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To promote better tax compliance among self-employed individuals, the government offered a new option under the TRAIN law: the 8% flat rate for income tax.
This 8% rate option for self-employed taxpayers simplifies income tax computation and filing requirements.
If you avail of this tax rate, you don’t deduct business expenses from your gross income to determine your taxable income. Rather, you simply multiply your gross sales or receipts for the year by 8%.
Also, you’re exempted from paying the 3% quarterly percentage tax under the 8% tax rate.
While all these benefits are good reasons to choose the 8% tax rate over the graduated rates of 0% to 35%, it’s not ideal for everyone. The flat tax rate works best for freelancers, professionals, and other service-oriented jobs/businesses whose business expenses are minimal.
Businesses and individuals with large business expenses can minimize their tax dues with the graduated tax rates, which allow certain deductions from the gross income.
To know which income tax rate option is optimal for you, do the math and compare the tax payable under the 8% tax rate vs. graduated rates. Whichever yields a lower tax due is the better option.
Go back to the main article: How to Compute Income Tax in the Philippines: An Ultimate Guide