Net Income and Taxable Income Calculation
Updated June 13, 2026
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Definition
Net income is your total gross income minus all allowable deductions as defined by the Bureau of Internal Revenue (BIR). It is the amount the graduated income tax rates are applied to, after exclusions for employees or business expenses for the self-employed.
Net income forms the foundation of Philippine income tax computation under the National Internal Revenue Code (NIRC). For employees, it is compensation minus mandatory contributions and tax-free benefits; employees cannot deduct expenses. For the self-employed and professionals, it is gross sales or receipts minus itemized business expenses or the 40% optional standard deduction. For corporations, it is gross income minus ordinary and necessary business expenses. Personal and dependent exemptions were repealed by the TRAIN Law (RA 10963) from 2018. The BIR distinguishes between different types of net income calculations depending on your taxpayer classification. Individual taxpayers report net compensation income on BIR Form 1700, while self-employed individuals and professionals use BIR Form 1701 or 1701A to declare net business income. Corporations file BIR Form 1702 showing net taxable income after all allowable deductions. Net income matters because it determines your final tax. Only the net amount is taxed at the graduated rates, and the first ₱250,000 of it is taxed at 0%, so an accurate calculation keeps you compliant and away from the penalties under Section 248 of the NIRC.
Detailed explanation
Definition
Net income is the amount remaining after subtracting all allowable deductions from your gross income. Under the National Internal Revenue Code, taxable income is gross income less the deductions and exemptions the Code allows (NIRC §31), and it forms the basis for computing your income tax liability. It is not the same as profit; net income is a tax concept that follows BIR rules, not accounting standards.
Gross Income vs. Net Income
Gross income includes all income from whatever source derived, unless specifically exempt by law (NIRC §32(A)). This includes salaries, wages, business profits, rental income, interest, dividends, and capital gains. Net income is what remains after you subtract allowable deductions from this gross total.
Allowable Deductions
The BIR permits deductions that are ordinary and necessary for earning income from business or profession. Employees cannot deduct expenses against compensation; what is left out of their taxable income is mandatory SSS, PhilHealth and Pag-IBIG contributions, 13th month pay and other benefits up to ₱90,000, and de minimis benefits. For self-employed individuals and businesses, deductions include cost of goods sold, salaries and wages, rent, utilities, depreciation, and other ordinary business expenses (NIRC §34(A)), or the 40% optional standard deduction on gross sales or receipts (NIRC §34(L)).
What Happened to Personal Exemptions
Until 2017, individuals could claim a ₱50,000 personal exemption and ₱25,000 for each qualified dependent, up to four. The TRAIN Law (RA 10963) repealed both from January 1, 2018. In their place, the first ₱250,000 of annual taxable income is taxed at 0%. Senior citizens and persons with disability have no separate income tax exemption unless they are minimum wage earners.
Non-Deductible Items
Certain expenses are not deductible even if incurred to earn income. These include personal, family, or living expenses (NIRC §36(A)(1)); bribes, kickbacks and similar payments (NIRC §34(A)(1)(c)); and wagering losses beyond wagering gains (NIRC §34(D)(6)). Donations are deductible only within the limits of NIRC §34(H). Disallowed deductions increase your taxable net income.
Net Income for Different Taxpayer Types
Employees: Gross compensation minus mandatory contributions and tax-free benefits equals taxable income.
Self-Employed and Business Owners: Gross sales or receipts minus cost of goods sold and operating expenses (or minus the 40% optional standard deduction) equals net taxable income.
Professionals (doctors, lawyers, accountants): Gross professional fees minus documented professional expenses (or the 40% optional standard deduction) equals net taxable income. Those with gross receipts of ₱3,000,000 or less may instead elect the 8% rate.
Computation Example
Juan dela Cruz earns ₱600,000 annually as an employee. His SSS, PhilHealth and Pag-IBIG contributions total ₱38,400, so his taxable income is ₱561,600. Income tax is ₱22,500 plus 20% of the ₱161,600 above ₱400,000, or ₱54,820.
Importance in Tax Planning
Understanding net income is critical for tax planning. Claiming every allowable deduction legally reduces your net income and therefore your tax liability. Keeping accurate records of business expenses, professional fees, and other deductible items is essential. The BIR requires documentation (receipts, invoices, contracts) to support claimed deductions during audit.
Why it matters
Net income determines how much income tax you owe. By understanding what deductions the BIR allows, you can legally reduce your taxable income and lower your tax bill. Employees, self-employed individuals, and business owners all benefit from knowing how to calculate net income correctly and claim all eligible deductions.
How it works
Identify Your Gross Income
List all income from all sources (salary, business revenue, rental income) unless exempt or already taxed through final withholding, such as bank interest and dividends (NIRC §32(A)). Include fringe benefits and allowances unless they qualify as tax-exempt under BIR rules.
Claim What the Law Allows
Employees take out SSS, PhilHealth and Pag-IBIG contributions, 13th month pay and other benefits up to ₱90,000, and de minimis benefits; they cannot deduct expenses. The self-employed deduct itemized business expenses with documentation or the 40% optional standard deduction on gross sales or receipts (NIRC §34(A), §34(L)).
Remember There Are No Personal Exemptions
The personal exemption (₱50,000) and the additional exemption for dependents (₱25,000 each) were repealed by the TRAIN Law from 2018. Their role is now played by the 0% rate on the first ₱250,000 of taxable income (NIRC §24(A), as amended by RA 10963).
Apply Tax Rate to Net Income
Apply the graduated rates from 2023 onward. Taxable income of ₱250,000 or less is taxed at 0%; over ₱250,000 to ₱400,000 at 15% of the excess; over ₱400,000 to ₱800,000 at ₱22,500 plus 20% of the excess; over ₱800,000 to ₱2,000,000 at ₱102,500 plus 25% of the excess (NIRC §24(A), as amended by TRAIN Law).
Examples
Salaried Employee, ₱600,000 Annual Income
Maria Santos earns ₱600,000 per year. Her SSS, PhilHealth and Pag-IBIG contributions total ₱38,400, so her taxable income is ₱561,600. Income tax is ₱22,500 + 20% × (₱561,600 minus ₱400,000) = ₱54,820 (NIRC §24(A)).
Self-Employed Professional, ₱800,000 Gross Receipts
Dr. Juan Reyes, a physician, earns ₱800,000 in professional fees with ₱200,000 of documented expenses (clinic rent, staff salaries, supplies). Itemized, his net income is ₱600,000 and income tax is ₱62,500. With the 40% optional standard deduction, net income is ₱480,000 and income tax is ₱38,500. Both routes add 3% percentage tax of ₱24,000, so the 8% option at ₱44,000 in total is cheapest (NIRC §24(A), §34).
Small Business Owner, ₱500,000 Net Sales
Anna Lim operates a retail store with ₱500,000 in annual sales. Cost of goods sold is ₱250,000 and operating expenses are ₱80,000, so net income is ₱170,000. That falls within the 0% bracket, so she owes no income tax, though 3% percentage tax of ₱15,000 applies on her sales unless she elected the 8% rate (NIRC §34(A), §24(A)).
Multiple Income Sources, ₱1,200,000 Total
Roberto Cruz earns ₱700,000 in salary and ₱500,000 in rental income. His salary minus ₱40,900 of contributions gives ₱659,100 of taxable compensation. With the 40% optional standard deduction, his net rental income is ₱300,000. Total taxable income is ₱959,100, and income tax is ₱102,500 + 25% × (₱959,100 minus ₱800,000) = ₱142,275 (NIRC §24(A)).
Senior Citizen Employee, ₱400,000 Annual Salary
Lola Teresa, age 65, earns ₱400,000 a year. After ₱32,500 of contributions, her taxable income is ₱367,500 and income tax is 15% × (₱367,500 minus ₱250,000) = ₱17,625. Senior citizens get no separate income tax exemption unless they are minimum wage earners (RA 9994).
Common misconceptions
- Myth: Net income and profit are the same thing.
- Fact: Net income is a tax concept based on BIR rules; profit is an accounting concept. They may differ because the Tax Code disallows or limits certain expenses that accountants allow (NIRC §34, §36).
- Myth: All business expenses are deductible from gross income.
- Fact: Only ordinary and necessary expenses incurred to earn income are deductible. Personal, living or family expenses are not deductible (NIRC §36(A)(1)), bribes and kickbacks are not deductible (NIRC §34(A)(1)(c)), and wagering losses are deductible only up to wagering gains (NIRC §34(D)(6)).
- Myth: Employees get a standard deduction of 13% of gross income.
- Fact: No such deduction exists. Employees cannot deduct expenses; their taxable income is compensation minus mandatory contributions and tax-free benefits, and the first ₱250,000 is taxed at 0% (TRAIN Law RA 10963).
- Myth: You still subtract a personal exemption before applying the tax rates.
- Fact: Personal and dependent exemptions were repealed from 2018. The 0% bracket on the first ₱250,000 of taxable income replaced them (NIRC §24(A), as amended by RA 10963).
- Myth: If you have a net loss, you owe no tax and the loss disappears.
- Fact: A net operating loss of a taxpayer using itemized deductions can be carried over to offset income in the next three consecutive taxable years (NIRC §34(D)(3)).
Questions people ask
How do I calculate net income if I have both salary and self-employment income?
Compute each part separately and add them. For the salary, take out mandatory contributions and tax-free benefits. For the business, deduct itemized expenses or the 40% optional standard deduction. Apply the graduated rates to the combined total; the first ₱250,000 is taxed at 0% (NIRC §24(A), §32(A), §34).
Can I deduct personal expenses like health insurance or car payments from my net income?
No. Personal, family, and living expenses are not deductible, even if they benefit your health or productivity (NIRC §36(A)(1)). Only ordinary and necessary business or professional expenses are deductible. Health insurance for employees may be deductible as a fringe benefit under specific BIR rules.
What happens if my deductions exceed my gross income?
You have a net operating loss and owe no income tax for that year. If you use itemized deductions, the loss can be carried over to offset income in the next three consecutive taxable years (NIRC §34(D)(3)). Taxpayers using the optional standard deduction cannot carry over losses.
Do I need receipts to claim deductions?
Yes. The BIR requires supporting documentation (receipts, invoices, contracts, bank statements) for all claimed deductions. Without documentation, the BIR may disallow the deduction during audit. Keep books and records for five years from the day after the return deadline (NIRC §34(A)(1)(b), §235).
Is there still a personal exemption?
No. The TRAIN Law repealed the ₱50,000 personal exemption and the ₱25,000 additional exemption per dependent from 2018. Instead, every individual pays 0% on the first ₱250,000 of taxable income. Senior citizens and persons with disability have no separate income tax exemption unless they are minimum wage earners.
Can employees claim a standard deduction?
No. There is no standard deduction for compensation income. Employees reduce their taxable income only through mandatory contributions, 13th month pay and other benefits up to ₱90,000, and de minimis benefits (NIRC §32(B), TRAIN Law RA 10963).
Can I claim both the standard deduction and itemized deductions?
No. Self-employed individuals and professionals choose either itemized deductions or the 40% optional standard deduction for the year, not both. Employees cannot claim either against compensation (NIRC §34(L)).
What is the difference between net income and taxable income?
For individuals the two are now the same figure, since personal exemptions no longer exist. Net income (gross income minus allowable deductions or exclusions) is the amount the graduated rates apply to. For example, net income of ₱500,000 is taxed at ₱22,500 + 20% × ₱100,000 = ₱42,500 (NIRC §24(A)).
In practice
- Employees must retain payslips and BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) to verify gross income and withholding when filing annual returns.
- Self-employed individuals and business owners must maintain detailed records (receipts, invoices, contracts, bank statements) for all claimed deductions; the BIR may disallow deductions lacking documentation during audit.
- Professionals claiming deductions for home office, vehicle, or equipment must allocate expenses proportionally to business use; personal portions are not deductible.
- Rental income is business income. Landlords deduct documented expenses or take the 40% optional standard deduction, or elect the 8% rate if they qualify (NIRC §24(A), §34(L)).
- Net operating losses from business or professional practice can be carried over for the next three consecutive taxable years to offset future income, but not by taxpayers who use the optional standard deduction (NIRC §34(D)(3)).
Next steps
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Sources & References (1)
Primary sources and the laws, regulations, and official issuances this page relies on. Links open the recorded source documents or references.
- LawPhil Project (Arellano Law Foundation). “NIRC §31, §34 (net income / allowable deductions): full text.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 31 and 34. Source checked .