8% Tax Option for Self-Employed Individuals

Core tax option rules and scope

In general, income of self-employed individuals—including single proprietors, professionals, and mixed income earners—is subject to the graduated income tax rates under Section 24(A)(2)(a) of the National Internal Revenue Code (NIRC), as amended.
Individuals whose gross sales and/or receipts and other non-operating income do not exceed the VAT threshold of P3,000,000.00 may elect either:
- the graduated income tax rates under Section 24(A)(2)(a) of the NIRC, as amended; or
- an 8% tax on gross sales or receipts and other non-operating income in excess of P250,000.00, in lieu of the graduated income tax rates and percentage tax under Section 116 of the NIRC, as amended.
For individuals earning both compensation income and self-employment income (mixed income earners), the compensation portion is taxed using the graduated income tax rates, while the self-employment/professional income follows the conditions below:
- If the gross sales/receipts and other non-operating income do not exceed the P3,000,000.00 VAT threshold, the self-employment/professional portion may be taxed using either:
  - graduated rates; or
  - an 8% income tax rate based on gross sales/receipts and other non-operating income in lieu of graduated income tax rates and percentage tax under Section 116 of the NIRC.
- If the gross sales/receipts and other non-operating income exceed the VAT threshold, the self-employment/professional portion is taxed using the graduated income tax rates under Section 24(A)(2)(a).

Who qualifies and who cannot elect

To qualify for and avail the 8% income tax rate option, all stated criteria must be satisfied:
- The taxpayer must be an individual earning from self-employment and/or the practice of profession.
- The taxpayer’s gross sales/receipts and other non-operating income must not exceed P3,000,000.00 during the taxable year.
- The taxpayer must be registered and subject only to percentage tax under Section 116 of the NIRC, as amended, or be exempt from VAT or other percentage taxes.
- The taxpayer must signify the intention to elect the 8% income tax rate through the procedures enumerated in Section II(7) of the Order.
The 8% income tax rate option is not available to taxpayers who fall under any of the following categories; they are taxed using the graduated income tax rates under Section 24(A)(2)(a) of the NIRC, as amended:
- purely compensation income earners;
- VAT-registered taxpayers, regardless of gross sales/receipts and other non-operating income amount;
- taxpayers exempt from VAT or other percentage taxes whose gross sales/receipts and other non-operating income exceeded P3,000,000.00 during the taxable year;
- taxpayers subject to other percentage taxes under Title V of the Tax Code, as amended, except those subject under Section 116;
- partners of a General Professional Partnership (GPP);
- individuals enjoying income tax exemption.
Persons exempt from income tax under Republic Act No. 9178—including Barangay Micro Business Enterprises (BMBEs) registered with the BIR pursuant to Department Order No. 17-04—must bind to the choice made to avail the privilege under Republic Act No. 9178 for the entire period of registration.
A BMBE cannot avail both BMBE status (income tax exemption but liability to other internal revenue tax) and the 8% income tax rate option at the same time, because taxpayers are not allowed to avail double or multiple tax exemption under different laws unless specifically provided by law.
The 8% income tax rate option is effective only for the current taxable year in which the election is made; for succeeding taxable years, graduated rates apply unless the taxpayer elects the 8% income tax rate option again as required.

How to elect, irrevocability, and annual repetition

Taxpayers are subjected at the beginning of each taxable year to the graduated income tax rates under Section 24(A)(2)(a) of the NIRC, as amended.
An election of the 8% income tax rate option is effective only for the taxable year when the election is made.
An election must be signified and selected every taxable year if the taxpayer wishes to be covered by the 8% income tax rate option.
The 8% income tax rate option, once elected, is irrevocable, and no amendment of the option is allowed for the taxable year it was made.
For new business registrants, intention to elect the 8% income tax rate option is signified by:
- registration using BIR Form No. 1901 and/or 1701Q; or
- filing the initial quarter return (BIR Form No. 2551Q and/or 1701Q) of the taxable year after the commencement of the new business/practice of profession.
For existing individual business taxpayers, intention to elect is signified by:
- filing BIR Form No. 1905 (Application for Registration Information Update) at the beginning of the taxable year to end-date the form type of quarterly percentage tax, and selecting the 8% income tax rate option in filing the initial quarterly income tax return for income tax purposes; or
- filing the 1st Quarterly Percentage Tax Return and/or the 1st Quarterly Income Tax Return.
If the taxpayer does not signify the election as required, the graduated income tax rates apply.

Computation base, VAT thresholds, and interaction with 8% rules

Taxable income for individuals earning from self-employment/practice of profession is based on:
- net taxable income if the taxpayer is taxed under graduated rates or fails to signify the 8% option; or
- the gross sales/receipts and other non-operating income in excess of P250,000 if the 8% income tax rate is availed for individuals earning purely self-employment and/or practice of profession.
For mixed income earners availing the 8% income tax rate for self-employment/professional income, taxable income is based on the gross sales/receipts and other non-operating income without the P250,000 reduction.
The P250,000.00 reduction under Section 24(A)(2)(b) of the Tax Code is available only to self-employed individuals earning income purely from self-employment and/or practice of profession.
The P250,000.00 reduction is not applicable to mixed income earners because it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income.
For mixed income earners, any excess of the P250,000.00 amount over actual taxable compensation income is not deductible against taxable income from business/practice of profession under the 8% income tax rate option.
The total tax due for mixed income earners is computed as the sum of:
- tax due from compensation computed using graduated rates; and
- tax due from self-employment/practice of profession equal to the 8% rate multiplied by the total gross sales/receipts and other non-operating income.

Return filing, bookkeeping, and VAT consequence mechanics

A self-employed individual qualified and availing the 8% income tax rate option must:
- file the Quarterly Income Tax Return (unless exempted by revenue issuances);
- file the Annual Income Tax Return, and the Financial Statement (FS) is not required to be attached;
- not file the Quarterly Percentage Tax Return; and
- signify intention to avail the 8% income tax rate every taxable year.
A self-employed individual must maintain books of accounts and issue receipts/invoices.
If an 8% income individual’s gross annual sales and/or receipts exceed P3,000,000.00 at any time during the current taxable year, the taxpayer is subjected to graduated income tax rates and becomes liable to VAT prospectively, and an audited FS must be attached when filing the annual income tax return.
When the P3,000,000.00 VAT threshold is exceeded, the taxpayer must update registration within the month following the month the threshold was exceeded to reflect the change from non-VAT to VAT.
Percentage tax is imposed from the beginning of the year until the taxpayer becomes liable to VAT.
A non-VAT individual who availed of the 8% option and whose cumulative gross sales/receipts exceeded P3,000,000.00 during the taxable year must:
- compute income tax under graduated income tax rates; and
- receive a tax credit for the previous quarter/s income tax payments made under the 8% income tax rate option.
Such taxpayer must update registration immediately within the month following the VAT threshold breach, becomes VAT-liable prospectively starting the first day of the month following when the threshold is breached, and must pay percentage tax covering sales/receipts and other non-operating income from the beginning of the taxable year or commencement of business/practice of profession until the time VAT liability begins.
A VAT-registered person whose gross sales/receipts for three (3) consecutive years did not exceed P3,000,000.00 may update registration from VAT to Non-VAT in order to qualify and avail the 8% income tax rate option, on or before the first quarter of a taxable year, under rules and regulations on registrations, updates, verification, and the inventory and cancellation of VAT invoices/receipts.

Registration, COR rules, and BIR filing procedures

New business registrants must signify election by submitting the Application for Registration by accomplishing BIR Form No. 1901 to the concerned Revenue District Office with jurisdiction over the place of residence or where the Head Office is located, together with complete documentary requirements.
Existing registrants must signify election by filing the Application for Registration Information Update using BIR Form No. 1905 to the concerned Revenue District Office where the taxpayer is registered, together with the Certificate of Registration (COR) for replacement or updating.
COR replacement or updating is required only for the first time the 8% income tax rate is availed.
For the concerned Revenue District Office’s Client Support Section, the duties are to:
- receive BIR Form No. 1901 or BIR Form No. 1905 and the COR;
- validate qualification under Section II(4) of the Order; and
- during registration/availing of the 8% option, execute required system tagging/end-dating and COR generation steps.
For taxpayers using the Integrated Tax System, the Revenue District Office must:
- tag 8% income tax rate option by selecting “8% Income Tax Rate” in the List of Values under the Special Code field;
- add/update applicable ATCs in 1701 and 1701Q as follows:
  - II015 Business Income — 8% IT Rate; or
  - II017 Income from Profession — 8% IT Rate; or
  - II016 Mixed Income — 8% IT Rate;
- register tax type as Percentage Tax a Quarterly;
- add form type 2551Q and applicable ATC; and
- end-date form type 2551Q with filing end-date 03/31/20xx or the last day of the applicable quarter if the new business registrant registers after the first quarter.
For taxpayers using the Electronic Tax Information System - Taxpayer Registration System, the Revenue District Office must:
- tag the 8% income tax rate option by selecting “8% Income Tax Rate” in the List of Values under the Investment Promotion Agency field;
- set Number of years = 1;
- set Incentive end date = 12/31/20xx;
- add/update applicable ATCs in 1701 and 1701Q as follows:
  - II015 — 8% IT Rate; or
  - II017 — 8% IT Rate; or
  - II016 — 8% IT Rate;
- register tax type as Percentage Tax a Quarterly;
- add form type 2551Q and applicable ATC; and
- suspend form type 2551Q with filing end-date 03/31/20xx or the last day of the applicable quarter if the new business registrant registers after the first quarter.
The Revenue District Office must generate the COR with PT printed on the face of the certificate and must manually print a reminder at the bottom of the certificate stating that if qualified and opted for the 8% income tax rate, the filing of quarterly percentage tax return is not required for the current taxable year the option was made.
The Revenue District Office must release the new COR to the taxpayer.
Information Systems Project Management Service (ISPMS) / Information Systems Development & Operations Service (ISDOS) must implement system changes that:
- add the “8% Income Tax Rate” option in the List of Values under the Special Code field (Integrated Tax System) and under the Investment Promotion Agency field in the Incentive Details tab (Electronic Tax Information System);
- automatically end-date/suspend form type 2551Q during the 1st quarter period when the 8% income tax rate check-box is selected and the option is tagged, and keep suspension until the end of the taxable year;
- automatically open the filing end-date or lift the suspension starting January 01 of the succeeding year and remove the tagging of the 8% income tax rate option; and
- prevent the generation of stop-filer/open cases for the 2551Q return for the taxable year when the 8% option was made.
The system rules ensure that PT in the Certificate of Registration remains present when printed and that 2551Q is lifted starting January 01 of the next year.

Transitory and operational coverage region

Pending enhancement of the Electronic Tax Information System - Taxpayer Registration System, Revenue District Offices under Revenue Region No. 8 in Makati City must use the Integrated Tax System for registration and updates of individuals availing the 8% income tax rate option under Section III(B).

Penalties and sanctions

No penalties or sanctions are stated in Revenue Memorandum Order No. 23-2018.