Comparison for Income Tax Rates in the Philippines – Graduated IT Rates vs 8% IT Rate (With Sample Computations)

Due to the RMC 60-2020 of the Bureau of Internal Revenue, many non-registered sellers and freelancers are called to register and pay taxes. There are Graduated Income Tax Rates, na base lang sa taxable, and 8% Income Tax Rates. This article is for those people or business whose gross sales or receipts (wala pang expenses puro Sales lang) is below PHP 3,000,000 (3M) as its better for that above 3M to have a CPA or accountant. If you were to choose – Graduated IT Rates or 8% IT Rate, read what is better for you!

Taxation became my favorite topic during CPA review classes since my reviewer was so cool. It was way back in 2012; the Train Law was implemented 6 years later. What the Train Law has that was not in our lessons was this 8% option, which you can use instead of the Graduated Rates and Percentage Tax.

I hope you can learn more about it here. P.S. This article is for those NON-VAT and earning less than PHP 3M per year, if you are not one, it’s better to consult your accountant.

Who can Avail the Income Tax Rates?

• Individual Citizens (or Resident Aliens) earning Purely Compensation Income – yung may mga sweldo
• Individuals Engaged in Business – Self-employed, hindi corporation as they usually use 30%, yung online sellers dito
• Practice of Profession – Doctors, Lawyers, Accountants (yung may PRC Card) or athletes, writers, etc. Mga freelancers and yung mostly nag-work from home ay under dito

The default tax rate is the Graduate IT Rates, pwede syang gamitin sa mga lahat sa listahan. However, yung 8% IT rate ay may conditions:

• Purely Self-Employed Individuals and/or Professionals with gross sales/receipts and non-operating income not exceeding PHP 3,000,000
  • pure meaning hindi ka mixed earner (example ng mixed-income earner is may sweldo from the company you are working at plus you have sideline na online business)
  • you are only taxed 8% in excess of PHP 250,000 – if less than 250K, zero tax mo
• If you are mixed-income earner – for sweldo Graduated Rates are used and for Business Income or Practice of Profession graduated rates or 8% it rates kaso you won’t have 250K deductions, Gross Sales/Receipts multiplied by 8% na yan

Graduated IT Rates Computation

You’ll be using the tax table if you opt for this. If you used this, you could choose between Itemized Deductions and Optional Standard Deduction. You will also be asked to file 3% Percentage tax.

The formula is usually:

Gross Sales / Receipts – Cost of Sales/Services = Gross Income – Deductions = Net Income

With Itemized Deductions

Itemized Deductions are the expenses that are allowed to be deducted to your gross income. The usual are:

• Depreciation – if you have buildings or equipment)
• Contributions – SSS, Philhealth, HDMF
• Taxes and Licenses – yung binayad mo sa BIR at sa pagkuha ng Mayor’s Permit, etc.
• Transportation and Travel

Please note that not all can be used under Itemized deductions, like professional fees na walang withholding tax or personal items na hindi para sa negosyo.

Gross Sales/Receipts – Yung sales nyo for the whole quarter or year, wala pang deductions or total fee from your client

Less Cost of Sales or Services – For sellers, it’s usually Beginning Inventory + Purchases – Ending Inventory, for services, you can use your direct cost and expenses.

It will equal to Gross Income.

You can also additionally deduct that in itemized deductions to have your Net Income. Net Income will be used as the basis for your Income Tax.

Example 1:

Gross Sales or Receipts: PHP 400,000
Less COS:                           –       150,000
Gross Income =                PHP 250,000
Itemized Deductions       –         50,000
Net Income                       PHP 200,000

Tax Due                             PHP            0

Why is tax due zero? Because hindi sya naka abot sa 250,000 as per the tax table.

Example 2 :

Gross Sales or Receipts: PHP 500,000
Less COS:                           –       150,000
Gross Income =                PHP 350,000
Itemized Deductions       –         50,000
Net Income                       PHP 300,000

Tax Due                             PHP  10,000

Why is it 10k? Net Income is PHP 300K; when you see the tax table, it says 20% in excess of 250K. So 300K – 250K = 50K x 20% = 10K.

This is a bit tedious, and you need to be careful with the deductions and computation of COS. When you get audited, especially if your income is high but you have zero tax due, and the BIR officers saw that you erroneously considered a few expenses as Itemized, but it’s really not, then you get to pay the penalty and the correct tax. It’s better to consult with a bookkeeper or accountant if you opt for this.

Please also note that with Itemized deductions, you will need to pass an income statement and financial statement during your Annual Income Tax Return.

With Optional Standard Deduction

OSD is quite simple. You will have a 40% deduction of your gross sales or receipts; the rest is net income—no more computation of Cost of Sales or Services or Itemized deductions. Also, you won’t submit a Financial Statement or Income Statement to the BIR, unlike the Itemized deduction.

Example 1:

Gross Sales or Receipts: PHP 400,000
OSD                                  –        160,000
Net Income                     PHP  240,000

Tax Due                            PHP            0

Why is tax due zero? Because hindi sya naka abot sa 250,000 as per the tax table.

Example 2:

Gross Sales or Receipts: PHP 500,000
OSD                                  –        200,000
Net Income                     PHP  300,000

Tax Due                          PHP    10,000

Computation is per tax table.

Percentage Tax Computation

Please note you will also be paying percentage tax, which is the 2551Q every quarter and year. It will be 3% of your gross sales or receipts.

Example:

Gross Sales or Receipts: PHP 50,000 x 3% = 1,500

8% IT Rates Computation

For the 8%, IT rate it’s pretty easy. It’s 8% Income Tax on Gross Sales/Receipts instead of Graduated IT Rates and Percentage Tax. Meaning wala ng percentage tax (2551), yung income tax nalang (1701).

However, wala na tong deductions like Itemized or OSD. You can have PHP 250,000 deduction if you are a purely self-employed and/or professional with gross below PHP 3M. If you are mixed, may sweldo at may sideline na online business, you won’t have PHP 250,000 deduction.

Example 1 for pure income earners:

Gross Sales or Receipts: PHP 300,000
Deduction                        –        250,000
Taxable Income                PHP   50,000

Tax Due                           PHP     4,000

It’s Taxable Income multiplied by 8%—no need to refer to the tax table.

Example 2 for mixed-income earners:

Gross Sales or Receipts: PHP 300,000
Deduction                        –                  0
Taxable Income                PHP 300,000

Tax Due                           PHP     24,000

For the business income lang yan, hindi pa kasama yung tax sa sweldo.

Example 3 for pure income earners:

Gross Sales or Receipts: PHP 400,000
Deduction                        –        250,000
Taxable Income                PHP 150,000

Tax Due                           PHP    12,000

Comparison of Payments

You should note that Graduated IT Rates – you will pay income tax and percentage tax, but you can claim deductions.

For 8% – no need to pay 3% percentage tax and you can only claim PHP 250,000 allowable reduction if you are a pure income earner.

Comparison 1:

For Graduated

Percentage Tax = 250,000 * .03 = 7,500
Income Tax = 250,000 – 100,000 (OSD) = 150,000 = Zero

For 8%

Percentage Tax = None
Income Tax = 250,000 – 250,000 = 0 = Zero

Comparison 2:

For Graduated

Percentage Tax = 300,000 * .03 = 9,000
Income Tax = 300,000 – 120,000 (OSD) = 180,000 = Zero

For 8%

Percentage Tax = None
Income Tax = 300,000 – 250,000 = 50,000 * .08 = 4,000

Comparison 3:

For Graduated

Percentage Tax = 400,000 * .03 = 12,000
Income Tax = 400,000 – 160,000 (OSD) = 240,000 = Zero

For 8%

Percentage Tax = None
Income Tax = 400,000 – 250,000 = 150,000 * .08 = 12,000

Comparison 4:

For Graduated

Percentage Tax = 500,000 * .03 = 15,000
Income Tax = 500,000 – 200,000 (OSD) = 300,000 = 10,000

For 8%

Percentage Tax = None
Income Tax = 500,000 – 250,000 = 250,000 * .08 = 20,000

Example 5:

For Graduated

Percentage Tax = 500,000 * .03 = 15,000
Income Tax = 500,000 – 250,000 (COS and Itemized Deductions) = 250,000 = Zero

For 8%

Percentage Tax = None
Income Tax = 500,000 – 250,000 = 250,000 * .08 = 20,000

Example 6:

For Graduated

Percentage Tax = 1,000,000 * .03 = 30,000
Income Tax = 1,000,000 – 600,000 (COS and Itemized) = 400,000 = 30,000

For 8%

Percentage Tax = None
Income Tax = 1,000,000 – 250,000 = 750,000 * .08 = 60,000

What is better depends on your business – the flow of your income and expenses. As you can see for those who earn about 400,000 per year, you can choose either of the two and end up paying the same (especially if you have OSD or your taxable income does not exceed 250K). However, if it’s lower, an 8% advantage, but if higher, it will depend on your net income too.

Please note that you can only choose one as you start the year. You can’t transfer from Graduated to 8% or vice versa. I hope you are enlightened in which is better; Graduated IT Rates or 8% IT Rate. You can also read how to pay online and how to file your taxes.

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About the Writer

Hey, I’m Lyza! I once was a person who just imagined going to places “one day” but decided to pursue my dreams. My first travel abroad was in Japan, solo, last 2018, and fell in love with the journey since. I’m aiming to visit 10 countries before turning 30 and 2 new places in the Philippines every year. Besides traveling, I love organizing trips, photography, reading, and making new friends. Follow my adventures through my Instagram.​