What to Expect: 8% Income Tax Rate on Gross Sales/Receipts

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One of the most intriguing provisions of Train Law since its effectivity in 2018 is the 8% income tax rate on gross sales/receipts. This is a filing option available for individuals who are under the self-employed category. But tax services in Manila caution that this is not for everyone as certain considerations apply. Learn more about this below:

Who is Eligible for This Tax Option?

If you are self-employed, take note that this option is available only for those who have gross sales and non-operating income that do not exceed the three million pesos VAT threshold and should not be subject to other kinds of percentage tax.

Small businesses owned by a corporation cannot avail of this option. The 8% income tax rate option is strictly applicable only to certain types of business activities that sole proprietors undertake. Some examples include consultancy services, convenience store businesses, or the practice of a profession.

With that case in mind, you can have the option to avail of the graduated income tax rates which follow the regular rates for individuals, or avail of the 8% income tax rate option on gross sales/receipts in excess of two hundred fifty-thousand pesos (P250,000).

The Benefits of Choosing This Tax Rate

According to tax and accounting services in the Philippines, you will experience simplified taxation if you choose to avail of the 8% income tax rate option. You also don’t need to separately settle the percentage and income tax because this option will already cover both taxes.

Aside from that, you don’t need to account for other expenses when you compute your taxes. If you purely earn through business income, what you need to do when computing is to add up your gross sales/receipts, deduct P250,000 (non-taxable), and once you get the difference, you then multiply it with 8% so you can get to your tax payable. You can simply use the following formula to get to your tax payable.

(Total of Gross Sales/Receipts – 250,000) (8%)

A reminder to you and other self-employed individuals that this option should not automatically be your choice. Tax and audit services in Pasig said that the 8% tax rate is imposed on gross sales/receipts, and deductions on business expenses are not allowed. It is crucial that you still do your computations and make sure that you will choose the option that would benefit you the most. 

In general, the 8% tax rate option is mostly preferred for those engaged in the sale of services or professionals whose expenses are minimal. For those who have huge operating expenses and cost of sales, the 8% tax rate option may not be a good option because it may yield a higher tax payable to the BIR. However, the administration requirements for this option are simplified. With that in mind, businesses should take time to weigh the advantages and disadvantages to help them decide and choose the option that would most benefit them.

Important Details to Remember

If you want to avail of this option, according to the Revenue Memorandum Order No. 23-2018, these are the criteria you need to follow:

  • Your gross sales/receipts and non-taxable income should not exceed the VAT threshold of three million pesos
  • You need to be a self-employed taxpayer, either a single proprietor, a mixed-income earner, or a professional.
  • You need to be registered and subject to percentage tax or be a non-VAT filer.
  • You need to express your intention of availing the 8% income tax rate option

You will not be qualified if you fall into one of the following:

  • A business owned by a corporation
  • Income Earner through Compensation
  • VAT registered taxpayer (depends on the amount of gross sales or receipts)
  • Exempted from VAT but exceeds the three million peso VAT threshold
  • Taxpayers subject to other types of Income Taxes
  • Partner of a General Professional Partnership (GPP)

The following are guidelines for you if you plan and want to apply for the 8% income tax rate option:

Existing Taxpayer

  • You need to file Form 1905 (Application for Registration Information Update)
  • You need to file Form 2551Q (Quarterly Percentage Tax Return) and/or Form 1701Q (Quarterly Income Tax Return)

New Taxpayer

  • File the Form 1901 (Application for Registration for Self-Employed and Mixed Income Individuals, Estates or Trusts) and/or file Form 1701Q (Quarterly Income Tax Return)
  • File Form 2551Q (Quarterly Percentage Tax Return) and/or File Form 1701Q (Quarterly Income Tax Return) for the initial quarter of the taxable year

If you need assistance in determining if the 8% tax rate on gross sales and receipts are more beneficial for you, careful analysis is key. If numbers are not your cup of tea, our team offering one of the best accounting services in the Philippines can help you determine if this option is the most favorable one for your pocket.