Employment Tax of Employee Who Has a Side Business Under the TRAIN LawAtty Elvin
Employment tax differs depending on the status, level of income, number of sources of income of employee.
While the double job approach is not yet popular in the Philippines unlike in many other countries, there are full-time employees who run a business on the side.
In such case, what is the tax implication? Does the 8% rate apply in this case?
The TRAIN law provides as well for the rate of tax on income of purely self-employed individuals and/or professionals whose gross sales or gross receipts and other non-operating income does not exceed the Value-Added Tax (VAT) threshold as provided in Section 109 (BB) of the Tax Code. (See discussion on page 70, Tax on Employee Compensation and Benefits 2nd Edition 2019 by Atty. Elvin B. Villanueva)
In effect, the TRAIN law amended Section 24 (A), (2), (b) of the Tax Code. Hence, self-employed individuals and/or professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of P250,000.00 in lieu of the graduated income tax rates under Subsection (A)(2)(a) and the percentage tax under Section 116 of the Tax Code.
The BIR points out that in the case of a purely self-employed/professional individual taxpayer who opted for the 8% income tax is no longer required to file and pay the 3% percentage tax. The 8% income tax rate is in lieu of the graduated income tax rates and the percentage tax under Section 116 of the Tax Code.
The 8% income tax rate shall be based on the gross sales/receipts and other non-operating income, net of returns and cash discounts. However, fi the individual earns income purely from business or practice of profession, he is entitled to the reduction of PhP250,000.00 before computing for the 8% income tax.
The point being is that only individuals earning income purely from self-employment and practice of profession are entitled to the amount allowed as reduction of PhP250,000.00 under Sec. 24 (A) (2) (b) of the Tax Code, as amended for the purpose of computing the 8% income tax.
For Mixed Income Earner, the excess of the PhP250,000.00 over the actual taxable compensation income is not deductible against the taxable income from business/practice of profession under the 8% income tax rate option. He is not entitled to the PhP250,000.00 reduction from business/practice of profession since said amount has already been applied in computing the income tax on compensation.
Hence, the total tax due shall be the sum of the tax due from compensation computed using the graduated income tax rates and the tax due from self-employment/practice of profession resulting from the multiplication of the 8% income tax rate with the total of the gross sales/receipts and other non-operating income.