Overview
This lecture covers the concept of compensation income, its sources, examples, and taxability, including exemptions and computations for taxable compensation income.
Sources of Gross Income
- Four main sources: compensation income, business/professional income, passive income, and capital gains.
- Compensation income arises from an employer-employee relationship and regular employment, not from casual work.
Compensation Income: Definition & Examples
- Compensation income includes all payments for services performed under an employer-employee relationship.
- Examples: salaries, wages, bonuses, holiday pay, overtime pay, night shift differential, hazard pay.
- Allowances (e.g., representation and transportation allowance or RATA) are compensation income if not liquidated or not refunded when in excess.
- Other examples: personal economic relief allowance (PERA), living quarters/free meals, tips, honoraria, commissions, retirement pay, separation pay, fees, and director’s fees if the director is also an employee.
Taxability of Compensation Income
- Not all compensation income is taxed; some items are specifically exempt by law.
- Minimum wage earners are exempt from income tax on compensation income and related allowances/bonuses.
- Allowances are taxable if unliquidated and provided by private employers; exempt if from government or if liquidated.
- Living quarters or meals are exempt if primarily benefit the employer; otherwise, they are taxable.
- De minimis benefits (small-value allowances) are generally taxable, subject to specific limits.
- Tips and gratitudes are taxable.
- Retirement pay is exempt only if: employee is at least 50, served at least 10 years, first-time retirement, and plan is government-approved.
- Separation pay is taxable unless separation is involuntary (e.g., due to disability).
- Proceeds from life insurance (upon death) are always exempt; if the insured survives, only gains are taxable.
Computation of Taxable Compensation Income
- Annualize all monthly income components to determine total gross compensation income.
- Add all bonuses and other benefits, both taxable and non-taxable, for gross compensation calculation.
- Deduct non-taxable components, e.g., bonuses within the PHP 90,000 annual threshold.
- Only the excess over PHP 90,000 for bonuses/benefits is taxable.
- Mandatory deductions (SSS, PhilHealth, Pag-IBIG) are subtracted to arrive at net taxable compensation income.
- Personal, family, or living expenses are not deductible.
Example Computations
- For regular employees, total annual income includes basic salary, all bonuses/benefits, minus non-taxable bonuses (up to PHP 90,000) and mandatory contributions.
- For minimum wage earners, all compensation income and related benefits are exempt regardless of amount, provided daily wage is at or below the regional minimum.
Key Terms & Definitions
- Compensation Income — Payment for services under an employer-employee relationship.
- Minimum Wage Earner (MWE) — Employee paid the regionally prescribed minimum wage, tax-exempt on compensation.
- Allowance — Additional payment for work-related expenses; taxability depends on liquidity and employer type.
- De minimis benefits — Small benefits with specific tax-exempt thresholds.
- Retirement Pay — Lump sum received upon retirement; conditionally tax-exempt.
- Separation Pay — Payment upon employment termination; tax-exempt if due to involuntary reasons.
- Mandatory Deductions — Required contributions (SSS, PhilHealth, Pag-IBIG) reducing taxable income.
Action Items / Next Steps
- Watch the next video/lesson on business and passive income.
- Practice computing taxable compensation income using provided examples.
- Review regional minimum wage rates for accurate classification as a minimum wage earner.