INCOME TAXATION

INCLUSIONS AND EXCLUSIONS FROM GROSS COMPENSATION INCOME

UNIT 4

Inclusions to Gross Compensation Income

Inclusions to gross compensation income would mean that these items of income will be included for the purpose of
computing compensation income subject to tax.

Compensation Income
In general, compensation means all remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code. This includes: salaries, wages, overtime pay,
emoluments and honoraria, allowances, commissions; fees, taxable bonuses, fringe benefits received by rank-and-file
employees (except those which are subject to the fringe benefit tax).
Other forms of income of a similar nature as defined above constitute compensation income.
Other Forms of Compensation
1. Compensation in kind. If services of an employee are paid other than money (e.g. property, stocks, bonds, etc.), such
is compensation in kind. The Fair Market Value (FMV) of the thing taken for payment is the amount included as
compensation income subject to withholding tax.
2. Living quarters and meals. The value of living quarters and meals furnished by the employer to its employees shall
be included as compensation income subject to withholding tax.
However, if these are furnished for the “convenience of the employer”, the value thereof is not to be included in the
employees’ compensation subject to withholding tax.
Example: Ms. Ashley Faith Timkang works as a marketing coordinator in Timex Corporation. She is given free meals
and free stay in the company’s dormitory since most of the time she has to attend customer needs in the office.
 The value of such benefit is not included as part of her compensation income subject to tax because the benefit
received is related to the nature of her work, this is in consonance with the “convenience to employer” rule.
3. Facilities and privileges given to employees. These items of income are furnished by an employer to its employees
on top of their regular basic salary and thus, should be included in the taxpayer’s gross income. However, if they are
relatively small in value (i.e. de minimis benefits), they are not subject to withholding tax.
4. Tips and Gratuities. Tips and gratuities paid directly to an employee by a customer of the employer which is not
accounted for by the employee to the employer shall be included as income subject to tax of that employee, but not
subject to withholding tax.
5. Pensions, Retirement and Separation pay. These constitute compensation income subject to withholding tax,
except when the amount received is due to a valid dismissal which requires the presence of two (2) conditions:
i. The employee is separated from the service of the employer due to death, sickness or other physical disability or for
any cause beyond the control of the said employee; and
ii. The employer pays benefits to the official or employee or his heirs as a consequence of such separation.
6. Fixed or Variable Transportation, Representation and Other allowances. In general, fixed or variable
transportation, representation and other allowances which are received by a public officer or an employee of a private
company in addition to their regular compensation, are subject to withholding tax.
7. Representation and Transportation Allowance (RATA) granted to public officers and employees and Personnel
Economic Relief Allowance (PERA) which essentially constitute reimbursement for expenses incurred in the
performance of government personnel’s official duties, shall not be subject to income tax or withholding tax.
Any amount paid specifically, either as advances or reimbursement for traveling, representation and other bona fide
 ordinary and necessary expenses incurred or reasonably expected to be incurred or used in the performance of
government personnel’s or private employees’ official duties, shall not be subject to withholding tax.
8. Vacation and Sick Leave Allowances/Credits. Amounts of vacation and sick leave credits which are paid to an
employee constitute compensation income subject to withholding tax.
9. Deductions made by employer from compensation of employee (e.g. Payment of employees’ Loans, membership
fees, mortuary, etc.) constitute compensation income subject to withholding tax.

Exclusions to Gross Compensation Income

Exclusions to gross compensation income would mean that these items of income will not be included for the purpose
of computing the income tax.
1. Facilities, Privileges and allowances of a relatively Small value or famously known as De minimis Benefits
Popularly known as De minimis Benefits, these are furnished by an employer to its employees which are relatively
small in value and are not included as part of compensation income subject to tax.
a. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the Basic minimum
wage.
b. Medical cash allowance to dependents of employees not exceeding P750.00 per semester or P125.00 per
month.
c. Rice subsidy not exceeding P1,500.00 per month or one (1) sack of rice per month amounting to not more
than P1,500.00.
d. Laundry allowance not exceeding P300.00 per month.
e. Uniform and clothing allowance not exceeding P5,000.00 per annum.
f. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per annum.
g. Actual medical cash assistance (medical allowance to cover medical and health care needs, annual medical
check-up, maternity assistance, routine consultations, not exceeding P10,000.00 per annum.)
h. Employees achievement awards or safety achievement (must be in a form of tangible property other than
cash or gift certificate) with a monetary value of not exceeding P10,000.00 under an established written plan
which does not discriminate in favor of highly paid employees.
i. Monetized value of unused vacation leave credits of the following are not subject to income tax and
withholding tax.
i. private employees not exceeding ten (10) days during the year; and
ii. monetized value of vacation and sick leave credits paid to government employees
j. Benefits by an employee by virtue of the collective bargaining agreement (CBA) and productivity incentive
schemes provided that the total monetary value received from both CBA and productivity incentive
schemes combined do not exceed P10,000.00 per employee per taxable year.
k. 13th Month Pay and Other Benefits (including productivity incentives and Christmas bonus) received by officials
or employees of public and private entities up to P90,000.00 only.
Note: The amount exceeding the P90,000.00 limit shall be taxable already.
2. GSIS, SSS, Philhealth and Other Contributions (e.g. Pag-Ibig and other contributions)
3. Holiday pay, Overtime pay, Night-shift differential pay and Hazard pay received by Minimum Wage Earners
(MWE).
4. Compensation for Injuries or Sickness. These includes:
i. Amount received, through Accident or Health Insurance or under Workmen’s Compensation Acts, as
compensation for personal injuries or sickness, and
ii. Amount of any damages received, whether by suit or agreement, on account of such injuries or sickness.
5. Benefits received from or enjoyed under the Social Security System (SSS) in accordance with the provisions of
Republic act 8282.
6. Benefits received from Government Security Insurance System (GSIS) under Republic Act 8291, including retirement
gratuity received by government officials and employees.

Computation for Taxable Compensation Income

Illustrative Problem No.1
Mr. Arnold Sy is an employee in a manufacturing company, he is married and has two (2) dependents. Shown below is
his salary information for the current month of June 2019:
Gross Monthly Salary (Basic) P 29,500.00
Gasoline and Transportation allowance 5,000.00
SSS, Philhealth, Pag-ibig Contributions 1,086.93 (see computation below)
Other Deductions (employee loan and mortuary fees) 3,000.00
Compute Mr. Sy’s, taxable income, tax due/withholding tax and net salary for the whole month of June 2019:

Computing Employee Contributions for the month of June 2019:

SSS Contributions P 581.30*
Philhealth Contributions 405.63**
Pag-ibig Contributions 100.00***
Total P 1,086.93
*Since Mr. Sy’s basic monthly salary is above P15,750.00, his SSS contribution is the highest amount in the SSS
contribution bracket for the employee share (i.e. EE).
**Based on Mr. Sy’s basic monthly salary, his Philhealth contribution is within the salary bracket of P10,000.00 to
P39,999.99. The computation is: ((P29,500.00 X .0275)/2) = P405.63 (personal share)
For Philhealth contribution, the total amount of contribution is divided by the employer and the employee.
***According to the Pag-Ibig/HDMF contribution advisory, the maximum base allowed in computing an employee’s
monthly contribution is set at P5,000.00. The computation is: P5,000.00 X .02 = P100.00.
(See last page: contribution tables for SSS, Philhealth and Pag-Ibig)

Computing Taxable Income and Tax Due/Withholding Tax for the month of June 2019:
Gross Monthly Salary P 29,500.00
Gasoline and Transportation allowance 5,000.00
Less: Employee Contributions 1,086.93
Taxable Income P 33,413.07

Tax Due/Withholding Tax Computation

Monthly [Over P33,333.00 to P66,666.00]
Fixed Rate P 2,500.00
Excess Over (25% Rate) 20.01 (33,413.70 - 33,333.00*) X .25
Tax Due/Withholding Tax P 2,520.01
- The new BIR withholding tax table provide brackets for determining the Tax due of individual taxpayers
*Since Mr. Sy’s income belongs to the P33,333.00 to P66,666.00 bracket, his tax due is computed using this
formula(P2,500.00 + 25% over P33,333.00) in the BIR withholding tax table.
(See last page: Revised Withholding Tax Table under the TRAIN Law)
Computing Net Salary for the month of June 2019:
Gross Monthly Salary P 29,500.00
Gasoline and Transportation allowance 5,000.00
Less: Employee Contributions 1,086.93
Other Deductions (employee loan and mortuary fees) 3,000.00
Withholding Tax 2,520.01
Net Salary P 27,893.06

Illustrative Problem No.2

Compute Mr. Sy’s, taxable income, tax due/withholding tax and net salary for the half month of June 2019

Computing Taxable Income and Tax Due/Withholding Tax for the half month of June 2019:
Gross monthly Salary (semi-monthly) P 14,750.00 (29,500.00 / 2)
Gasoline and Transportation allowance (semi-monthly) 2,500.00 (5,000.00 / 2)
Less: Employee Contributions (semi-monthly) 543.47 (1,086.93 / 2)
Taxable Income (semi-monthly) P 16,706.53

Tax Due/Withholding Tax Computation

Semi-Monthly [Over P16,667.00 to P33,332.00]
Fixed Rate P 1,250.00
Excess Over (25% Rate) 9.88 (16,706.53 - 16,667.00*) X .25
Tax Due/Withholding Tax P 1,259.88
*Since Mr. Sy’s income belongs to the P16,667.00 to P33,332.00 bracket, his tax due is computed using this formula
(P1,250.00 + 25% over P16,66700) in the BIR withholding tax table.

Computing Net Salary for the half month of June 2019: (other amounts are divided by two)
Gross Monthly Salary (semi-monthly) P 14,750.00
Gasoline and Transportation allowance (semi-monthly) 2,500.00
Less: Employee Contributions (semi-monthly) 543.47
Other Deductions (semi-monthly) 1,500.00
Withholding Tax (semi-monthly) 1,259.88
Net Salary (Semi-Monthly) P13,946.65

Allowable Deductions from the Compensation Income of an Individual Taxpayer

An individual taxpayer earning only compensation income cannot deduct his personal and living expenses for the purpose
of computing the Taxable Income.

Illustrative Problem No.3

In 2019, Mr. Arguilles was employed as an account officer in a non-life insurance company, a private company. He
received an annual gross salary of P251,000.00 for the year.
He receives an allowance (for representation and transportation) on top of his basic salary of P50,000.00
He also received the gross monetized value of his 14 days unused leave credits in the amount of P7,000.00 (or 14 days
X P500.00 per day), and the amount of P93,600.00 which covers his 13 th Month Pay, productivity incentives and Christmas
bonus.
His total employee contributions (SSS, Philhealth, Pag-ibig) amounted to P12,516.00.
He is married and has one 10 year-old child.
Compute Mr. Arguilles’ taxable income and tax due/withholding tax for the whole year of 2019.
Computing Taxable Income and Tax Due for the year 2019:
Annual Gross Salary P 251,000.00
Representation & Transportation Allowance 50,000.00
Monetized Value of un-used leave credits (Taxable portion) 2,000.00 (500.00 X 4 days)
Other benefits (Taxable portion) 3,600.00 (93,600.00 - 90,000.00)
Less: Employee contributions 12,516.00
Taxable Income P 294,084.00
-Since Mr. Arguilles is employed in a private company, the amount of his monetized unused leave credits which is tax exempt
is up to 10 days only. The remaining 4 days will be included in his gross income and will be subject to tax.
-The amount exceeding the P90,000,00 ceiling for the 13th month pay, bonus and other benefits is taxable .

Tax Due/Withholding Tax Computation

Fixed Rate P 0.00
Excess Over (20% Rate) 8,816.80
Tax Due/Withholding Tax P 8,817.00

Illustrative Problem No.3 (Continuation)

Assume that Mr. Arguilles is employed in a government office. Compute his taxable income and tax due/withholding tax
for the whole year of 2019.

Computing Taxable Income and Tax Due for the year 2019:
Annual Gross Salary P 251,000.00
Other benefits (Taxable portion) 3,600.00 (93,600.00 - 90,000.00)
Less: Employee contributions 12,516.00
Taxable Income P 242,084.00

Tax Due/Withholding Tax Computation

Note 1 There is no Tax Due/Withholding tax for Mr. Arguilles since his income did not exceed P250,000.00.
Note 2 Since Mr. Arguilles is a government employee, the total amount of his monetized unused leave credits is tax exempt and
his RATA is tax exempt as well.

__________________________________________________ ___END OF NOTES______________________________________________________________

Exercise No. 1
Instruction: Write IN if the item is to be Included in the Gross compensation income subject to tax of an individual
taxpayer and EX if the item is to be Excluded.
____ 1. Monetized value of un-used leave credits paid to government employees.
____ 2. Payment of employee loan deducted from compensation of employees.
____ 3. Representation and transportation allowance (RATA) received by public officials or employees.
____ 4. Separation pay received by an employee during his resignation because of change of location.
____ 5. Night-shift differential pay received by Minimum Wage Earners.
____ 6. Vacation and Sick Leave Allowances paid to a private employee.
____ 7. 13th Month Pay, Productivity Incentives and Christmas Bonus in the amount of P89,900.00
____ 8. GSIS, Philhealth and Pag-ibig contributions of employees.
____ 9. Stocks and bonds received by the employee in lieu of money.
____ 10. The amount of P5,000.00 as bonus received by the employee during the company’s anniversary celebration.
____ 11. Privileges and allowances furnished by an employer to its employees.
____ 12. The value of free meals and free stay in the company’s dormitory given to an employee since most of the time
he/she has to attend customer needs in the office.
____ 13. P10,000.00 cash received by an employee as achievement award for his 10 years of employment.
____ 14. Amount of damages received by an employee on account of injuries and sickness he/she suffered related to his
work.
____ 15. Fixed or Variable transportation, representation and other allowances given to employee.

Exercise No. 2
Instruction: Compute what is required in the problem and show your solutions.
Ms. Pauline Cadeliña is an employee in a botanical factory. Shown below is her salary information for the current
month of January 2019:
Gross Monthly Salary (Basic) P 25,500.00
Monthly Representation Allowance 3,000.00
SSS, Philhealth, Pag-ibig Contributions ________?
Required: Compute the following for Pauline
a. Total monthly employee contribution (SSS, Philhealth, and Pag-Ibig)
b. Taxable Income for the month of January 2019
c. Tax due/Withholding tax for the month of January 2019
d. Net salary for the month of January 2019
e. Annual Taxable Income for the year 2019 (assuming he received a total amount of P91,500.00 as 13th month pay and
bonuses)
f. Tax due/Withholding tax for the whole year of 2019 (continuation of letter e.)

Exercise No. 3
Instruction: Compute what is required in the problem and show your solutions.
Ms. Maricel Licay is an employee in San Miguel Corporation. Her gross basic monthly salary for the month of April 2019
amounts to P35,000.00. She is single and has no dependents.
Required: Compute the following for Luchie:
a. Total monthly employee contribution (SSS, Philhealth, and Pag-Ibig)
b. Taxable Income for the month of April 2019
c. Tax due/Withholding tax for the month of April 2019
d. Net salary for the month of April 2019
e. Tax due/Withholding tax for the half month of April 2019
f. Net salary for the half month of April 2019

Exercise No. 4
Instruction: Compute what is required in the problem and show your solutions.
Mr. Christian Alcoser is a branch manager of a bank, he received P780,000.00 as his gross salary for the year 2019.
He also received the gross monetized value of his 13 days unused leave credits in the amount of P32,500.00. His daily
rate is P2,500.00 per day.
He received the amount of P104,000.00 which covers his 13 th Month Pay, productivity incentives and Christmas bonus.
He received total Representation and Transportation Allowance (RATA) of P72,000.00 for 2019. His employee
contributions (SSS, Philhealth, and Pag-Ibig) totaled to P29,800.00 in 2019.
He is married to Novelyn and has 12 children.
Required: Compute the following:
a. His annual Taxable Income and Tax due for 2019 assuming he is employed in a privately-owned bank.
b. His annual Taxable Income and Tax due for 2019 assuming he is employed in a government-owned bank.
SSS Premium Contribution Table

Philhealth Premium Contribution Table

Pag-ibig Premium Contribution Table

For Pag-ibig, the maximum base

allowed in computing an

employee’s monthly contribution is

set at P5,000.00.

Hence, the computation is:

P5,000.00 X .02 = P100.00

Revised Withholding Tax Table
Effective January 1, 2018 to December 31, 2022

DAILY 1 2 3 4 5 6

Compensation 685.00 &

685.00 1,096.00 2,192.00 5,479.00 21,918.00
Level (CL) Below

Prescribed 0.00 0.00 82.19 356.16 1,342.47 6,602.74

Minimum
Withholding Tax + 20% + 25% + 30% + 32% Over + 35%
0.00
Over CL Over CL Over CL CL Over CL

WEEKLY 1 2 3 4 5 6

Compensation 4,808.00
4,808.00 7,692.00 15,385.00 38,462.00 153,846.00
Level (CL) & Below

0.00 0.00 576.92 2,500.00 9,423.08 46,346.15

Prescribed
Minimum
Withholding Tax + 20% + 25% + 30% + 32% Over + 35%
0.00
Over CL Over CL Over CL CL Over CL

SEMI-
1 2 3 4 5 6
MONTHLY
Compensation 10,417.00
10,417.00 16,667.00 33,333.00 83,333.00 333,333.00
Level (CL) & Below

Prescribed 0.00 0.00 1,250.00 5,416.67 20,416.67 100,416.67

Minimum
Withholding Tax + 20% + 25% + 30% + 32% Over + 35%
0.00
Over CL Over CL Over CL CL Over CL

MONTHLY 1 2 3 4 5 6

Compensation 20,833 &

20,833.00 33,333.00 66,667.00 166,667.00 666,667.00
Level (CL) Below

Prescribed 0.00 0.00 2,500.00 10,833.33 40,833.33 200,833.33

Minimum
Withholding Tax + 20% + 25% + 30% + 32% Over + 35%
0.00
Over CL Over CL Over CL CL Over CL