Individual Income Taxation – Train Law Tax for Individuals

The Train Law which was executed in 2018 has amended a lot of the tax rules incorporated in the NIRC. One of the major changes that was made in the TRAIN Law was the complete revamp of Individual Income Taxation which will be discussed in detail in this post.

Types of Individual Income Earners

  1. Compensation Income Earner – this is an individual who is purely earning compensation income. He has no other income aside from salary and other benefits received by means of employment.
  2. Self-Employed/Businessman – this individual is not an employee, but rather he or she has his/her own business or is practicing his or her profession.
  3. Mixed Income Earner – this individual is earning a salary under an employer – employee relationship and at the same time is practicing his/her profession and/or has a business.
  4. Minimum Wage Earner – this is a compensation income earning individual with earnings that does not exceed the Statutory Minimum Wage in a certain location.

Individual Tax Rates (Tax Regimes) Under the Train Law

Graduated Income Tax Rate for Individual Income Taxation

The table below presents the current and updated graduated tax rates to be used by individual income earners. This table incorporates an exemption of P250,000 on income.

Tax Schedule Effective January 1, 2018 until December 31, 2022:
Not over P250,000 0%
Over P250,000 but not over P400,000 20% of the excess over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% of the excess over P400,000
Over P800,000 but not over P2,000,000 P130,000 + 30%  of the excess over P800,000
Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the excess over P2,000,000
Over P8,000,000 P2,410 + 35% of the excess over P8,000,000

8% Income Tax Regime

Individuals may also opt to use the 8% income tax regime on Gross Receipts and Other Non Operating Income subject to certain rules and conditions.

Individual Income Taxation Rules

Compensation Income Earners

Pure compensation income earners are allowed to use the graduated income tax rate ONLY. They do not have the option to use the 8% income tax regime as stated in the Train Law.

Self Employed Professionals and Businessmen

Self Employed professionals and those individuals engaged in business have the option to use the graduated income tax rates or the 8% income tax regime.

Mixed Income Earners

Mixed income earners shall be taxed using the graduated rate on their compensation income. While they have the option to use the graduated rate or the 8% income tax rate for their business or professional income.

Minimum Wage Earners

The following income earned by a minimum wage earner is exempt from income tax:

  1. Basic Wage/Salary
  2. Overtime Pay
  3. Holiday Pay
  4. Night Shift Differential
  5. Hazard Pay

For a more in-depth discussion of Minimum Wage Earners, click here.

8% Income Tax Regime Rules for Individual Income Taxation

  1. The taxpayer should be earning business income or income from profession
  2. The gross sales or receipts of the taxpayer should not exceed P3M for the taxable year
  3. The intention to avail of the 8% income tax regime should be communicated to the BIR via the first quarter income tax return to be filed on or before May 15 of the current year.
  4. A deduction of P250,000 from the Gross Receipts or Gross Sales is allowed for those purely earning business income or income from profession.
  5. Mixed income earners are not allowed to deduct P250,000 from their business income or income from profession.

Difference: Train Law and Old Law for Individual Income Taxation

  Old Law Train Law
Personal Exemption P50,000 None
Additional Exemption P25,000 per child or PWD relative None
Health/Hospitalization Insurance P2,400 None
Highest Rate in Tax Table 32% 35%
Exemption in the tax table None First P250,000
8% optional rate Not Applicable Applicable

Computation of Annual Individual Income Tax

EXAMPLE 1: MWE

Mr. Early Bird, works at CPARTC Inc. He is not engaged in business nor has any other source of income other than his employment. For 2018, Mr. Early Bird earned a gross compensation income of P135,000 for 12 months (including benefits). The minimum wage in his place of work is P450 per day. Mr Early Bird has worked for 24 days every month. The taxpayer contributed to the SSS, Philhealth and HDMF amounting to P5,000 during the year and has received 13th month pay of P11,000. Compute for the Income tax payable.

Click to show the Answer
The MWE is exempt from tax
EXAMPLE 2: SELF EMPLOYED

Mr. Agcipet Bird, a professional entertainer, had the following data for 2018:

  • Gross Sales P1,500,000
  • Operating Expenses  300,000
  • Direct Cost 800,000

Compute the total tax to be paid of Mr. Agcipet Bird for the taxable year 2018 assuming that he used:

  1. Graduated Tax Rate
  2. 8% Flat Rate
Click to show the Answer

OPTION 1 (Graduated)

OPTION 2 (8%)

       

EXAMPLE 3: VAT THRESHOLD

Mr. Agamote is a prominent contractor who offers architectural and engineering services. Since his career kickstarted, his total receipts amounted to P4,250,000 for taxable year 2018. His recorded cost of services and operating expenses were P2,150,000 and P1,000,000 respectively. Can Mr. Agamote avail of the 8% tax rate?

Click to show the Answer

The BIR will not allow Mr. Agamote to use the 8% tax rate because his total receipts exceeded the P3 million VAT threshold.

EXAMPLE 4: MIXED INCOME EARNER

Mr. Old Bird, has total taxable salary for 2018 amounting to P1,500,000. He also has a canteen which generated gross sales of P2,500,000 with direct costs of P800,000 and operating expenses of P300,000. Compute for the income tax due assuming that he:

  1. Used the graduated tax rate for business income
  2. Used the 8% flat rate for business income.
Click to show the Answer

Solution:

Requirement 1

Requirement 2

individual income taxation