Compare the 8% flat tax with graduated plus percentage tax.
Recommended option
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8% flat tax
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Graduated + 3%
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Your breakdown
Updates live as you type| Item | 8% route | Graduated route |
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Two routes to the same finish line
Every self-employed Filipino under the VAT threshold gets to pick how their business income is taxed, and the choice can swing the bill by tens of thousands of pesos. This comparison puts the two routes the BIR (Bureau of Internal Revenue) allows side by side. On one side is the flat 8 percent, charged on gross sales above the PHP 250,000 reduction and replacing the percentage tax. On the other is the graduated income tax on your net profit, with the percentage tax added on top of gross. The tool computes both and tells you which is cheaper, so you are not guessing. Read every rate and threshold here as the figures this calculator applies and confirm them with the BIR.
The reason the answer is not obvious is that the two routes tax different things. The 8 percent ignores your costs and hits revenue. The graduated route rewards your costs, taxing only what is left after deductible expenses, but then it tacks on the percentage tax this calculator sets at 3 percent of gross. So the winner depends almost entirely on how heavy your expenses are relative to what you bill.
The expense ratio is the hinge
Think of it as a seesaw balanced on your expense ratio. When expenses are a small fraction of gross, your net profit is large, the graduated tax on it is high, and the 8 percent usually wins. When expenses eat most of your revenue, net profit shrinks, the graduated tax on it is modest, and even with the 3 percent percentage tax the graduated route can come out ahead. Somewhere in between sits a crossover point, and this calculator finds which side of it you are on for your exact numbers.
A consultant billing PHP 1.5 million with PHP 600,000 of costs
Run the default scenario: PHP 1,500,000 of gross, PHP 600,000 of deductible expenses, pure self-employed. The flat route takes 8 percent of PHP 1,250,000 (gross less the PHP 250,000 reduction), which is PHP 100,000. The graduated route taxes net profit of PHP 900,000, giving PHP 127,500 under the graduated table, then adds 3 percent of PHP 1,500,000, which is PHP 45,000, for a total of PHP 172,500. The flat tax wins by PHP 72,500 here, using the rates this calculator applies.
A mistake that quietly costs money
The trap is choosing the 8 percent because it sounds simple, then realising at year-end that your expenses were high enough that graduated would have been cheaper. The election is generally made at the start of the year and holds for that whole year, so a wrong call is expensive to unwind. Before you commit, estimate your full-year expenses honestly and run them here. If you are close to the crossover, the graduated route also gives you the Optional Standard Deduction, a flat 40 percent of gross in place of itemised costs, which can tilt the maths further. And remember the hard ceiling: once gross passes the PHP 3,000,000 VAT threshold this tool uses, the 8 percent option disappears and VAT replaces the percentage tax entirely.
If I have almost no expenses, is the 8 percent always better?
Almost always, yes. With negligible costs your net profit is close to your gross, so the graduated tax on it is steep and the added 3 percent percentage tax only widens the gap. A laptop-based freelancer with few deductible outgoings is the textbook case for the flat rate. Still run your figures, because a large one-off expense in the year can change the picture.
Can I switch routes from one year to the next?
Yes. The lock-in is within a year, not forever. You can elect the 8 percent one year and revert to graduated the next if your cost profile changes, by indicating your choice on the relevant return with the BIR. Reviewing the decision annually, as your revenue and expenses shift, is sensible rather than setting it once and forgetting it.