Understanding Philippine Income Tax
The Philippine income tax system is administered by the Bureau of Internal Revenue (BIR). Under the TRAIN Law (Tax Reform for Acceleration and Inclusion), significant changes were made to make the tax system more progressive and reduce the burden on low and middle-income earners.
One of the most important changes is that the first ₱250,000 of annual income is now tax-exempt. This means if your annual taxable income is ₱250,000 or below (approximately ₱20,833 monthly), you don't have to pay any income tax.
How Philippine Income Tax is Calculated
The income tax calculation in the Philippines follows this formula:
Tax = Fixed Tax + (Taxable Income - Compensation Level) × Rate
Where:
• Taxable Income = Gross Income - SSS - PhilHealth - Pag-IBIG
• Fixed Tax = Base tax for your bracket
• Compensation Level = Lower limit of your tax bracket
• Rate = Tax rate for income exceeding the compensation level
Monthly Withholding Tax Table (TRAIN Law)
The following table shows the BIR withholding tax brackets for monthly compensation:
| Monthly Taxable Income | Tax Rate / Calculation |
|---|---|
| ₱0 - ₱20,833 | 0% (Tax Exempt) |
| ₱20,833 - ₱33,333 | 15% of excess over ₱20,833 |
| ₱33,333 - ₱66,667 | ₱1,875 + 20% of excess over ₱33,333 |
| ₱66,667 - ₱166,667 | ₱8,541.80 + 25% of excess over ₱66,667 |
| ₱166,667 - ₱666,667 | ₱33,541.80 + 30% of excess over ₱166,667 |
| Above ₱666,667 | ₱183,541.80 + 35% of excess over ₱666,667 |
Mandatory Contributions
Before calculating your income tax, mandatory contributions are deducted from your gross income:
1. SSS (Social Security System)
SSS contribution is based on your monthly salary credit. For 2024, the contribution rate is 14% of the monthly salary credit, with the employer paying 9.5% and the employee paying 4.5%. The maximum monthly salary credit is ₱30,000.
2. PhilHealth (Philippine Health Insurance)
PhilHealth contribution is 5% of your monthly basic salary, shared equally between employer and employee (2.5% each). The maximum contribution base is ₱100,000 monthly.
3. Pag-IBIG (Home Development Mutual Fund)
Pag-IBIG contribution is typically ₱100 for employees earning more than ₱1,500 monthly. Higher voluntary contributions are possible.
Monthly Gross Salary: ₱30,000
Deductions:
• SSS: ₱1,350
• PhilHealth: ₱750
• Pag-IBIG: ₱100
• Total Contributions: ₱2,200
Taxable Income: ₱30,000 - ₱2,200 = ₱27,800
Tax Bracket: ₱20,833 - ₱33,333 (15% rate)
Tax = (₱27,800 - ₱20,833) × 15%
Tax = ₱6,967 × 15%
Monthly Tax: ₱1,045.05
Net Pay: ₱30,000 - ₱2,200 - ₱1,045.05 = ₱26,754.95
Who Needs to Pay Income Tax?
The following individuals are required to pay income tax in the Philippines:
- Filipino Citizens: Taxed on worldwide income
- Resident Aliens: Taxed on income from Philippine sources
- Non-Resident Aliens: Taxed on income from Philippine sources at varying rates
- Domestic Corporations: Taxed on worldwide income
- Foreign Corporations: Taxed on income from Philippine sources
Tax-Exempt Income
Certain types of income are exempt from taxation:
- 13th month pay and other bonuses up to ₱90,000 annually
- Contributions to SSS, PhilHealth, and Pag-IBIG
- De minimis benefits (rice subsidy, clothing allowance, etc.)
- Separation pay due to retirement, death, or illness
- Income from selling a principal residence (under certain conditions)
Filing Requirements
Employees who receive purely compensation income from a single employer, where taxes have been correctly withheld, are generally not required to file an annual income tax return (ITR). However, the following must file:
- Self-employed individuals and professionals
- Employees with multiple employers
- Employees receiving mixed income (compensation + business income)
- Non-resident aliens engaged in trade or business
Frequently Asked Questions
Under the TRAIN Law, annual taxable income of ₱250,000 and below is exempt from income tax. This translates to approximately ₱20,833 monthly taxable income. However, remember that taxable income is calculated after deducting mandatory contributions (SSS, PhilHealth, Pag-IBIG).
The 13th month pay and other bonuses are tax-exempt up to ₱90,000 annually. Any amount exceeding ₱90,000 is subject to income tax. This exemption is meant to protect the mandatory 13th month pay that all employers are required to give.
Gross income is your total salary before any deductions. Taxable income is your gross income minus mandatory contributions (SSS, PhilHealth, Pag-IBIG) and other allowable deductions. Income tax is calculated based on your taxable income, not gross income.
Yes, if too much tax was withheld from your salary during the year, you may be entitled to a refund. Your employer should perform an annual tax reconciliation (called "annualization") to determine if you're owed a refund or if you have additional tax to pay.
Some allowances are tax-exempt (de minimis benefits) while others are taxable. Tax-exempt de minimis benefits include: rice subsidy (₱2,000/month), clothing/uniform allowance (₱6,000/year), medical cash allowance (₱1,500/month), and others. Any allowance exceeding these limits is taxable.
Tips for Reducing Your Tax Burden
- Maximize de minimis benefits: Ask your employer about tax-free benefits within legal limits
- Contribute to Pag-IBIG MP2: Additional Pag-IBIG savings are tax-deductible
- Keep track of deductions: Ensure all mandatory contributions are properly deducted
- Monitor your 13th month: Structure bonuses to maximize the ₱90,000 exemption
- Consult a tax professional: For complex situations, professional advice can help optimize your taxes legally
Conclusion
Understanding Philippine income tax is essential for financial planning. With the TRAIN Law's changes, many Filipino workers now enjoy lower tax rates or complete exemption. Use our calculator above to determine your exact tax liability based on your income and mandatory contributions.
Remember that tax laws can change, so it's always best to verify current rates with the BIR or a qualified tax professional for the most accurate information.