The 8% income tax option for small businesses

Who can choose 8%

BIR offers the 8% rate to individuals earning from self-employment or a profession, including mixed-income earners who also have a salary, as long as gross sales or receipts and other non-operating income do not exceed the VAT threshold of ₱3,000,000. For mixed-income earners, the salary is always taxed at the graduated rates. Only the business income can use 8%.^[2]

The option is not available to VAT-registered taxpayers, whatever their sales, or to people who earn only a salary. Corporations, partnerships and OPCs cannot choose it either; the law gives it to self-employed individuals and professionals.^[2,3]

How the 8% is computed: two formulas

Purely self-employed or professional (no salary): 8% × (gross sales or receipts + other non-operating income − ₱250,000). This tax replaces both the graduated income tax and the percentage tax.^[2,3]

Mixed income (salary plus business): 8% × (gross sales or receipts + other non-operating income). There is no ₱250,000 reduction. BIR explains that the ₱250,000 is already built into the 0% first bracket of the graduated rates on your salary. Even if your taxable salary is below ₱250,000, the unused part cannot be deducted from your business sales. Your total income tax is the graduated tax on your salary plus the 8% tax on your business sales.^[2,3]

Example, purely self-employed: a home-based baker in Laguna sells ₱900,000 in 2027 and has no salary or other income. Her 8% tax is (₱900,000 − ₱250,000) × 8% = ₱52,000 for the year. She files no 2551Q.^[2,3]

Example, mixed income: an office worker in Cebu City has ₱400,000 of taxable salary and sells ₱300,000 of baked goods on the side, with no other income. Her salary tax under the 2023 graduated rates is 15% × (₱400,000 − ₱250,000) = ₱22,500. Her business tax under 8% is 8% × ₱300,000 = ₱24,000, with no ₱250,000 reduction. Her total income tax for the year is ₱46,500.^[2,3]

8% or graduated rates: run both numbers

Under graduated rates, you pay income tax on net income (sales minus allowed expenses) and also 3% percentage tax on gross sales. Since 1 January 2023, the graduated schedule starts at 0% up to ₱250,000 of taxable income and 15% on the excess over ₱250,000 up to ₱400,000. Some guides still quote the old 20% rate for that bracket, which ended in 2022.^[3,4]

Example, continued: if the purely self-employed baker had ₱600,000 of expenses, her net income would be ₱300,000. Graduated income tax would be 15% of ₱50,000 = ₱7,500, plus percentage tax of 3% × ₱900,000 = ₱27,000, a total of ₱34,500. That is less than the ₱52,000 under 8%. With ₱300,000 of expenses instead, net income would be ₱600,000: income tax of ₱22,500 + 20% of ₱200,000 = ₱62,500, plus ₱27,000, a total of ₱89,500, so 8% would be far cheaper.^[3,4]

If you also earn a salary, use the mixed-income formula when you compare. Your 8% figure is on all your sales, so it is higher than the same sales would give a purely self-employed person.^[2]

The rule of thumb: 8% suits businesses with high margins, like services and freelancing. Low-margin businesses, like a sari-sari store that resells goods, can pay less under graduated rates if they keep good records of expenses. Ask an accountant to check your own figures.

How and when to elect 8%

BIR's rules list the ways to signify the choice. A new registrant elects it on Form 1901 at registration, or on the first quarter return of the year (Form 2551Q or 1701Q). An existing taxpayer elects it by filing Form 1905 at the beginning of the taxable year, or by selecting it on the initial quarterly income tax return. If you do not elect it, the graduated rates apply.^[2]

The choice must be made each taxable year, and once made it is irrevocable for that year. If your sales go over ₱3,000,000 during the year, you are automatically moved to graduated rates and become liable to VAT going forward. You must still keep books of accounts and issue invoices on 8%.^[2]

The two 8% formulas, with the examples on this page

Questions people ask

I have a job and a side business. Do I subtract ₱250,000 from my sales?

No. For mixed-income earners, the 8% is on gross sales or receipts and other non-operating income without the ₱250,000 reduction. Your salary is taxed at the graduated rates, and BIR says the ₱250,000 is already counted in its 0% first bracket.

Can I switch from 8% to graduated in the middle of the year?

No. Once elected, the option is irrevocable for that taxable year. You may choose again for the next year.

What happens if my sales pass ₱3,000,000?

You are automatically moved to graduated income tax rates and become liable to VAT going forward.

Do I still file quarterly returns on 8%?

Yes. You still file quarterly and annual income tax returns, but no quarterly percentage tax return.

Can a corporation or OPC use 8%?

No. The law gives the option to self-employed individuals and professionals only.