BIR Computations: TRAIN Tax for Self-Employed and Professionals
If you are a professional or self-employed individual receiving income purely from self-employment or your practice of profession, here are the updated BIR rules as regards your tax liability under the approved TRAIN law. The tax rules and sample computation are reiterated in Revenue Regulations of the Bureau of Internal Revenue RR 8-2018.
(UPDATE): The BIR has released a new Revenue Memorandum Order covering the availment of 8% tax rate for self-employed and professionals. Read about it here: 8% BIR Tax Rule for Self-Employed and Professionals (RMO 23-2018)
Here are relevant items on taxation of Self-Employed and Professionals from BIR’s RR 8-2018:
“Individuals earning income purely from self-employment and/or practice of profession whose gross sales/receipts and other non-operating income does not exceed the value-added tax (VAT) threshold as provided under Section 109 (BB) of the Tax Code, as amended, shall have the option to avail of:
- The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended; OR
- An eight percent (8%) tax on gross sales or receipts and other non-operating income in excess of two hundred fifty thousand pesos (P250,000.00) in lieu of the graduated income tax rates under Section 24(A) and the percentage tax under Section 1 16 all under the Tax Code, as amended.
Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st Quarter Percentage and/or Income Tax Return, or on the initial quarter return of the taxable year after the commencement of a new business/practice of profession, the taxpayer shall be considered as having availed of the graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended. Such election shall be irrevocable and no amendment of option shall be made for the said taxable year.
The option to be taxed at 8% income tax rate is not available to a VAT-registered taxpayer, regardless of the amount of gross sales/receipts, and to a taxpayer who is subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title. Likewise, partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which is already net of cost and expenses cannot avail of the 8% income tax rate option.
A taxpayer who signifies the intention to avail of the 8% income tax rate option, and is conclusively qualified for said option at the end of the taxable year [annual gross sales/receipts and other non-operating income did not exceed the VAT threshold (P3,000,000.00)] shall compute the final annual income tax due based on the actual annual gross sales/receipts and other non-operating income. The said income tax due shall be in lieu of the graduated rates of income tax and the percentage tax under Sec. 116 of the Tax Code, as amended. The Financial Statements (FS) is not required to be attached in filing the final income tax return. However, existing rules and regulations on bookkeeping and invoicing/receipting shall still apply.
A taxpayer shall automatically be subject to the graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended, even if the flat 8% income tax rate option is initially selected, when taxpayer’s gross sales/receipts and other non operating income exceeded the VAT threshold during the taxable year. In such case, his income tax shall be computed under the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s income tax payment/s under the 8% income tax rate option.
In addition, a taxpayer subject to the graduated income tax rates (either selected this as the income tax regime, or failed to signify chosen intention or failed to qualify to be taxed at the 8% income tax rate) is also subject to the applicable business tax, if any, subject to the provisions of Section 8 of these Regulations, an FS shall be required as an attachment to the annual income tax return even if the gross sales/receipts and other non-operating income is less than the VAT threshold. However, the annual income tax return of a taxpayer with gross sales/receipts and other non-operating income of more than the said VAT threshold shall be accompanied by an audited FS.
Taxable income for individuals earning income from self-employment/practice of profession shall be the net income, if taxpayer opted to be taxed at graduated rates or has failed to signify the chosen option. However, if the option availed is the 8% income tax rate, the taxable base is the gross sales/receipts and other non-operating income.”
* Click here to view a copy of BIR Revenue Regulations RR 8-2018.
How to Compute Taxes of Professionals and Self-Employed
Sample Computation: Illustration 1
Ms. Terry operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She already signified her intention to be taxed at 8% income tax rate in her 1st quarter return.
Her income tax liability for the year will be computed as follows:
|Gross Sales - Convenience Store||P800,000.00|
|Gross Receipts -|
|Less: Amount allowed as deduction||250,000.00|
|TAX DUE (8% of P850,000.00)||P68,000.00|
- The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.
- Taxpayer’s source of income is purely from self-employment, thus she is entitled to the amount allowed as deduction of P250,000.00 under Sec. 24(A)(2)(b) of the Tax Code, as amended.
- Income tax imposed herein is based on the total of gross sales and gross receipts.
- Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and percentage tax due, by express provision of law.
Sample Computation: Illustration 2
Ms. Terry above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses amounting to P600,000.00 and P200,000.00, respectively, or a total of P800,000.00, the income tax shall be
computed as follows:
|Less: Cost of Sales||600,000.00|
|Less: Operating Expenses||200,000.00|
|TAX DUE: On excess (P300,000 - P250,000) x 20%)||P10,000.00|
CONCLUSION: Aside from the income tax due above, Ms. Terry is likewise liable to pay business tax.
Sample Computation: Illustration 3
Mr. Yoso signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Quarter Income Tax Return. He has no other source of income, His total sales for the first three (3) quarters amounted to P3,000,000.00 with 4th quarter sales of P3,500,000.00.
|1st Quarter||2nd Quarter||3rd Quarter||4th Quarter|
|(8% Rate)||(8% Rate)||(8% Rate)|
|Less: Cost of Sales||300,000.00||300,000.00||1,200,000.00||1,200,000.00|
|Less: Operating Expenses||120,000.00||120,000.00||480,000.00||720,000.00|
Computation of Tax Due:
|Less: Cost of Sales||3,000,000.00|
|Less: Operating Expenses||1,440,000.00|
|INCOME TAX DUE:|
|Tax Due under Graduated Rates||P509,200.00|
|Less: 8% income tax previously paid (Q1 to Q3)*||220,000.00|
|ANNUAL INCOME TAX PAYABLE||P289,200.00|
* Computed as: (P3,000,000.00 – P250,000.00) x 8% = P220,000.00
- The gross receipts exceeded the VAT threshold of P3,000,000.00. Taxpayer shall be liable to pay income tax under graduated rates pursuant to Section 2(A)(2)(a) of the Tax Code, as amended.
- Taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8% income tax option computed net of the allowable deduction of P250,000.00 granted for purely business income.
- Taxpayer is likewise liable for business tax(es), in addition to income tax. For this purpose, the taxpayer is required to update his registration from non-VAT to VAT taxpayer. Percentage tax pursuant to Section 116 of the Tax Code, as amended, shall be imposed from the beginning of the year until taxpayer is liable to VAT. VAT shall be imposed prospectively.
- Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty, if timely paid on the due date immediately following the month/quarter when taxpayer ceases to be a non-VAT.
Sample Computation: Illustration 4
Ms. RSVP is a prominent independent contractor who offers architectural and engineering services. Since her career flourished, her total gross receipts amounted to P4,250,000.00 for taxable year 2018. Her recorded cost of service and operating expenses were P2,150,000.00 and P1,000,000.00, respectively.
Her income tax liability will be computed as follows:
|Less: Cost of Service||2,150,000.00|
|Less: Operating Expenses||1,000,000.00|
|INCOME TAX DUE:|
|On excess (P1,100,000.00 - P800,000.00) x 30%)||90,000.00|
|INCOME TAX DUE||P220,000.00|
CONCLUSION: The gross receipts exceeded the VAT threshold of P3,000,000.00; subject to graduated income tax rates; liable for business tax – VAT, in addition to income tax.
Sample Computation: Illustration 5
In 2018, Mr. Swabe owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000.00. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.
His tax due for 2018 shall be computed as follows:
|TAXABLE INCOME FROM BUSINESS:|
|Less: Cost of Sales||1,000,000.00|
|Less: Operating Expenses||600,000.00|
|Net Income from Operation||P900,000.00|
|Add: Non-operating Income||100,000.00|
|INCOME TAX DUE:|
|On excess (P1,000,000.00 - P800,000.00) x 30%)||60,000.00|
|TOTAL INCOME TAX||P190,000.00|
- The taxpayer has no option to avail of the 8% income tax rate on his income from business since his business income is subject to Other Percentage Tax under Section 125 of the Tax Code, as amended.
- Aside from income tax, taxpayer is liable to pay the prescribed business tax, which in this case is percentage tax of 18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as amended.
Source: Bureau of Internal Revenue (BIR www.bir.gov.ph), Department of Finance (DOF www.dof.gov.ph) Philippines
Read these other useful posts about TRAIN Tax Law:
- All about TRAIN Tax Law and BIR Guidelines and Regulations
- New TRAIN Income Tax Rates and BIR Income Tax Tables
- How to Compute: BIR Tax for Self-Employed and Professionals under TRAIN
- UPDATED RULE: 8% BIR Tax Rate for Self-Employed and Professionals
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