Every employed Filipino with a taxable income has a duty to pay income tax — but many don't fully understand how it's computed. Understanding the TRAIN Law tax brackets, what counts as taxable income, and how withholding tax works helps you verify your payslip, plan your finances, and file your annual ITR with confidence.
Legal Basis: The TRAIN Law
The Tax Reform for Acceleration and Inclusion (TRAIN) Law, officially Republic Act No. 10963, took effect on January 1, 2018. It significantly restructured the Philippine personal income tax system in two phases:
- Phase 1 (2018–2022): Initial tax rate reductions and new tax-exempt thresholds
- Phase 2 (2023 onwards): Further reductions to the middle income brackets, currently in effect
— Employees earning ₱250,000 or less per year are completely exempt from income tax
— The top marginal rate is 35% for annual income above ₱8,000,000
— 13th month pay and bonuses are tax-exempt up to ₱90,000 per year
— Self-employed individuals with gross sales below ₱3,000,000 may opt for an 8% flat tax
Who Needs to Pay Income Tax?
The following individuals are required to file and pay income tax in the Philippines:
- Employees with annual taxable income exceeding ₱250,000
- Self-employed individuals and professionals
- Mixed income earners (both employment and business/professional income)
- Employees with two or more employers simultaneously
- Employees whose employers did not withhold tax correctly
— Employees earning ₱250,000 or less per year (approximately ₱20,833/month or below)
— Minimum wage earners — their basic pay, holiday pay, overtime pay, and hazard pay are all exempt
— Those whose only income is from a single employer and whose annual income is ₱250,000 or below
The TRAIN Law Tax Brackets (2023 Onwards)
Philippine income tax uses a progressive tax system — meaning different portions of your income are taxed at different rates. Only the income within each bracket is taxed at that bracket's rate, not your entire income.
| Annual Taxable Income | Tax Rate | Tax Formula |
|---|---|---|
| ₱0 – ₱250,000 | 0% | Exempt — no tax due |
| ₱250,001 – ₱400,000 | 15% | 15% of excess over ₱250,000 |
| ₱400,001 – ₱800,000 | 20% | ₱22,500 + 20% of excess over ₱400,000 |
| ₱800,001 – ₱2,000,000 | 25% | ₱102,500 + 25% of excess over ₱800,000 |
| ₱2,000,001 – ₱8,000,000 | 30% | ₱402,500 + 30% of excess over ₱2,000,000 |
| Above ₱8,000,000 | 35% | ₱2,202,500 + 35% of excess over ₱8,000,000 |
If your annual income is ₱600,000, you do NOT pay 20% on the entire ₱600,000. Instead:
— First ₱250,000 is taxed at 0% = ₱0
— Next ₱150,000 (₱250,001–₱400,000) is taxed at 15% = ₱22,500
— Remaining ₱200,000 (₱400,001–₱600,000) is taxed at 20% = ₱40,000
— Total tax = ₱62,500, not ₱120,000 (which would be wrong)
Step-by-Step Computation
Compute your gross annual income
Add all income from your employer for the year: basic salary × 12 months, plus any additional compensation like allowances that are taxable. Do not include non-taxable benefits at this stage.
Subtract non-taxable income and mandatory contributions
Deduct the following from gross income to arrive at taxable income: SSS/GSIS employee contributions, PhilHealth employee contributions, Pag-IBIG employee contributions. These mandatory government contributions are fully deductible. Also exclude non-taxable benefits such as de minimis benefits within the threshold and the ₱90,000 tax-exempt portion of 13th month pay and bonuses.
Identify your tax bracket
Compare your annual taxable income to the TRAIN Law tax table above. Find which bracket your income falls into — this determines your base tax and the applicable marginal rate on the excess.
Apply the tax formula
Use the formula for your bracket: base tax + (marginal rate × amount in excess of lower bracket limit). This gives you your annual income tax due.
Subtract tax already withheld
If your employer withholds tax monthly (BIR Form 1601-C), add up all the withholding tax deducted from your payslips during the year. Subtract this from your annual tax due. If the result is positive, you owe the difference. If negative, you are due a refund.
What Is Taxable Income?
Taxable income is your gross income minus all allowable deductions and exclusions. For employees, the computation is:
Non-Taxable Items = 13th month pay (up to ₱90,000) + de minimis benefits within limits
Mandatory Contributions = SSS + PhilHealth + Pag-IBIG (employee share)
| Income / Deduction Item | Taxable? |
|---|---|
| Basic monthly salary | ✅ Yes |
| Cost of Living Allowance (COLA) | ✅ Yes (unless specifically exempt) |
| Overtime pay | ✅ Yes |
| 13th month pay — first ₱90,000 | ❌ No — tax exempt |
| 13th month pay — above ₱90,000 | ✅ Yes — excess is taxable |
| De minimis benefits (within limits) | ❌ No — tax exempt |
| SSS employee contribution | ❌ No — deductible |
| PhilHealth employee contribution | ❌ No — deductible |
| Pag-IBIG employee contribution | ❌ No — deductible |
| Hazard pay (for minimum wage earners) | ❌ No — tax exempt |
| Night differential (for minimum wage earners) | ❌ No — tax exempt |
Worked Examples
Example 1: ₱25,000/month Employee (Exempt)
Example 2: ₱40,000/month Employee
Example 3: ₱80,000/month Employee
🧮 Quick Income Tax Estimator
Enter your monthly basic salary for a quick annual tax estimate. Uses 2023 TRAIN Law brackets.
Withholding Tax vs Annual Income Tax
Most employed Filipinos don't pay income tax directly to the BIR — their employer withholds it from their monthly salary and remits it on their behalf. This is called withholding tax on compensation.
- Monthly withholding tax: Your employer computes your estimated annual tax and withholds roughly 1/12 of it each month.
- Annual ITR (BIR Form 1700/1701A): At year-end, you reconcile the total tax withheld against your actual annual tax due.
- Tax refund: If too much was withheld (common when you changed jobs mid-year or had irregular income), you get a refund — either from your employer or by filing with the BIR.
- Tax still due: If too little was withheld, you pay the difference when you file your ITR, due on April 15 of the following year.
BIR Form 1700 (employees with income from one employer only) — April 15 annually
BIR Form 1701 (mixed income earners, self-employed) — April 15 annually
BIR Form 1701Q (quarterly ITR for self-employed) — May 15, August 15, November 15
Most rank-and-file employees with a single employer and correctly withheld tax are covered by the substituted filing system — their employer files on their behalf using BIR Form 2316, so they don't need to file separately.
The 8% Flat Tax Option for Self-Employed
Self-employed individuals and professionals whose gross sales or receipts do not exceed the VAT threshold of ₱3,000,000 per year may choose to pay a flat 8% income tax on gross sales/receipts and other non-operating income in excess of ₱250,000, instead of using the graduated brackets.
The 8% option is simpler (no need to track deductions) and often lower for self-employed individuals with few business expenses. However, if your business has significant allowable deductions (rent, supplies, salaries), the graduated rate with deductions may result in lower tax. Compare both scenarios to choose the most beneficial option. This election must be made every year when filing the first quarterly ITR.
De Minimis Benefits
De minimis benefits are small perks given to employees that are exempt from income tax within prescribed limits. Common examples include:
| Benefit | Tax-Exempt Limit |
|---|---|
| Monetized unused vacation leave (private) | Up to 10 days per year |
| Medical cash allowance to dependents | ₱1,500/month or ₱18,000/year |
| Rice subsidy | ₱2,000/month |
| Uniform and clothing allowance | ₱6,000/year |
| Actual medical benefits | ₱10,000/year |
| Laundry allowance | ₱300/month |
| Employee achievement awards (in kind) | ₱10,000/year |
| Christmas gift / anniversary gift | ₱5,000/year |
| Daily meal allowance for overtime | 25% of basic daily minimum wage |
Any de minimis benefits that exceed these limits are added to the employee's other taxable compensation and become subject to income tax.
Frequently Asked Questions
Do I need to file an ITR if my employer withholds tax?
Most rank-and-file employees with a single employer are covered by the substituted filing system. Their employer's submission of BIR Form 2316 serves as their ITR. However, you must file your own ITR if you have multiple employers, earn business or professional income, or had insufficient withholding.
What happens if I don't file my ITR?
Failure to file carries a 25% surcharge on the tax due, plus 12% annual interest on unpaid tax, plus a compromise penalty. Criminal prosecution is also possible for willful failure to file. Always file on time — even if you have no tax due, you may still be required to file.
How do I know if I am due for a refund?
At year-end, your employer should provide you with BIR Form 2316 showing total compensation and total tax withheld. If the tax withheld exceeds your computed annual tax, you have excess withholding — your employer may refund this directly, or you can claim it when filing your ITR.
What is the difference between BIR Form 1700 and 1701?
Form 1700 is for employees who earn compensation income only (from one or more employers). Form 1701 is for self-employed individuals, professionals, and mixed-income earners who combine employment income with business or professional income.
1. Employees earning ₱250,000 or less annually are fully exempt from income tax
2. Tax is computed using progressive brackets — only the income in each bracket is taxed at that rate
3. Mandatory contributions (SSS, PhilHealth, Pag-IBIG) are deducted before computing taxable income
4. 13th month pay is tax-exempt up to ₱90,000 per year
5. Most employees are covered by substituted filing via BIR Form 2316
6. Self-employed may choose the 8% flat tax if gross receipts are below ₱3,000,000
7. ITR deadline is April 15 of the following year
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