Choosing 8% vs graduated rates

The two options

If you’re self-employed, not VAT-registered and your gross sales or receipts are ₱3 million or less, you can choose one of these for the year:

Option 1: 8% flat rate

• 8% of your gross sales/receipts above ₱250,000 (if you’re purely self-employed).
• It replaces both the graduated income tax and the 3% percentage tax (Form 2551Q). Fewer forms, simpler math.
• Expenses don’t lower your tax.
• If you’re also employed (mixed income), the ₱250,000 reduction doesn’t apply to your business income.

Option 2: Graduated rates

• Income tax from 0% to 35% on your net income. The first ₱250,000 of net income a year is tax-free.
• You also pay 3% percentage tax on gross sales, filed quarterly on Form 2551Q.
• Net income is figured one of two ways: OSD (deduct a flat 40% of gross, no receipts needed) or itemized deductions (deduct your actual business expenses, with proper receipts — and you file Form 1701 instead of 1701A).

Two examples

How we got these: 8% = (₱600,000 − ₱250,000) × 8%. OSD: net income ₱360,000 → income tax ₱16,500, plus ₱18,000 percentage tax. Itemized A: net ₱500,000 → income tax ₱42,500 + ₱18,000. Itemized B: net ₱200,000 → ₱0 income tax + ₱18,000. Purely self-employed, using the graduated table in effect from 2023.

In example A the 8% rate wins. In example B, with big expenses, itemizing wins. That’s why Deskless Books compares all three with your real numbers as the year goes on.

When do I choose?

• You choose the 8% rate in your first quarterly return of the year (1701Q for Q1), or when you register. If you don’t choose it, the BIR treats you as on graduated rates.
• Your choice usually can’t be changed for the rest of the year, so decide early — ideally before your first quarter deadline.
• If your gross sales go above ₱3 million, you can’t use the 8% rate and you’ll need to register for VAT. Deskless Books warns you as you get close.