Graduated Income Tax or 8% Special Tax: Which is Better?

Filing of Income Tax Return can be a tedious process that requires analytical thinking and proper monitoring. With the right strategy and application, you can save a certain amount of money in your tax remittances, this is called tax avoidance. Unlike tax evasion, tax avoidance is a legal way for people or businesses to minimize their tax liability, this includes the selection of income tax rate, if applicable.

In the Philippines, individuals earning from self-employment or practice of profession have the option to avail either graduated tax rate under RR 8-2018 or 8% tax on gross sales/receipts.

The most common and widely used income tax rate for individual taxpayers is the graduated income tax. It follows a set of tax rates which increases as the taxable amount rises, this is also known as progressive income tax.

Here is the latest tax table for the graduated tax system:

Effective January 1, 2018, Upon creation of TRAIN law (Tax Reform Acceleration and Inclusion Act), BIR introduced a new tax scheme for self-employed and professionals, this is the 8% tax special tax rate.

8% income tax is computed based on the Total of the Gross Sales and/or Receipts and other non-operating income over 250,000 instead of the graduated income tax and percentage tax.

Who can avail of the 8% income tax regime?

• Individuals Earning from Pure Business or Professional Income Earners (Freelancers, Consultants, Practitioners)
• Mixed-Income Earners (Individuals Earning Income from Compensation and Self-employment)

Provided that Gross Sales/Receipts, as well as non-operating income, shall not exceed the VAT threshold amounting (3,000,000) for the taxable year. In case a taxpayer exceeded 3,000,000 during the taxable year even though he initially files for the 8% income tax rate, the taxpayer will be automatically be subjected to the graduated tax rates for the remaining quarters and annual income tax return. Income tax payments under an 8% income tax rate shall be allowed as a tax credit.

Exempt Individuals

• Non-individuals like Partnerships, Corporations, Cooperatives;
• Partners of GPP, since their distributive income is already net of cost and expenses;
• Individuals Purely Earning Income from Compensation;
• Vat Registered Taxpayers;
• Taxpayers subjected to Other Percentage Tax Specially assigned in the purpose of business; and
• Exempt Individuals

The taxpayer must signify his/her intention to file under an 8% tax option for the year applicable before the filing of the 1st Quarter ITR. If not, he will be considered as having availed of the graduated income tax rates.

Where can you save?
There is a misnomer that availing the 8% option can save you money than using the graduated income tax. It mostly depends on the flow of income and expense of the taxpayer that at some point he can save from using graduated income tax rather than an 8% option.

Below are examples of a different scenario in which one tax rate is better than the other

It is best to seek advice from your accountant or bookkeeper if you don’t want to have a hard time thinking for the possible savings in complying with income tax. Here in AccountablePH, we have certified accountants and bookkeepers to help you with just that.