All individual taxpayers are granted a personal exemption of P 50,000.

Additional exemptions of 25,000 are given for each qualified dependent but only up to four dependents.
Tax Exempt for Bonus is P 82,000

For husband and wives with children, only one spouse can claim the additional exemption. The husband is deemed
head of the family and will claim the deduction unless he explicitly waves his right in favor of his wife.

Who are required to pay income tax in the Philippines? (Section 23 National Internal Revenue Code [NIRC] of 1997)
- A citizen of the Philippines, living in the Philippines, is taxable on all income earned inside and
outside the Philippines;
- A non-resident citizen is taxable only on income earned in the Philippines;
- An OFW is taxable only on income earned in the Philippines.
- A foreigner living in the Philippines is taxable only on income earned in the Philippines.
- A domestic corporation is taxable on all income derived from sources inside and outside the
Philippines; and
- A foreign corporation is taxable only on the income derived inside the Philippines.

List of sources of gross income: (NIRC 1997 Chapter 6 Section 32 A)

Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and
similar items;
Gross income derived from the conduct of trade or business or the exercise of a profession;
Gains derived from dealings in property; (Note: subject to 6% capital gains tax for individuals and for corporation if land
and building is not used in business)
Interests; (Note: generally subject to 20% final withholding tax)
Rents;
Royalties; (Note: generally subject to 20% final withholding tax,10% if from books and literary works)
Dividends; (Note: generally subject to 10% final withholding tax for individuals, tax exempt for corporation)
Annuities;
Prizes and winnings; (Note: generally subject to 20% final withholding tax, except those that are tax exempt based on
specific criteria in the law)
Pensions; and
Partner's distributive share from the net income of the general professional partnership
Compensation Income
Employed individuals that earn compensation income pay their income taxes monthly. Employers withhold the income
tax of their employees from their monthly gross income and remit these sums to the BIR.
Philippine individual income tax is progressive. The tax rate increases as the tax base increases which means that tax
payers with more capacity to pay will pay more taxes

Withholding income tax for employees:

- Employers are required by law to withhold income tax dues from their employees salary.
- It is implemented because employees might not have sufficient cash to pay for their income tax dues if aggregated to a
one time annual payment.
- The withholding tax deduction is computed based on the employees gross compensation (net of mandatory
contributions to SSS or GSIS, Philhealth and Pag-ibig Fund), tax status, timing of compensation payments and using the
published BIR withholding tax table.
Income tax is computed at the end of the year based on all compensation income derived during the year.
- Taxable income is computed after deducting personal and additional exemptions.
- Applicable tax rate is applied on the taxable income to get the tax due.
- The total income tax withheld by the employer is deducted from the tax due to get remaining tax liability by the
employee.
Taxpayers who derive their income solely from compensation are required to file BIR Form 1700 as their income tax
returns. However, to give relief to these taxpayers, the employee may present BIR Form 2316 as their income tax return.
BIR Form 2316 is a statement issued by the employer and signed by the employee but not filed with the BIR. This is
referred to as substituted filing.

Business Income
The tax payments of a business organized as a sole proprietorship are made in the name of its owner. The owner is
considered an individual taxpayer who derived income from business. He is required to file BIR Form 1701.
Businesses may settle their income tax liabilities and submit their income tax returns (tax form) to the government three
months and fifteen days from the close of the year. For a business that follows a calendar year, the date of settlement is
April 15.
- Some businesses pay income tax on a quarterly basis based on their quarter-end income. Quarterly payments are due
sixty days following the close of the first three quarters of the year.
- When the tax due is in excess of 2,000, the individual taxpayer may elect to pay the tax in two equal installments. The
first installment shall be paid at the time the return is filed and the second installment is paid on or before July 15
following the close of the calendar year.

Two approaches for the computation of income tax for the business:
- Itemized deduction. Use the itemized expenses in the income statement. The business should have a complete set of
accounting books and supporting receipts for the deductions that were itemized on the tax form.
- Optional standard deduction scheme. Deductions are up to a maximum of 40% of gross receipts. Gross receipts is
equal to net sales plus other taxable income. This means that the business taxable income is equivalent to 60% of gross
receipts.
Mixed Income Earner is a compensation-earner who at the same time is engaged in business or practice of
profession.A taxpayer deriving mixed income will also use BIR Form 1701.