Businesses and self-employed individuals aim to maximize profits. This can be done by effectively managing expenses, a category which taxes fall under. You can only do this efficiently with proper bookkeeping and accounting practices in place to track all your transactions.
Thus, to minimize tax expenses, careful monitoring of records is key. It is also vital for self-employed individuals and companies to properly plan their course of action come tax season to prevent mistakes and take advantage of incentives, where applicable.
In the case of self-employed individuals, it is the decision to file and avail of the 8% special tax rate on income, or to follow the traditional tax scheme. This option is one that has been granted under the TRAIN Law provision enacted in recent years. Learn more about the 8% income tax rate on gross sales and receipts below.
So, what is this TRAIN Law, and this supposed 8% tax?
The TRAIN Law is known as the Tax Reform for Acceleration Inclusion Law, which was passed with the goals of simplifying and expediting the Philippine Tax system, while also promoting investments and job creation. This revised tax scheme also accommodates the optional 8% income tax rate for self-employed persons. This 8% tax rate is one that the individual may choose in favor of the traditional tax rates.
Qualifications for Availing the special tax rate
First, the individual must be self-employed individuals, which include sole proprietors and professionals like doctors, dentists, lawyers, etc. Second, the gross receipts or gross sales and the addition of non-operating income for the year must not be in excess of three million pesos (P 3,000,000). Noteworthy, small businesses owned by a corporation are not eligible for this tax rate.
What are the Benefits?
Benefits include simpler taxation and potentially less spent on tax expenses, provided that the individual does the math correctly and weighs the costs of opting for this 8% tax against the regular tax rates (on income exceeding P250,000, which range from 0% to 25% depending on the income level). Moreover, paying for the 8% tax is inclusive of both separate income tax and percentage tax, which, when filed using the traditional rates, will have to be paid separately.
In addition, you don’t have to account for other expenses when computing your taxes. With purely business income or income from practicing a profession, you just need to add up your gross sales/ receipts and deduct the non-taxable (P250,000). The difference will then be multiplied by 8% to get your total tax dues. It is very simple to compute and with fewer documentary requirements to present to the BIR.
If you are a sole-proprietor, professional, or any other self-employed individual, this option is not imposed. Should you choose to take advantage of this simpler tax payment option, you are no longer eligible to file for tax deductions on business expenses. Thus, it is vital to do your computations and check your accounting records to see which tax scheme will yield the most benefits. If your operating expenses are minimal, this 8% rate is a good choice. However, if your books show that you have a lot of business expenses, doing the traditional tax scheme may be more beneficial for you.
How To Take Advantage of This Tax Option
Here are some things that you need to do if you decide to go with the 8% Tax Rate on gross sales/ receipts:
- Cancel Value Added Tax (VAT) Registration
In order to avail of this special tax rate, the individual must cancel their VAT registration or percentage tax registration.
- Elect application of 8% rate
Next, the individual must elect to apply this 8% special income tax rate in his first-quarter income tax return (ITR). This is due on the 15th of May. Those doing so must check the BIR page for the necessary forms for first-quarter filing.
- Submit the Taxpayer Registration Update form
The individual must then submit the taxpayer registration update form (BIR Form 1905) to the Bureau of Internal Revenue (BIR) to end-date, or legally end, the percentage tax. With the failure to end-date percentage tax registration, the individual must continuously file percentage tax returns that reflect a net zero amount of tax, noting that they are availing of the 8% income tax rate for that taxable year.
Noteworthy, withholding taxes that are collected from clients of individuals opting to avail of 8% tax rates should be reduced to 5%. The individual must then submit a sworn declaration to their client which states that their income for the year does not exceed P 3,000,000 alongside a Certificate of BIR registration showing that the self-employed individual is not VAT registered.
If you need assistance in figuring out this tax rate or assessing if this is the best option for your operations, give our team a call. We provide free 30-minute consultations.