX.
**Taxable Income, if excess is not returned to employer.
NOT TAXABLE COMPENSATION
1. Call Centers – Transportation and CP allowances
2. Rank and File – Transportation of 1500 on daily basis
3 Supervisory – Transportation of 3000 on daily basis
CP allowance of 1200
4. Night Shift Employee – Transportation/Night Shift Allow
5. Field Workers – Meal/Out of Town, NOT subject to FBT,
Income Tax, and WITHHOLDING TAX.
6. BPOComp/beyond-start10pm – 100 taxi/transportation,
EXEMPT FROM TAX.
**Transpo allowance precomputed on a daily basis and paid
when employees are in duty, NOT subject to
SUBSTANTIATION/ INCOME TAX/ WITHHOLDING TAX
4. Commission
5. Fees
6. Tips and Gratuities – if not accounted by employee to
employer are TAXABLE Income, but NOT subject to
WITHHOLDING TAX.
7. Hazard or Emergency Pay – for MWE, NOT TAXABLE.
8. Retirement Pay
-General: TAXABLE.
-Exceptions: 1. SSS/GSIS
2. Retirement Pay approved by BIR,
Reasonable benefit plan (fair/equitable), employed 10 years,
50 yrs old at time of retirement, availed for first time.
TAXABLE if NOT Voluntarily Availed.
10. Pension – TAXABLE unless law exempts or BIR
approves the pension plan.
***Gain from redemption of shares on mutual fund is exempt
from income tax.
11. Vacation and Sick Leave
a. TAXABLE CI – if paid/availed as a salary of
employee in vacation or sickleave inspite absence
from work.
b. NOT SUBJECT TO TAX & WITHOLDING TAX
– Monetized value of unutilized vacation leave credits of 10
days or less paid to private employees
– Monetized value of vacation and sick leave paid to
government officials and employees
12. 13th month pay and other benefits
– NOT TAXABLE if 90,000 or less
13. Fringe Benefits and De Minimis
– NOT SUBJECT TO INCOME TAX AND WITHHOLDING
TAX
14. Overtime Pay/ Back Pay
15. Profit Sharing – received by employee as proportionate
share in the profit of the business
16. Awards for special services
17. Beneficial Payment – employer pays the income tax
owed by an employee are additional compensation income.
18. Other Forms of Compensation
- paid in kind but paid in money
- ex. Insurance premium paid by employer for insurance
coverage where the heirs of employee are beneficiaries of
the employees income.
D. SHARES OF STOCKS RECEIVED AS COMPENSATION
- it is treated as if the corporation sold its stock at its market
value and paid the employees in cash.
- Compensations in a form of shares of stock treats FAIR
MARKET VALUE OF THE SOS AT THE TIME RECEIVED is
the BASIS OF TAX.
Stock Option – privilege to a avail shares of stock at a
certain price.
 Equity settlement
 Cash settlement – received Cash = Actual Fair
market value LESS Fixed nominal value.
-------------Grant of Options:
Granted by/for:
a. Employer Employee Realationship w/o cash received –
Employer cannot claim deductions for the grant of options
b. Price – full consideration is subject to CAPITAL GAINS
TAX.
-------------Sale or Transfer of Options:
a. Sale/Barter/Exchange by Grantee is treated as
Sale/Barter/Exchange not listed on the stock exchange -
CAPITAL GAINS TAX if transferred for a consideration.
b. Sold/Transferred without consideration – donation
subject to DONOR’S TAX
-------------Exercise of Options:
- Difference between BV/FMV of shares (wc is higher) at the GAINS FROM DEALINGS IN PROPERTY
time of stock exercise and the grant fixed price shall be taxed - Income from sale/exchange of assets.
Rank and File INCOME & WITHHOLDING ON COMPE.
GERULE: Entire Amount of the Gain or Loss is a TAXABLE.
Supervisory/Mangerial FRINGE BENEFIT TAX
Suppliers WITHHOLDING TAX @ SOURCE
Person (natural/juridical) who DONOR’S TAX A. PASSIVE INCOME (PI)
isn’t employee/supplier - Final Tax in PI of Citizens and Residents Alien.
- Waits to be realized.
E. INCOME TAX RECEIVED AS COMPENSATION
- BASIS OF TAX is the AMOUNT PAID. 1. Yield from deposit substitute and trust fund.
2. Interest Income
F. CONVENIENCE OF THE EMPLOYER’S RULE 3. Royalty Income
**GENERAL RULE: NOT TAXABLE if 4. Dividend Income
- If it is furnished to the employee for necessary performance 5. Prizes and Winnings
of duties.
RULE: Subject to FINAL TAX.
LIVING QUARTERS MEAL SUBSIDIZED ------Deductions and personal exemptions are NOT allowed
Taxable, income - furnished Taxable, income - value of to reduce the tax based on PI – FINAL TAX
in addition to cash salary any board/loding furnished
and exclusive benefit of by employer. INTEREST INCOME
employee. TAX EXEMPT Interest Earnings received from:
Not part of Compensation Exclusion – when furnished - Cooperatives,
income – furnished for the for the convenience of the - BSP prescribed form of investments
convenience of the employer employed and incidental to (More than 5 years),
the requirements of his work. - Expanded foreign currency deposit
system earned by NON RESIDENT R/A,
G. REMUNERATION FOR CASUAL LABOR - Land under tenant-purchaser, CARP
- Not considered compensation if it is NOT in the course of FINAL TAX - Financing companies (20% FWT),
employers business. - Not BSP prescribed form Investments
- Compensation if paid for casual labor. (5% 4l5, 12% 3l4, 20% l3 FWT)
- Compensation if performed for a corporation. - Expanded foreign currency deposit
system earned by RESIDENT (7.5% FWT)
GROSS INCOME FROM BUSINESS AND PROFESSION -With co-depositor (50% of 7.5%)
NORMAL TAX - Principal business activity
A. The Cost of Sales - Incidental interest earnings NOT subject
-- Net Sales less Cost of Sales = Gross income to Final Withholding Tax

1. Cost of Goods Manufactured ---- Normal Tax of Corporation is 30%

- Cost of Finished Goods equals RM, DL, FOH ---- Normal Tax of Individual is 20% to 35%

2. Cost of Goods Sold of Trading/Merchandising Concern ROYALTY INCOME

- Invoice COGS plus Import duties and Freight in -In general, 20% Final Tax
transporting goods. -In books literary works music composition, 10% Final Tax

3. Cost of Services DIVIDEND INCOME

- Gross Receipts less Returns, Allowance, Discount, COS. TAX -Received from DC by DC and RFC
a. Salaries EXEMPT -Received from a COOPERATIVE-
b. Benefits of personnel, consultants, specialists - PURE STOCK DIVIDEND
directly rendering the service - PURE LIQUIDATING DIVIDEND (RETURN
c. Cost of facilities directly utilized in service OF CAPITAL)
(depreciation, rental, cost of supplies)’ FINAL -Received from DC
d. Banks – Cost of services includes interest TAX ----by C/RA 10%
income. ----by NRA doing business in PH 20%
----by NRA not doing business in PH 25%
B. Telegraph and Cable Services ----by NR FC 15%
1. Foreign Corporation NORMAL - Not tax exempt
Included – Services WITHIN the PH only TAX - Not final tax
- Originating in PH - Distributive shares of partner in professional
Not Included – Originating OUTSIDE PH partnership

C. Rental Income
a. Prepaid Rental
b. Security Deposit with Restriction
c. Security Deposit with an Acceleration Clause

D. Income from Leasehold Improvements

a. Outright Method
b. Spread Out Method

E. Termination of Contract of Lease

a. With insurance
b. Without insurance