Taxes can be a daunting topic for many individuals, especially when it comes to understanding the different rates and options available. However, there’s good news on the horizon for self-employed individuals and small business owners in the Philippines. The introduction of the 8% income tax rate option brings a fresh breeze to the tax landscape.
While the normal income tax rate varies between 5% and 32%, depending on total income earned, the 8% income tax rate offers a new and reduced alternative. This lower tax rate specifically applies to gross income derived from business or professional practice. This option promises to simplify the accounting and tax filing process, and potentially save you some hard-earned cash. So, how does this new tax rate work and how can you take advantage of it? Let’s dive into the details.
What is the 8% Income Tax Rate?
The 8% income tax rate is a recently implemented law that applies specifically to sole proprietors and professionals who are registered with the Professional Regulation Commission (PRC). Under this new law, eligible individuals are required to pay a flat 8% tax on their gross income from professional practice.
How to Qualify for the 8% Income Tax Rate
To take advantage of the 8% income tax rate, you need to meet certain criteria outlined in RMO No. 23-2018. Here’s a summary of the requirements:
- You must be a self-employed individual taxpayer, including single proprietors, mixed-income earners, and professionals.
- You should not be a value-added tax (VAT) filer or subject to percentage tax.
- You need to express your intention to avail the 8% income tax rate option.
If you meet these criteria, you’re on your way to potentially reducing your tax burden and simplifying your tax compliance. However, while the 8% income tax rate is a fantastic option for many, it’s important to note that it’s not available to everyone. The following groups are not eligible:
- Withholding Agents.
- Non-VAT taxpayers with total annual sales exceeding PHP 3,000,000.
- Minimum Wage Earners (MWEs).
- Individuals involved in employer-employee relationships.
- Partners of General Professional Partnerships.
Applying for the 8% Income Tax Rate
Applying for the 8% income tax rate is a straightforward process. Here’s what you need to do:
- If you are currently subject to the percentage tax on your registration income, submit Form 1905 to end-date the percentage tax.
- Fill out either BIR Form 2551Q or 1701Q, depending on your tax requirements, and indicate your choice to avail the 8% income tax rate.
- Submit BIR Form 1701Q for the year with a notice of your 8% gross sales choice.
Remember, once you’ve made your choice and filed the necessary forms, it will remain effective for the entire year and cannot be changed. You must take note of this because the last thing you want is a BIR audit and be slapped with penalties.
How to Compute Your Tax
Computing your tax using the 8% income tax rate is relatively simple. Subtract any non-taxable income of PHP 250,000 from your total gross sales or receipts, and then multiply the difference by the 8% income tax rate. However, if you’re a mixed-income earner, you won’t be eligible for the PHP 250,000 deduction.
Filing Your Income Tax Return
Opting for the 8% income tax rate doesn’t mean you’re exempt from filing your annual income tax return. You’re still required to file your income tax return no later than April 15 of each calendar year. Remember to use BIR Form 1700 for individuals and BIR Form 1701 for mixed income earners.
Making the Right Choice for You
The introduction of the 8% income tax rate option brings a refreshing change to the tax landscape. By choosing this rate, you can simplify your tax compliance and potentially reduce your tax burden. Deciding between the 8% income tax rate and the regular tax rate requires careful consideration. While the 8% option can save you money, it’s important to remember that it’s a fixed rate that won’t adjust with changes in your income.
Don’t forget to review the eligibility criteria, follow the application process, and make an informed decision based on your unique circumstances. Again, this option is only available to self-employed individuals and small business owners. Evaluate your circumstances, consult with an accounting professional if necessary, and weigh the pros and cons of each option. It’s important to choose the tax option that aligns with your financial goals and maximizes your benefits.
Ready to take advantage of the 8% income tax rate and enjoy more tax savings? Look no further! Contact our expert accounting firm today to ensure a seamless application process and accurate computation of your taxes. Let us guide you through the complexities, so you can focus on growing your business. Don’t miss out on this opportunity – reach out to us now. Cheers to saving money and a smoother tax experience!