Compare sole proprietor and corporation tax.
Lower-tax structure
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Sole proprietor tax
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Corporation total tax
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Your breakdown
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The question behind "should I incorporate?"
Almost every freelancer and small business owner in the Philippines hits this fork eventually. You are doing well enough that the BIR registration you ticked years ago, sole proprietor, starts to feel limiting. A friend or an accountant mentions that a corporation pays a lower headline rate. The catch is that a corporation does not actually pay your tax. It pays its own, and then anything you pull out as salary or dividends gets taxed again in your hands. This tool exists to settle that argument with numbers instead of folklore, by adding up every layer on both paths.
It is built for owner-operators who take real money out of the business each year, not for people sitting on retained profit indefinitely. If you plan to leave most earnings inside the company to reinvest, the dividend layer never fires and the comparison shifts. The default scenario assumes you distribute everything left after your salary, which is the harshest case for the corporate side and the most honest one for a person who needs the cash to live on.
Two tax stacks, side by side
On the sole proprietor side the logic is short. If your gross sales sit above the VAT registration threshold of PHP 3,000,000, the 8 percent flat option is off the table and you pay graduated income tax on net income plus percentage tax on gross. Below that threshold the calculator picks whichever is cheaper, graduated or the flat 8 percent. On the corporate side three things stack up: corporate income tax on the profit that remains after your salary, ordinary graduated income tax on that salary as compensation, and a final tax on the dividends the company pays out of what is left.
A PHP 3 million net income, PHP 8 million gross, walked through
Take the defaults: net income of PHP 3,000,000, gross sales of PHP 8,000,000, and an owner salary of PHP 1,200,000. Because gross is well past PHP 3,000,000, the sole proprietor is locked into the graduated path. The figures below use the rates this calculator applies and are internally consistent with its output.
The corporation wins this scenario by PHP 155,000. Notice why: the profit after salary, PHP 1,800,000, sits in the 30 percent graduated band as a sole proprietor but is taxed at a flat 25 percent corporate rate, and even the extra 10 percent dividend tax on top does not fully close the gap. The salary itself is taxed identically on both paths, so it is the treatment of the residual profit that decides the contest.
Where the corporate advantage evaporates
The result flips fast if you change two things. Pay yourself a bigger salary and less profit drops to the 25 percent corporate layer, but more of your pay climbs into the higher personal bands, so the saving shrinks. Distribute less and the dividend tax falls, which is the legitimate route to deferral: leave money in the company, reinvest it, and you only trigger the 10 percent when you finally take it. The common mistake is treating the corporate route as automatically cheaper at every income level. At lower profits, where a sole proprietor may still qualify for the flat 8 percent and skip percentage tax entirely, incorporating usually loses once you add registration costs, audited financial statements, and the heavier compliance load.
Does the calculator account for SSS, PhilHealth, and Pag-IBIG?
No, and that is deliberate to keep the tax comparison clean. As a corporate owner-employee you and the company both remit SSS, PhilHealth, and Pag-IBIG on your salary, which adds cost the sole proprietor partly avoids. Factor those mandatory contributions in separately, and confirm the current rates with each agency, before treating the on-screen gap as your true net saving.
Is the 10 percent dividend rate fixed?
The 10 percent final tax applies to cash and property dividends paid to resident individuals, and that is the figure modelled here. Nonresidents and corporate shareholders face different rates, and treaty relief can change the picture for foreign owners. Treat the 10 percent as the resident-individual case and verify your own situation with the BIR before deciding.
Rates, bands, and thresholds shown reflect the assumptions built into this calculator and have not been independently confirmed as current law. Verify the latest income tax brackets, the VAT threshold, the corporate rate, and the dividend tax with the Bureau of Internal Revenue before you restructure.