Gross and Net Income Lecture Notes

Gross and Net Income Fundamentals

• Gross Income: Defined as the total earnings of an individual before any deductions are made. It represents the full amount of compensation received for work performed.

• Net Pay: Often referred to as "take-home pay," this is the actual amount an employee receives after all mandatory and voluntary deductions are subtracted from the gross pay.

• Deductions: These are specific amounts subtracted from gross pay by law (mandatory) or by mutual agreement (voluntary) between the employer and employee.

Mathematical Formulas for Income

• The calculation for Gross Income is as follows: $\text{Gross Income} = \text{Salary} + \text{Allowances}$

• The calculation for Net Pay is as follows: $\text{Net Pay} = \text{Gross Income} - \text{Total Deductions}$

Common Deductions in the Philippines

Social Security System (SSS)

• Applicability: Primarily for private sector employees.

• Purpose: Provides benefits for retirement, disability, maternity, sickness, and death.

• Rate: The employee share is calculated as $5\%$ of the monthly salary, with a maximum cap of $\text{₱}\,1,350$.

Government Service Insurance System (GSIS)

• Applicability: Restricted to government employees only.

• Purpose: Provides life insurance, retirement, disability, and survivorship benefits.

• Rate: The employee share is $9\%$ of the monthly salary, typically rounded to the nearest peso.

Pag-IBIG Fund (HDMF)

• Applicability: Required for all employees.

• Purpose: Provides access to housing loans, savings programs, and calamity loans.

• Rate: Calculated as $2\%$ of the monthly salary, with a mandatory cap of $\text{₱}\,200$.

PhilHealth

• Applicability: Required for all employees.

• Purpose: Provides healthcare benefits and hospitalization coverage.

• Rate: The total rate is $5\%$ of the monthly salary, which is shared equally between the employee and the employer (the employee share is effectively $2.5\%$).

Withholding Tax (BIR)

• Applicability: Required for all employees earning above a certain threshold.

• Purpose: Represents income tax collected in advance by the employer on behalf of the Bureau of Internal Revenue (BIR).

• Rate: Determined by a progressive tax table based on the employee's monthly salary bracket and applicable exemptions.

BIR Income Tax Table (Effective 2025)

Optional or Conditional Deductions

These deductions are not mandated by law in every instance but depend on specific agreements between the employer and employee:

• Loans: Repayments for company loans or external financial aid.

• Cash Advances: Repayment of salary levels taken in advance.

• Insurance Premiums: Optional private health or life insurance plans.

• Union Dues: Mandatory fees for members of a labor union.

• Absences/Tardiness: Deductions based on missed work hours or late arrivals.

Practical Examples and Calculations

Example 1: Factory Worker (Anna)

• Scenario: Anna earns $\text{₱}\,550$ per day and worked for $22$ days this month.

• Gross Income Calculation: $\text{₱}\,550 \times 22 = \text{₱}\,12,100.00$

• Deductions Breakdown:

  • SSS: $\text{₱}\,12,100.00 \times 5\% = \text{₱}\,605.00$

  • PhilHealth: $(\text{₱}\,12,100.00 \times 5\%) \div 2 = \text{₱}\,302.50$

  • Pag-IBIG: Maximum of $\text{₱}\,200.00$

  • Tax: Exempted (Income falls below tax bracket)

• Total Deductions: $\text{₱}\,605.00 + \text{₱}\,302.50 + \text{₱}\,200.00 = \text{₱}\,1,107.50$

• Net Pay Calculation: $\text{₱}\,12,100.00 - \text{₱}\,1,107.50 = \text{₱}\,10,992.50$

Example 2: Hourly Worker with Overtime (James)

• Scenario: James earns $\text{₱}\,75/\text{hour}$. He worked $160$ regular hours and $10$ Overtime (OT) hours at a $125\%$ rate.

• Gross Income Calculation:

  • Regular Pay: $160 \times \text{₱}\,75 = \text{₱}\,12,000.00$

  • OT Pay: $10 \times \text{₱}\,75 \times 1.25 = \text{₱}\,937.50$

  • Total Gross: $\text{₱}\,12,937.50$

• Deductions Breakdown:

  • SSS: $\text{₱}\,12,937.50 \times 5\% \approx \text{₱}\,647.00$

  • PhilHealth: $\text{₱}\,12,000.00 \times 2.5\% = \text{₱}\,300.00$

  • Pag-IBIG: $\text{₱}\,12,000.00 \times 2\% = \text{₱}\,200.00$

  • Withholding Tax: Exempted

• Total Deductions: $\text{₱}\,647.00 + \text{₱}\,300.00 + \text{₱}\,200.00 = \text{₱}\,1,147.00$

• Net Pay Calculation: $\text{₱}\,12,937.50 - \text{₱}\,1,147.00 = \text{₱}\,11,790.50$

Example 3: Public School Teacher (Ms. Rivera)

• Scenario: Monthly salary of $\text{₱}\,71,511.00$ plus a non-taxable allowance of $\text{₱}\,2,000.00$. She has a GSIS loan of $\text{₱}\,5,000.00$.

• Gross Income Calculation: $\text{₱}\,71,511.00 + \text{₱}\,2,000.00 = \text{₱}\,73,511.00$

• Deductions Breakdown:

  • GSIS: $\text{₱}\,71,511.00 \times 9\% = \text{₱}\,6,435.99$

  • PhilHealth: $\text{₱}\,71,511.00 \times 2.5\% = \text{₱}\,1,787.78$

  • Pag-IBIG: $\text{₱}\,200.00$

  • Withholding Tax: $\text{₱}\,9,752.75$ (Based on annual taxable income of approximately $\text{₱}\,853,132$)

  • Loan: $\text{₱}\,5,000.00$

• Total Deductions: $\text{Total} = \text{₱}\,23,176.52$

• Net Pay Calculation: $\text{₱}\,73,511.00 - \text{₱}\,23,176.52 = \text{₱}\,50,334.48$

Exit Ticket Activity

• Problem: Ariel earns a base salary of $\text{₱}\,10,000.00$ and a $10\%$ commission from $\text{₱}\,80,000.00$ in sales.

• Task:

  1. Compute the gross income.

  2. Estimate deductions (Note: Pag-IBIG is capped at $\text{₱}\,100$ for this scenario).

  3. Calculate the final net income.