Taxable income and income subject to personal income tax are two fundamental concepts, yet they often cause confusion during tax declaration and settlement for both individuals and businesses. According to statistics from the General Department of Taxation, thousands of errors in tax settlements occur annually due to incorrect determination of deductible items, leading to unnecessary late payments or tax arrears. Understanding these regulations is crucial. Personal Income Tax Law No. 04/2007/QH12 And consolidated accounting documents are a mandatory requirement for accountants.
The importance of clearly distinguishing between taxable income and income subject to personal income tax (PIT) is not only about complying with the law but also about helping individuals optimize their legitimate tax benefits. This is especially relevant in the context of adjusted regulations regarding personal allowances. Resolution 954/2020/UBTVQH14, Understanding the true nature of different types of income will help businesses minimize legal risks. This article from MAN experts will provide a detailed analysis of all the in-depth aspects of this issue.
The legal nature of taxable income and income subject to personal income tax.
To fully understand the tax calculation process, we first need to place these concepts within the context of the current legal framework.
Definition of Taxable Income as stipulated by regulations
Taxable income is the total amount of income an individual receives from various sources during the tax period, after deducting tax-exempt income. According to Article 2 of Circular 111/2013/TT-BTC, taxable income from salaries and wages includes salaries, fees, allowances, and subsidies (excluding deductions as prescribed).
The determination taxable income Taxable income requires a clear distinction between what is "received" and what is "taxable." Taxable income is the "input" of the tax calculation, including monetary and non-monetary benefits that employers pay to employees.
Definition of Taxable Income
Taxable income is the remaining income after deducting allowances such as personal allowances, mandatory insurance contributions, charitable and humanitarian contributions, and educational contributions from taxable income. This is the final figure which is then multiplied by the progressive tax rate.
In our auditing practice, we have found that many accountants often overlook voluntary contributions or incorrectly determine dependent deductions, leading to discrepancies in taxable income and net income. personal income tax.
The formula for calculating and the relationship between taxable income and income subject to personal income tax.
Applying standardized formulas is key to ensuring accuracy in financial reporting and tax settlement documents.
General formula
The relationship between these two indicators is expressed by the following formula:
|
Taxable income = Taxable revenue – Deductions |
In this case, taxable income is calculated as follows:
|
Taxable income = Total income – Tax-exempt amounts |
Detailed comparison table of taxable income and income subject to personal income tax.
Below is a summary table to help you quickly distinguish between these two concepts in tax accounting:
| Criteria | Taxable income | Taxable income |
| Legal basis | Article 2 of Circular 111/2013/TT-BTC | Article 7 of Circular 111/2013/TT-BTC |
| Scope | Broad (covers most income) | Narrow (referring to the remaining income subject to tax) |
| Exclusions | Tax-exempt income (holiday pay, hazardous work allowance, etc.) | Deductions (family allowance, insurance, charity) |
| Purpose | Determine the total income level that must be included in the management scheme. | Determine the exact amount of tax payable to the government. |
| Order of determination | Predetermined | Determine later |
Tax-exempt income – A prerequisite for determining taxable income.
Before calculating taxable income and income subject to personal income tax, accountants need to filter out items that are not subject to tax (tax-exempt income).
Income from compensation and insurance
According to regulations, compensation from life insurance, non-life insurance, and work-related accident compensation are not included in taxable income. This is to protect the social security rights of workers in risky situations.
Special allowances and subsidies
Not all income is included in taxable income and personal income tax. Allowances stipulated by the State for hazardous and dangerous work, regional allowances, severance pay, and unemployment benefits under the Labor Code are all excluded when calculating taxable income.
Deductions from taxable income for personal income tax purposes.
This is the most important part of converting taxable income to income subject to tax.
Personal deductions according to Resolution 954/2020/UBTVQH14
Currently, personal allowance It is currently being applied as follows:
- For the taxpayer themselves: 11 million VND/month (132 million VND/year).
- For each dependent: 4.4 million VND/month.
Accurately determining the number of dependents and the period of deductions is crucial for correctly calculating taxable income and personal income tax.
Mandatory insurance contributions
Social insurance, health insurance, unemployment insurance, and professional liability insurance for certain specific occupations will be deducted directly from taxable income. At MAN, when providing tax accounting services, we always carefully review payroll to ensure that deductions are made correctly according to regulations.
Charitable and humanitarian contributions
Contributions to organizations and facilities that care for and nurture children in extremely difficult circumstances, people with disabilities, and elderly people without support, as recognized by the State, will be deductible from income before tax calculation.
Example illustrating the calculation of taxable income and income subject to personal income tax.
To clarify further, let's consider a practical example of how taxes are calculated for a professional working in Vietnam.
Situation: Mr. A's total monthly income is 50,000,000 VND. This includes:
- Lunch allowance: VND 730,000 (maximum amount not included in taxable income).
- Telephone allowance: 500,000 VND (according to company regulations).
- Mr. A has two young children (dependents).
- Mandatory insurance contributions (10.5%): Calculated based on the maximum insurance contribution salary.
Step 1: Calculate taxable income
Taxable income = 50,000,000 – 730,000 = 49,270,000 VND. (Assuming the telephone allowance is within the exempted allowance as per company regulations).
Step 2: Calculate deductions
- Personal deduction: 11,000,000 VND.
- Dependent deduction: 4,400,000 x 2 = 8,800,000 VND.
- Compulsory insurance (Assumed): ~4,000,000 VND.
- Total deductions = 11,000,000 + 8,800,000 + 4,000,000 = 23,800,000 VND.
Step 3: Calculate taxable income
Taxable income = 49,270,000 – 23,800,000 = 25,470,000 VND.
Clearly, the difference between taxable income and income subject to personal income tax in this case is nearly 24 million VND. Without understanding the deductions, the amount of tax payable will increase significantly.
Common mistakes when settling personal income tax.
During the process of providing tax settlement and tax reporting services to hundreds of businesses, MAN has identified the following common errors:
Confusion between total income and taxable income.
Many businesses use the entire payroll figure to calculate taxes, forgetting to exclude tax-exempt allowances. This unnecessarily increases the tax burden on employees.
The dependent's supporting documents are invalid.
Declaring dependents without birth certificates, confirmation from local authorities, or delaying tax registration for dependents can lead to the tax authorities rejecting the deduction when determining taxable income and personal income tax.
Failure to keep up-to-date with new legal documents.
Tax laws are frequently supplemented with circulars and official documents (such as Circular 92/2015/TT-BTC). Using outdated regulations can lead to systemic errors in tax reporting.
Professional personal income tax settlement process at businesses.
To effectively manage taxable income and income subject to personal income tax, businesses need to establish a standardized process.
Collect and classify income documents.
Accountants need to gather all documents related to salaries, bonuses, and other benefits. Proper classification from the outset helps determine exactly which items are taxable income.
Review the list of tax deductions.
Annually, businesses are required to ask employees to update their family circumstances. This serves as the legal basis for determining the deduction amount when calculating taxable income.
Use the Tax Declaration Support Software (HTKK).
The application of technology helps minimize manual calculation errors. However, users still need to understand the nature of taxable income and income subject to personal income tax to verify the validity of the data.
The role of tax consultants in optimizing taxable income and personal income tax liability.
In the digital age, tax authorities are increasingly tightening their management through electronic data. Self-assessment of tax returns sometimes carries more risks than cost savings.
Professional tax consulting services help businesses:
- Develop a smart compensation structure, optimizing tax-exempt allowances.
- Ensure that your personal allowance claim documents are always complete and submitted on time.
- Representing clients in dealings with tax authorities during audits and inspections regarding taxable income and personal income tax (PIT) calculation.
MAN – Master Accountant Network proudly serves as a trusted partner providing comprehensive tax solutions, helping businesses focus on growth with peace of mind.
Conclude
Taxable income and income subject to personal income tax are inseparable links in the personal income tax system in Vietnam. Understanding and accurately applying these regulations not only helps individuals fulfill their civic duties but also serves as a tool for businesses to effectively manage financial risks. In the context of a volatile economy, tax policies are constantly updated to suit changing realities, requiring accountants to possess keen insight and solid, in-depth knowledge.
To support businesses and individuals in effectively handling personal income tax-related transactions, MAN – Master Accountant Network provides a comprehensive and professional accounting and tax service ecosystem. From auditing to ensuring the transparency of financial reporting, tax consulting optimize and update policies, to settlement services and tax reporting In a comprehensive package, MAN helps clients mitigate risks and ensure compliance with and timely fulfillment of tax obligations.
Service contact information at MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- Email: man@man.net.vn
Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
Frequently Asked Questions about Taxable Income and Income Subject to Personal Income Tax
Yes. Tet bonuses and holiday bonuses are considered income from salaries and wages and must be added to taxable income to determine the amount of personal income tax payable.
Yes, if the parents are outside of working age or are of working age but are disabled, unable to work, and have an average monthly income of no more than 1,000,000 VND.
Remember: Taxable income is income after exemptions, while income subject to tax is income after deductions. Is the Tet bonus included in taxable income?
Can I claim a tax deduction for my elderly parents?
How can you quickly distinguish between taxable income and income subject to personal income tax?
