The amount that your employees earn throughout the year before any deductions is called annual gross income (AGI). If you’ve always wondered what this type of annual income is and how to properly calculate it, our blog will walk you through the basics.
What is Annual Gross Income?
AGI describes an employee’s total earnings made within one year before deductions. In the Philippines, AGI comprises the following:
- Money received from services, including fees, salaries, wages, and commissions
- Gross income earned by running a business or working for an employer
- Gains from property dealings
- Royalties or payments received for the ongoing use of copyrighted works, franchises, or similar assets
- Dividends or money earned by a company’s shareholders
- Annuities or insurance contracts that provide regular payments right away or in the future
- Prizes and winnings
- Pensions or retirement funds for employees
- Distributive share from the net income of general professional partnerships
What Payments Aren’t Included?
Payments made to a life insurance plan or amounts received by the insured as return of premium aren’t part of AGI.
Gifts, bequests, and devises are also excluded from AGI. Bequests are properties given from an individual’s will, while devises are a gift of property made in will.
Other exclusions from AGI include:
- Compensation received when injured or sick
- Income exempt under treaty
- Retirement benefits, pensions, gratuities, or similar payments
- Miscellaneous items such as government benefits or 13th month pay and other benefits below ₱90,000
Why is Annual Gross Income Important?
Preparing for tax returns starts with AGI. Specific deductions and exemptions will apply, which turns the amount into adjusted gross income — and eventually, taxable income.
Knowing the AGI of your employees is also important because lenders only let individuals borrow a specific amount depending on their gross income. They’ll use an individual’s debt-to-income ratio (DTI) to determine how much money they can take out for a loan. Lenders compute DTI using this formula:
Monthly debt payments ÷ Monthly gross income = Debt-to-income ratio
How Do You Calculate Annual Gross Income?
When computing AGI, get an employee’s annual (gross) salary first. Take their monthly gross pay and multiply it by 12.
As an example, let’s say an employee is earning a gross income of ₱25,000 per month. Your calculation should look like this:
₱25,000 x 12 = ₱300,000
But if they’ve received different amounts of compensation throughout the year, add them up with their extra sources of income. Consider this formula:
₱300,000 (annual gross salary) + ₱100,000 (from property investments) + ₱10,000 (dividends) + ₱5,000 (interest) = ₱415,000
How Do You Compute Your Annual Income Tax?
We’ve mentioned that annual gross income becomes taxable income after certain deductions and exemptions. That said, let’s look at how you can calculate annual income tax in the Philippines.
Income Tax Rates
The government has set graduated tax rates for the following types of income:
- Compensation of local and foreign employees
- Compensation received by mixed-income earners
- Earnings of mixed-income and self-employed individuals from business or professional work
If an employee’s income falls under either of the first two categories, tax rates will automatically apply. But if they’re running a business or rendering professional services, these rates can be mandatory or optional.
Tax rates are mandatory for taxpayers with gross sales or receipts costing over ₱3,000,000. However, individuals can choose whether they want specific rates to cover their income or not if their gross sales or receipts fall to an amount of ₱3,000,000 or below.
Current Income Tax Rates
To help you calculate annual income tax, see the table of current income tax rates below.
|Annual Taxable Income||Tax Rate|
|₱250,000 and below||0%|
|Over ₱250,000 up to ₱400,000||20% of the excess over ₱250,000|
|Over ₱400,000 up to ₱800,000||₱30,000 + 25% of the excess over ₱400,000|
|Over ₱800,000 up to ₱2,000,000||₱130,000 + 30% of the excess over ₱800,000|
|Over ₱2,000,000 up to ₱8,000,000||₱490,000 + 32% of the excess over ₱2,000,000|
|Over ₱8,000,000||₱2,410,000 + 35% of the excess over ₱8,000,000|
Keep in mind that these rates will change starting January 1, 2023. See below:
New Income Tax Rates Starting January 1, 2023
|Annual Taxable Income||Tax Rate|
|₱250,000 and below||0%|
|Over ₱250,000 up to ₱400,000||15% of the excess over ₱250,000|
|Over ₱400,000 up to ₱800,000||₱22,500 + 20% of the excess over ₱400,000|
|Over ₱800,000 up to ₱2,000,000||₱102,500 + 25% of the excess over ₱800,000|
|Over ₱2,000,000 up to ₱8,000,000||₱402,500 + 30% of the excess over ₱2,000,000|
|Over ₱8,000,000||₱2,202,500 + 35% of the excess over ₱8,000,000|
Calculating Your Annual Income Tax
Compute annual income tax with this formula:
Taxable income (Gross income - Allowable deductions) x Tax rate - Tax withheld = Income tax due
Here’s the breakdown:
- Compute your annual gross salary first. We’ll use the monthly gross salary from our previous example and multiply it by 12: ₱25,000 x 12 = ₱300,000.
- Get the total annual employee contributions (they fall under allowable deductions).
- SSS - ₱25,000 x 0.045 = ₱1,125, then ₱1,125 x 12 months = ₱13,500
- PhilHealth - ₱25,000 x 0.035 = ₱875 ÷ 2 = ₱437.50, then ₱437.50 x 12 months = ₱5,250
- Pag-IBIG - ₱100 x 12 months = ₱1,200
- Add and get the total: ₱13,500 + ₱5,250 + ₱1,200 = ₱19,950
- Subtract total annual contributions from the annual salary. For example: ₱300,000 - ₱19,950 = ₱280,050
- Find the corresponding tax rate as indicated on the table provided above. The 20% rate with an excess over ₱250,000 applies to our example.
- Calculate your income tax due.
- Subtract the non-taxable ₱250,000 from your taxable income: ₱280,050 - ₱250,000 = ₱30,050
- Multiply the amount by 20%: ₱30,050 x 0.20 = ₱6,010
Get Annual Gross Income Computations Right
Errors can (and do) happen when calculating annual gross income. But with more streamlined payroll processes, you can avoid those mistakes. Break free from manual computation and use Sprout’s Payroll management tool.
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