How to Calculate Taxable Income From Gross Income (Philippines)

Knowing that gross income and taxable income are different is the easy part. Getting from one to the other, in the right order and without dropping or double-counting anything, is where most mistakes happen. This guide walks through the calculation step by step under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law, with a worked example for an employee who also freelances.

Quick answer

Start with all your income, set aside income already taxed at source or exempt, remove the exclusions the Code allows, then subtract allowed deductions if you have business or professional income. What remains is taxable income under NIRC Section 31, and the graduated rate table is applied to it. Employees get exclusions only; the self-employed may also deduct.

What formula turns gross income into taxable income?

Section 31 of the NIRC (RA 8424) defines taxable income as “the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income.” Section 32(A) defines gross income as “all income derived from whatever source,” except when the Code provides otherwise.

Personal and additional exemptions no longer apply: Section 12 of RA 10963 (TRAIN Law) repealed Section 35 of the NIRC. That leaves a working formula with four subtractions:

1. Total gross income from all sources for the taxable year
2. minus income subject to final tax or exempt, which is taxed separately or not at all
3. minus exclusions under Section 32(B)
4. minus deductions under Section 34, for business or professional income only
5. equals taxable income, to which the Section 24(A)(2)(a) schedule applies

The heading of Section 24(A)(2) reads “Rates of Tax on Taxable Income of Individuals,” which is why the order matters: the rate table is never applied to the gross figure. For the conceptual difference between the two terms, see gross income vs taxable income in the Philippines.

How do you calculate taxable income step by step?

Step 1: Identify your taxpayer class and tax option

Your class decides which subtractions you may use. A purely compensation earner, a self-employed individual or professional, and a mixed income earner each follow a different path. If you are self-employed and chose the 8% option under Section 24(A)(2)(b), there is no taxable income to compute for your business: the tax is 8% of gross sales or receipts and other non-operating income over ₱250,000. If you are unsure which class you are in, read who is required to pay income tax in the Philippines first.

Step 2: Add up gross income for the year

List every item of income received or earned in the calendar year: basic pay, allowances, overtime, 13th-month pay, bonuses and other benefits; and, for the self-employed, gross sales or gross receipts and other non-operating income. Use your payroll records and your invoices, bank deposits and platform payout reports. For what counts as income at all, see what income is subject to Philippine income tax.

Step 3: Set aside income taxed separately or exempt

Some income never enters the graduated computation:

• Passive income under final tax. Section 24(B)(1) imposes “a final tax at the rate of twenty percent (20%)” on interest from Philippine bank deposits, among other items. The bank withholds it; you do not add it to taxable income.
• Minimum wage earners. Under Revenue Regulations No. 8-2018, minimum wage earners “shall be exempt from the payment of income tax based on their statutory minimum wage rates,” and their holiday pay, overtime pay, night shift differential and hazard pay “are likewise exempt.” Any other income they earn is still counted.

Step 4: Remove the exclusions

Section 32(B) lists items that “shall not be included in gross income.” The two that affect almost every employee are:

• 13th-month pay and other benefits, under Section 32(B)(7)(e) as amended by TRAIN. The combined total is excluded up to ₱90,000; the excess is added back.
• Mandatory contributions and union dues, under Section 32(B)(7)(f): “GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.” Only your own share deducted from pay counts.

Other exclusions, such as life insurance proceeds, gifts and qualifying retirement benefits, apply only if you received them. De minimis benefits are a separate category defined by BIR regulations; their limits are not restated here.

Step 5: Subtract deductions (business and professional income only)

Section 34, as amended by Section 11 of TRAIN, opens with “Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed.” If you have business or professional income at graduated rates, choose one of two methods:

• Itemized deductions under Section 34, such as ordinary and necessary business expenses. In CIR v. Isabela Cultural Corporation, G.R. No. 172231 (February 12, 2007), the Supreme Court required that the expense be ordinary and necessary, paid or incurred during the taxable year, paid or incurred in carrying on the business, and “supported by receipts, records or other pertinent papers.” Deductions are strictly construed against the taxpayer.
• Optional standard deduction (OSD) under Section 34(L). Revenue Regulations No. 8-2018 states that for individuals, “OSD shall be computed at the rate of forty percent (40%) of gross sales/receipts.” The election “must be signified by checking the appropriate box in the income tax return filed for the first quarter” and is “irrevocable for the taxable year.”

Step 6: Combine the parts and apply the rate table

A mixed income earner on graduated rates “shall combine the taxable income from both compensation and business/practice of profession,” according to Revenue Regulations No. 8-2018. Apply the schedule once to the combined figure. Under the schedule for January 1, 2023 onward:

Source: Section 24(A)(2)(a) of the NIRC as amended by Section 5 of RA 10963. After computing the tax, compare it with the tax already withheld by your employer or clients, as shown on the certificates they issue, to see whether you still owe or have overpaid.

How does the calculation change for each type of taxpayer?

Use the row that matches you. Each row shows which steps apply.

The 8% option is open only where gross sales or receipts and other non-operating income do not exceed the VAT threshold of ₱3,000,000 in Section 109(BB). Above that, graduated rates apply.

Worked example: an employee who also freelances

Hypothetical example for illustration only, for a taxable year from January 1, 2023 onward. The contribution and expense figures are assumed, not computed from SSS, PhilHealth or Pag-IBIG tables. Percentage tax on the graduated-rate options is not computed here.

Bea earns a monthly salary of ₱35,000, a 13th-month pay of ₱35,000 and a ₱70,000 performance bonus. Her own mandatory contributions for the year are assumed to be ₱21,000. She earned ₱5,000 of interest on a savings account. On the side, she does freelance design work with ₱600,000 of gross receipts and ₱150,000 of documented expenses.

Her compensation

1. Gross compensation: ₱35,000 × 12 = ₱420,000, plus ₱35,000 13th-month pay and ₱70,000 bonus = ₱525,000.
2. 13th-month pay and bonus total ₱105,000. Only ₱90,000 is excluded; ₱15,000 stays taxable.
3. Exclusions: ₱90,000 + ₱21,000 contributions = ₱111,000.
4. Taxable compensation: ₱525,000 − ₱111,000 = ₱414,000.
5. The ₱5,000 bank interest was subject to 20% final tax (₱1,000) withheld by the bank. It is not added.

Her freelance income, three ways

1. OSD: 40% × ₱600,000 = ₱240,000. Taxable business income: ₱360,000. Combined: ₱414,000 + ₱360,000 = ₱774,000. Tax: ₱22,500 + 20% × ₱374,000 = ₱22,500 + ₱74,800 = ₱97,300, plus percentage tax.
2. Itemized: ₱600,000 − ₱150,000 = ₱450,000. Combined: ₱864,000. Tax: ₱102,500 + 25% × ₱64,000 = ₱102,500 + ₱16,000 = ₱118,500, plus percentage tax.
3. 8% option: tax on compensation is ₱22,500 + 20% × ₱14,000 = ₱25,300. Business tax is 8% × ₱600,000 = ₱48,000, with no ₱250,000 reduction for a mixed income earner. Total: ₱73,300, with no percentage tax.

No rounding is needed. Two lessons: the ₱15,000 of bonus above the ceiling is easy to miss, and a mixed income earner cannot take the ₱250,000 reduction on the business side because, as Revenue Regulations No. 8-2018 explains, it is already built into the 0% tier applied to compensation. Which option is cheaper depends on your own receipts and expenses, not on this example.

What mistakes throw off the calculation?

• Applying the rate table to gross salary instead of taxable compensation.
• Excluding the full 13th-month pay and bonuses when the total exceeds ₱90,000.
• Adding bank interest already subjected to final tax.
• Employees deducting work expenses, which Section 34 does not allow.
• Taking the OSD on gross income instead of gross sales or receipts, or switching methods mid-year.
• Applying the ₱250,000 reduction to the business income of a mixed income earner on the 8% option.

Your options and what to do next

If you earn only a salary

• Ask HR or payroll for your year-end certificate of compensation paid and tax withheld. Check that it shows gross compensation, non-taxable amounts and taxable compensation on separate lines.
• Total your 13th-month pay, bonuses and other benefits. If the total is over ₱90,000, the excess should appear as taxable.
• If the figures do not match your payslips, raise it with payroll before the year-end adjustment.

If you are self-employed or a professional

• Decide your method early: 8%, graduated with OSD, or graduated with itemized deductions. The OSD and 8% elections are made in the first quarter return and cannot be changed for the year.
• If you will itemize, keep invoices, receipts and proof of payment for every expense, matched to the year it was paid or incurred.
• Not yet registered? Start with BIR ORUS registration and your TIN, or visit the Revenue District Office (RDO) for your place of business.

If you have both

• Get your employer’s year-end certificate and your clients’ certificates of tax withheld.
• Compute taxable compensation first, then the business base for your chosen option, as in the example.
• File and pay through the channels your RDO assigns, such as eBIRForms, eFPS or an authorized agent bank.

For deadlines and filing obligations, see how Philippine income tax works for individual taxpayers; this guide does not restate them. First action: write your gross income for last year on one line, then list each subtraction beside the NIRC section that allows it. If a subtraction has no section, it does not belong.

Key takeaways

• Taxable income is pertinent gross income less authorized deductions (Section 31); the graduated rates apply to taxable income only.
• Work in order: total income, set aside final-tax and exempt items, remove exclusions, subtract deductions, combine, apply the table.
• 13th-month pay and other benefits are excluded only up to ₱90,000 in total.
• Employees get exclusions, not deductions; the self-employed choose itemized deductions or the 40% OSD on gross sales or receipts.
• Mixed income earners combine both taxable amounts on graduated rates, and cannot use the ₱250,000 reduction on business income under the 8% option.

Related: what income is excluded before Philippine tax is computed, with each Section 32(B) exclusion and its conditions, and gross income vs taxable income, for what the two terms mean.

Related: once you have your taxable income, see Philippine individual income tax rates explained for the rate that applies.

Frequently asked questions

What is the formula for taxable income in the Philippines?

Taxable income equals the pertinent items of gross income, less the deductions the law authorizes for that type of income (NIRC Section 31). In practice: total gross income, minus income taxed separately or exempt, minus exclusions, minus allowed deductions.

Do I compute tax on my gross salary or on my taxable compensation?

On taxable compensation. Section 24(A)(2) applies the graduated rates to taxable income, so you first remove exclusions such as 13th-month pay and other benefits up to ₱90,000 and your own GSIS, SSS, PhilHealth and Pag-IBIG contributions and union dues.

How much of my 13th-month pay and bonuses is excluded?

The combined total of 13th-month pay and other benefits is excluded only up to ₱90,000 under Section 32(B)(7)(e), as amended by the TRAIN Law. Anything above ₱90,000 is added back to taxable compensation.

Is the optional standard deduction based on gross income or gross receipts?

For individuals, the optional standard deduction is 40% of gross sales or gross receipts, not of gross income, under Section 34(L) as amended by the TRAIN Law and Revenue Regulations No. 8-2018. It is chosen in the first quarter return and is irrevocable for that taxable year.

Do I add bank interest to my taxable income?

No, not interest on a Philippine bank deposit. It is subject to a 20% final tax under Section 24(B)(1), withheld by the bank, so it is not added to the taxable income taxed at graduated rates.

How do mixed income earners compute taxable income?

Under Revenue Regulations No. 8-2018, a mixed income earner on graduated rates combines taxable compensation and taxable business income and applies the rate table once. On the 8% option, compensation is taxed at graduated rates and the 8% applies to gross sales or receipts without the ₱250,000 reduction.

Are minimum wage earners required to compute taxable income?

Minimum wage earners are exempt from income tax on their statutory minimum wage, and their holiday pay, overtime pay, night shift differential and hazard pay are also exempt under Revenue Regulations No. 8-2018. Other income they earn is still taxable.

Paano kinukuwenta ang taxable income mula sa gross income?

Simulan sa kabuuang kita mo sa taon. Ihiwalay ang kitang may final tax na at ang exempt, ibawas ang exclusions tulad ng 13th month pay hanggang ₱90,000 at ang sarili mong SSS, PhilHealth at Pag-IBIG, tapos ibawas ang deductions kung may negosyo ka. Ang matitira ang taxable income.

Pwede bang ibawas ng empleyado ang gastos niya sa trabaho?

Hindi. Ayon sa Section 34 ng NIRC na inamyendahan ng TRAIN Law, walang deduction para sa kitang galing sa employer-employee relationship. Exclusions lang ang ibinabawas sa sahod ng empleyado.

Kailangan ko pa bang kuwentahin ang taxable income kung 8% ang pinili ko?

Para sa negosyo o propesyon mo, hindi na. Sa 8% option, ang base ay gross sales o gross receipts na lampas ₱250,000 kung purely self-employed ka. Pero kung may sahod ka rin, kukuwentahin pa rin ang taxable compensation mo.

Sources

• National Internal Revenue Code of 1997 (RA 8424): Sections 24(B)(1), 31, 32(A), 32(B)(7)(f) and 34.
• RA 10963 (TRAIN Law): Section 5 (Section 24(A)(2)(a) schedule for January 1, 2023 onward; 24(A)(2)(b) and (c)); Section 9 (Section 32(B)(7)(e), ₱90,000 ceiling); Section 11 (Section 34 opening and 34(L)); Section 12 (repeal of Section 35); Section 109(BB) ₱3,000,000 threshold.
• BIR Revenue Regulations No. 8-2018 (official copy reproduced in DPWH Department Memorandum Circular No. 19, s. 2018): OSD computation and election, minimum wage earner exemption, mixed income earner rules.
• Supreme Court, Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007.

This guide is general information about Philippine tax law, not tax or legal advice for your situation. For your specific facts, consult a CPA, a tax lawyer or your BIR Revenue District Office.

Last correction: November 10, 2026. Added a Related link to the gross vs taxable income guide. Checked: RA 10963 Sections 5 (2023-onward schedule, Section 24(A)(2)(b) 8% option), 9 (₱90,000 ceiling), 11 (Section 34 opening and 34(L) OSD) and 12 (repeal of Section 35), the Section 109(BB) ₱3,000,000 threshold, and the worked-example arithmetic. No figures changed.

By the TaxCode.ph Editorial Team. Sources checked as of: November 10, 2026.