The 8% income tax rate is a new law requiring sole proprietorship and professionals who are PRC registered to pay 8% tax on gross income. If you are a professional, it will be imposed on your gross receipts less the allowable expenses. If you are a sole proprietor, it will be imposed on your total revenue. If you own a professional services firm, it will be imposed on the total fees you charge for the services rendered by your employees of the covered profession.
Expert tax services in Manila say that the difference between the normal income tax rate and the 8% income tax rate is that the normal income tax ranges from 5% to 32% and depends on the total income earned. The 8% income tax rate is a new and lower tax rate that is applied to the gross income from professional practice.
How to Take Advantage of the 8% Income Tax Rate
You need to submit a copy of your certificate of registration and evidence that could prove that you have been paying your professional tax to BIR.
According accounting services in the Philippines, if you are self-employed and have gross sales that do not exceed PHP 3,000,000 and are not subject to percentage tax, you can choose from any of the following two options:
- Follow the graduated income tax rate or the regular rate
- Pay an 8% tax on your gross sales that should not exceed PHP 250,000
Who are Eligible for this Tax Option
According to the RMO No. 23-2018, the following criteria must be met to be eligible to avail of the 8% income tax rate:
- Must be a self-employed individual taxpayer (single proprietor, mixed-income earner, professional)
- Must be a non-VAT filer or subject to percentage tax
- Must express intention to avail the 8% income tax rate option
People who are not eligible for this are the following:
- Withholding Agents
- Non-VAT taxpayers whose total annual sales exceed PHP 3,000,000
- MWEs or Minimum Wage Earners
- Employer-Employee Relationships
- Partners of General Professional Partnerships
How to Apply for this Tax Rate
If you are eligible for the 8% income tax rate, you can have 8% tax on your registration income. Tax and accounting services in the Philippines suggest the following steps to apply for this tax rate and maximize your savings:
- To end-date the percentage tax on your registration income, you must submit Form 1905.
- If you did not end-date your percentage tax, submit BIR Form 2551Q with a notice of your 8% gross sales choice.
- Submit BIR Form 1701Q for the year with a notice of your 8% gross sales choice.
Choose one of the options if you want to avail of the 8% income tax rate:
- Through BIR Form 1905, update your registration
- Check the appropriate option in the new BIR Form 2551Q or 1701Q
Once you have chosen one of the options, it will be effective for the whole year and cannot be changed.
How to Compute for Tax Dues
To compute your tax using the 8% income tax rate, it would be your total gross sales/receipts less the non-taxable income of PHP 250,000, and multiply the difference by 8% income tax rate. If you are a mixed-income earner, there will be no deduction of PHP 250,000.
When Income Tax Return Should be Filed
Opting for the 8% income tax rate does not mean you don’t need to file for an annual income tax return. This is because the 8% tax rate is applied on to your quarterly income and not your annual income tax due.
You must file your income tax return no later than April 15 of the calendar year. Take note of the following:
- BIR Form 1700 for Individuals
- BIR Form 1701 for Mixed Income Earners
Making the Best Choice for YOU
If you choose the 8% flat rate, it will help you save money on your taxes. However, it is a fixed rate meaning it will not change even if your income will increase or decrease. It is also only available to individuals who are self-employed or have a small business. Make sure to weigh the pros and cons of both the normal tax rate and the 8% income tax rate before deciding which option to choose.
Don’t let the complexities of tax compliance overwhelm you! If you’re a self-employed individual or a small business owner in the Philippines, our experienced accounting firm is here to help you navigate the 8% income tax rate option. Take advantage of our expertise and ensure accurate filing, maximum tax savings, and peace of mind. Contact our accounting services in Pasig to get started on simplifying your taxes and optimizing your financial success.