[Music] hello everyone this is the second part of our discussion in gross income so in this video we'll discuss more on the compensation income it's sources its examples and its taxability so if you're ready let's start so now at this point we'll discuss the sources of income before computing income tax which will be discussed in the later discussions uh in the later lessons it is necessary for us first to identify the items included in the gross income of the taxpayer whether an individual or a corporate taxpayer so in general the sources of income are classified into four so we have four items in general sends first the compensation income this income is derived from employer employee from the employment which means when we say employment meaning to say that the taxpayer is being employed and there is an employer employee relationship so aside from that compensation income the taxpayer can also earn income from business and doing professional services okay if the taxpayers engage into selling of goods or selling of service or into business in general and uh the taxpayer may also earn positive incomes when you say passive incomes these are incomes which the taxpayers are not actively engaged into but still continue to receive for example dividends or interest we also have capital gains capital gains is the gains derived or the excess of money derived from the sale of capital assets so these are the four categories or sources of income in general that we need to understand so in this video we will focus on the compensation income first and in the next videos you have the business and passive incomes in capital gains so i hope i hope you watch the you'd watch the other videos in this lesson so let's focus in the compensation income compensation income these are all remunerations or payments for services performed by an employee for his employer under an employer employee relationship unless specifically excluded by the code so when we say compensation income these are any income any payment made by the employer to his employee uh when we say employer this is the person employing someone and on his employee this is the person rendering service for someone okay so there is an employer employee relationship this is not just a casual work or casual job a temporary job this is a regular job with a contract an agreement so any remunerations received by the employee from his employer shall be considered as compensation income however not all compensation incomes are subject to tax and not or not all employees are subject to tax there are some exemptions so we need to carefully understand who or what are these items of compensations which are not subject to tax and which are subject to tax okay so the following are examples of compensation income there are a lot of items that can be considered as compensation income okay so these are just examples so first we have salaries in wages when you say salaries these are fixed rate usually or regularly received by an employee from his employer when they say wages these are daily uh wage or daily rate given by the employer to his employee so when the taxpayer is a minimum wage earner meaning to say his wage daily wage does not exceed the regular or the prescribed amount the prescribed minimum wage then that employee is exempted from the tax again with the employee is is a minimum wage earner then his income shall be exempted from the income tax okay so we also have bonuses and other benefits these are extra pays extra money given by the employer to his input to their employees and then these are subject to the limit of 90 000 pesos so later on we will explain we will um elaborate what is this 90 000 limit we also have holiday pay for example it's holiday and you're required to work on holidays any payment they're on shall be considered also as compensation income subject to tax and overtime pay when you are required to work overtime meaning in excess of your regular time we also have night shift differential if you will be working during the night in hazard bay if you are if your work involves hazardous or dangerous activities or if you are working on the dangerous zones okay so this compensation incomes are subject to income tax these are taxable in general sense however if these items are received by the minimum wage earner all of these are exempted from the tax okay so all of these are non-taxable or exempt from income tax if the receiver is a minimum wage earner so take note of that aside from these six items we also have allowances allow one says these are small amounts given by the employer to their employees because maybe the employees are required to do something so for example the rata or representation and transportation allowance so if the employee is sent outside let's say it's sent for a meeting or a seminar outside of the city or outside of province then that is that allowance can be considered as compensation income however uh the taxability of such allowance depends whether the item is liquidated or not so if the data or if the representation of transportation allowance is required to be liquidated and in excess shall be returned to the employer then that rata is not a compensation income of the employee because it is liquidated okay but for example if the rata is not required to be liquidated in its total sense or it's its entirety then that rata is considered as a compensation income therefore taxable okay so for example if you are the employee and you are sent outside of the province to attend a seminar and you are given a rata of ten thousand pesos and then you are not required to submit anything or to liquidate that ten thousand then that can be considered as your income a compensation income subject to tax however if your employer requires you to require you to to liquidate and submit all documents to prove that this amount was used then that cannot be considered as your compensation income okay so how about if you are going to liquidate but any excess is not refundable or not determinable so for example you are given ten thousand and then you're go you have to liquidate that let's say out of ten thousand you only spend let's say six thousand leaving four thousand excess so if the excess is not returned again if the excess which is not used is not returned to the employer then that excess which is not returned can be considered as your income therefore taxable but if the excess is returned to the employer then again that is entirely non-taxable okay so we also have the personal economic relief allow one so there will be instances wherein the employer will give extra allowance just to compensate the employee for as a relief no for example if if the employee if the employee is in is involved in in a job or a task wherein he has is his burden to to spend on something and then the employer thinks that it is better appropriate for him to compensate the employee to relieve him of the of the economic burden of such job then that pera or allowance shall be considered as compensation income however again it depends whether it is liquidated or not like rata if the pera is liquidated then that is not your compensation income if the pera however is not liquidated it's just forgiven to you freely then that is a compensation income subject attacks however these scenarios is are assumed that the employee is a private employee if the employer is a government or any government agency the rata and the pera will always be exempted from the tax okay regardless of the whether these are liquidated or not if the employer is the government or any government agency then these are not subject to tax okay so these are subject to tax these two items are only subject to tax if number one given by the an employer who is a private uh person or private company and then that is also not liquidated okay so if it is if the if the employer is the government then that is not taxable non-taxable if the employer requires to liquidate these items then also that is non-taxable okay so next we have additional compensation allowance it's similar to rata and pera and again they follow the same rules we also have living quarter or meals allowances so for example you are a laborer of a construction company or any you are a person or become of any in any company and then you are given free boarding house or free living quarters you have free meals your allowances again these are considered as your compensation income but the question as to whether whether these are taxable or not depends on who benefit these meals and allowances okay so if for example in the case of housemaids were in there required to live with the with their ammo or with their bosses then that is for the benefit of their employers right so then that is none taxable okay that is non-taxable because the the employers are benefited but for example if the uh the employers for example if if you are if if a house made is let's say not required to live with their bosses with their employers but they are given free meals they're just females they they can go to their they can go back to their homes every day but they're given free meals just free meals let's say morning and lunch and dinner so free meals so since there are no benefit um derived by the employer from giving this meal allowances then that is considered compensation income subject to tax okay so next we have facilities and privileges of a relatively small value we call this the minimize so the minimize are subject to limitations there are later on we'll discuss uh the minimize these are small allowances like rice or medicine or christmas bonuses or christmas gifts so again these are discussed later on and again these are considered as compensation income we also have vacation and sick leave allowances so this is under the minimize and again we'll discuss more of this in our succeeding videos aside from allowances we also have tips and gratitudes so when i say tips these are payment we made usually in in a restaurant or for some dining experience so these tips are taxable gratitudes on the other hand are payment personally made by two the priest or a celebrant for initiating a christening for example so this is not an offertory this is not an offering but a personal payment made to the priest or a celebrant okay these tips and what it is are actually taxable compensation income but in reality it depends it still depends whether you will declare this or not but in its real sense tips and gratities are taxable and are subject to income tax okay we also have honoraria and other emoluments so if you are invited to speak in a workshop or a seminar and you are given an honorarium okay so that is considered as taxable compensation income we also have commissions if you are working on a commission basis then your commission are subject to tax we also have retirement paying other similar remunerations so any payment made by the employer to the employee for once the employee retired from the company for his involvable service in the company so retirement pay and other similar remunerations are in general as a general rule these are taxable these are subject to tax however retirement pay and other similar emulations like separation pay may be exempted from the tax if the following four requirements are met okay so number one if the employee is at least 50 years old at a time of retirement so if the employee retires at the age of 50 or more then that retirement pay could be exempted from the tax otherwise if he retires uh let's say at the age below 50 years old then that retirement pay is taxable and another requirement is if the employee has rendered service for 10 years in the same company okay 10 years and then if the employee has availed the retirement pay for the very first time it is the first time to retire then that is also exempted from the tax and finally if such private benefit plan is approved by the brso when every company is required by the br to have their separate private benefit plan so that when one or two or several of the employees will retire from the company the company has something or has a fund to pay for the retirement pay of the employees so again these four requirements should be met all of them should be met so that the retirement pay could be exempted from the tax otherwise if one of these four requirements are not met or is not met then the entire retirement pay is taxable okay so next we have separation pay so separation pay is a payment made by the employer to his employee once the employee resigns or stopped from being employed okay so separation pay is not a retirement pay a retirement pay is something that is received only once you retire so separation pay in its as a rule is actually subject to income tax okay so it is subject to income tax however separation pay could be exempted again could be exempted if the reason why you separate from do it from being employed is involuntary okay if the reason of the resignation or separation is involuntary then that separation pay is exempted from the tax so for example if you are a driver a company driver and then you intend to um stop from being employed or you intend to resign from the company for whatever reason okay so that is voluntary resignation therefore since it's voluntary resignation whatever payment made with a company to you as a separation pay is subject to income tax okay however if you are a company driver and then you met an accident causing a severe okay severe injury on your part in which it results to you being unfit for the job being a company driver then of course you would just sign from the company right so since the reason for the resignation is an accident which is an involuntary part on the employee then the separation pay could be exempted from the tax okay so next we have proceeds of life insurance so always remember any proceeds of life insurance will never ever be subject to income tax okay so when the beneficiary is or when that when the insured person so for example i am the insurer i am the insured person and then i nominate some three people to be my beneficiary and then i died for example then any proceeds received by my beneficiary from the insurance company will be exempted from the income tax okay it will always be exempted from the income tax however if i survived my policy say for example my policy is good for 10 years and if i don't die in 10 years and i will get whatever in whatever investment i had with insurance company okay so i am alive and then i i receive the entire amount of investment the fund value then that could be the time when uh such proceeds will be subject to income tax okay again if there is death then that proceeds is exempted from the tax from the income tax but if the insured person survived the policy and received himself the proceeds of the fined value of the insurance then that is subject to income tax however only the gains okay only the gains so finally we have fees including director's fee if the director is at the same time an employee of the employer corporation so again this is considered as a taxable compensation income now remember this as a rule every income is generally taxable unless specifically exempted by the law and requirements to be exempted are met and the cytos or place of compensation income is where the services are rendered regardless of the residence of the payor okay so compensation income is computed as follows so first we have this general formula and then first we annualize the compensation in communisay annualized meaning we multiply the monthly or the regular payment into 12 months so we get the total annual compensation income if the employee is receiving is a fixed salary rate okay then we add the bonuses in other benefits so these are the 13 month pay the small value privilege likes the vietnamese in other benefits to get the total gross compensation income so this total gross compensation income includes both the taxable and non-taxable component okay so that includes both the taxable non-taxable component after we get the total gross compensation income we will now deduct the non-taxable compensation income because not everything in the compensation income we have computed above is subject to tax so as i have said there are some items which are not subject to tax such as the bonuses subject to the limit of 90 000 pesos so for example we have the 13 month pay in other benefits so any 13 month pay any bonuses and other benefits received by the employee from his employer will be exempted from the tax so it will not be subject to tax provided that the total amount do not exceed the 90 000 pesos limit okay so for example if the 13 month pay is 100 000 then we will deduct the entire 90 000 leaving 10 000 as still part of the taxable compensation income okay so if on the other hand the employee receives let's say seventy thousand uh thirteen months then other benefits so the entire seventy thousand is deducted from the total gross compensation income why because it does not exceed the limit of 90 000 pesos okay so after we deduct an untaxable compensation income we will get the compensation income subject to tax so this compensation income is not yet the top not yet the taxable income still it is object tax but not yet not yet the final or the net taxable income because we still need to deduct the mandatory deductions such as the field health the social security system premiums and then the pagibig or the hdmf housing development in in uh hdmf so after we deduct the military reductions then we'll get the taxable compensation income so this is now where we will base our income tax okay so let's have an example danny a resident of cebu is employed as the head accountant of x company during the year 2018 he had a following data pertaining to his income so danny received the following uh his monthly basic salary is 29 000. his media bonus is 20 000. his 13th month paid bonus is 29 000 and productivity bonus received during christmas we have 25 000. he also had this ss monthly contribution again this is monthly field health so insurance monthly contributions these are mandatory uh contributions by the way we also have the housing development mutual fund or the html for the bug ebay that is 20 pesos rather we also have monthly premiums paid on health and hospitalization insurance so this is another insurance of danny okay so 3 000 pesos and danny had the following personal family and living expenses a total of 200 000 pesos so compute our challenge our task is to compute the taxable compensation income of danny okay so what do we need here we need this four items to be annualized to be projected into one year so that we can compute the annualized or total gross compensation income so our solution would be in computing taxable compensation income remember to multiply the monthly figures by 12 months since the income tax is computed on the annual basis so you have monthly base accelerate so 39 times 12 meteor bonus since it's a media bonus you don't have to multiply that with 12 months then we have 31 pay that's 29 and productivity incentives or bonus received during christmas so a total of uh 422 thousand pesos so this total compensation income includes both the taxable and non-taxable component okay so after we get the total compensation income now let's have let's proceed to the competition of compensation income subject to tax so again we just carried over the 420 000 less than taxable compensation bonus is not subject to tax that is exempted 13 month pay also and productivity incentives a bonus a total of 74. so let us check first is 74 000 exceeding 90 000 the answer is no therefore there is no uh for on the part of bonuses and other benefits there is no excess amount there is no excess amount in excess of 90 000. therefore the entire 74 000 should be deducted from our total compensation income so next you might be asking me how about if the total bonuses and other benefits is 104 000 okay how about that so in that case we're in total bonuses and other benefits exceed the threshold limit of 90 000 then we will deduct the entire entirely the 90 000 limit okay just the 90 000 limit so again if the total bonuses and other benefits exceed the 90 000 limit then we will deduct the 90 000 pesos limit from our total compensation income however in this case since the total bonuses does not exceed 90 000 therefore we will just deduct the 74 000. so after this you will get the compensation income subject to tax or we call this taxable compensation so if you will imagine this the 348 is subject to tax while the 74 is not subject to tax if you will add 74 and 348 it will we will derive the total compensation income of 422 000 pesos so after we get the taxable compensation income again this is not yet the final figure we still need to deduct the monetary contributions so again we carry over the amount less the mandatory deductions exemptions for tax so this are provided by the law to be deducted from the compensation income and these are the ss monthly contribution the page the field health so a total of 1 300. however since this is monthly contributions we need to multiply this by 12 months so we get 15 600 and we will deduct the 15 600 from our taxable compensation income you might be asking where is the personal insurance where okay so just ignore that part because it is not necessary and it will never be deducted from our compensation income how about the personal living in family expenses again that is not deducted from our taxable compensation income we only have to deduct these three figures the ss the field health and the htmf or the giving a total of fifteen thousand six hundred so we get three hundred thirty two thousand four hundred this is now our net taxable compensation income wherein we will compute our income tax which later on we'll discuss in the later lessons okay always remember this in computing the taxable compensation income the bonuses are added okay because again we are just computing the total compensation income and total compensation income includes both taxable and non-taxable component but in computing the compensation income subject to tax the all bonuses and other benefits must be subject to a limit of ninety thousand pesos as i have just discussed if the total bonuses and other benefits exceed the ninth house and the exists the excess thereof shall be taxable therefore we can only deduct the entire 90 000 so again if the total bonuses in other benefits let's say it's 97 for example 97 000 then we can only deduct the 90 000 again only the 90 000 pesos just leave the 7 000 pesos to be part of the taxable compensation income okay if the total bonuses in other benefits do not exceed 90 000 okay such bonuses and other benefits must not be subject to tax therefore we will deduct the entire amount from the compensation income as what we did in danny's problem let's have another example abby's a minimum wage earner employed at fcc company for the taxable year 2018 channel found data so abby received the basic pay of 200 000 so this is an annual income already we don't have to multiply this by 200 by 12 months also apart from that she also received holiday and overtime pay of 30 000 pesos in total 13 months pay 20 000 pesos productivity incentives you have annual mandatory contributions so ss page i feel health and the big or the htmf so we are tasked to compute the growth the gross compensation income of abby so it's just a gross compensation income being asked but it will show you how to compute the taxable income of abi assuming obvious of course minimum wage earner okay so our solution would include the following first the basic pay of hundred thousand and then we will add the holiday pay and overtime pay of thirty thousand thirteen month pay twenty thousand also have productivity incentives of fifteen thousand annual gross compensation income is 265. okay so this is the answer to our question but how much is to the abyss grow up total gross compensation income however is happy subject to tax the answer is no because again abby is a minimum wage earner so despite of the income is examined from the tax okay so to compute the net taxable income we will deduct from the total gross compensation income those items which are considered as non-taxable so first we have the thirteenth month pay of twenty thousand and productivity incentives of fifteen thousand total of thirty five thousand and then our threshold our limit is twenty thousand so it does not exceed the limit therefore we will deduct the entire 35 000 from the total gross compensation income so we will get the taxable compensation income of 230 000 pesos however this is not yet the net taxable compensation income because we still have to deduct the mandatory contributions so we have this you carry over the 230 000 and less monetary contributions again this is already an annual so we don't have to multiply this by 12 months so ss 10 thousand field health 1200 and each dmf or pagibig contribution have 1000 a total of twelve thousand two hundred so we'll deduct that to get the net taxable compensation income and again abby will never be subject to tax because avi is a minimum wage earner when we say minimum wage earner abby's a wage is just the minimum wage okay so in every province or region in the philippines uh there is a corresponding minimum wage so for example in cargo in cargo region our minimum wage is 328 pesos per day daily so if you are receiving that amount per day then that is exempt you will be exempted from the tax so despite that you would receive um holiday pay or overtime pay or bonuses you'll be exempted from the tax in other regions the minimum wage um will reach 500 or 600 depending on where uh the region or province is reached with situated so uh usually it's the indian capital region wherein there is a higher minimum wage so again even if you receive a high wage but it's still the minimum wage then you are considered as a minimum wage earner so you try to compute your um income your your daily wage if you still in the bracket of minimum wage earner because if you do then you're considered as an mwe and therefore you will be examined from the tax so i hope you learned a lot from this discussion and i hope you're interested in computing compensation income because later on we will discuss how do we i will discuss on how to compute income tax on our compensation income with proper way of filing an income tax return so please watch the next video on business income thank you for watching you