TAXATION: 8% Income Tax Option R.C.

Pendon

8% Income Tax Option

The 8% income tax replaces the percentage tax under section 116 & the graduated income tax
paid by individual taxpayers.

Tax Rate: 8%

Tax Base: Gross sales/receipts + other non-operating income

Exempt portion: P250,000

For tax purposes, “gross sales/receipts” means that sales returns, allowances, and discounts
has already been deducted.

Who may avail?

The following criteria should all be satisfied to be able to qualify and avail of the 8% income tax
rate option:1

1. Individual who are self-employed or professional (SEP) or a mixed income earner;

2. Total gross sales/receipts and other non-operating income did not exceed the
P3,000,000 VAT threshold during the taxable year;
3. Taxpayers are subject to percentage tax under Section 116 of the NIRC; or exempt from
VAT or other percentage taxes; and
4. Have signified their intention to elect the 8% income tax rate.

Who are not qualified for the 8% income tax?

The 8% income tax rate option is not available to the following individual taxpayers: 2

a. Corporations
b. Non-resident aliens not engaged in trade or business (NRA-NETB)
c. Purely Compensation Income Earners;
d. VAT-registered taxpayers, regardless of the amount of gross sales or receipts and other
non-operating income;
e. Taxpayers exempt from VAT or other percentage taxes whose gross sales/receipts and
other non-operating income exceeded the P3,000,000 VAT threshold during the taxable
year;
f. Taxpayers who are subject to percentage taxes, except those subject under Section 116;
g. Partners of a General Professional Partnership (GPP);
h. Individuals enjoying income tax exemption.
i. Taxpayers subject to other forms of Income Taxes

1
Revenue Memorandum Order No. 23-18, May 21, 2018
2
Id.

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TAXATION: 8% Income Tax Option R.C.Pendon

How to avail the 8% tax?

At the beginning of each taxable year, all individuals are subjected to graduated income tax
rates. If a taxpayer wants to be subject to the 8% income tax, they must signify their intention
to be taxed at 8% through the means discussed below.

It should be noted that if an individual who opted to avail of the 8% income tax rate is effective
only for the current taxable year when the election has been made, and shall be automatically
subjected to the graduated income tax rates at the beginning of the succeeding taxable years.
Thus, the availment of the 8% income tax rate option is required to be signified and selected
every taxable year, if the taxpayer wishes to be covered by such income tax rate.

For those who are availing the 8% option for the first-time, the tax must first be indicated in
the Certificate of Registration. This may be done through the following:

1. For new business registration, the 8% option can be signified during their Application
for Registration (BIR Form 1901) as shown below:

2. If upon registration the taxpayer did not avail the 8% income tax rate, he may submit
an Application for Registration Information Update (BIR Form 1905), together with the
COR for replacement or updating.

The updating or replacement of the COR is only for the first-time availment of the 8%
income tax rate. There is no need to replace the COR in the succeeding year.

In the subsequent/succeeding years, the taxpayer will be subject to the graduated income tax
rates by default. If the taxpayer opted use the 8% income tax rate, such shall be signify in one
of the following returns (whichever is to be filed first):

1. 1st quarter income tax return (BIR Form1701Q); and/or

2. 1st quarter percentage tax return (BIR Form 2551Q).

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TAXATION: 8% Income Tax Option R.C.Pendon

It is important to note that the choice to be taxed at 8% is irrevocable and cannot be changed
during subsequent quarters (2nd to 4th quarter). Only next year, or when the taxpayer becomes
disqualified the tax rate during the year, it can be changed.

Illustration 1:

On January 30, 2021, Mr. A elected the 8% income tax rate option by filing BIR Form 1905.
Later, on Mr. A’s 1 st quarter 2551 and 1701Q, he signified that he will taxed using the
graduated income tax rate.

What income tax rate will Mr. A will be subject to?

Answer: Mr. A will be taxed at 8%. The election made on January 30, 2021, is irrevocable and
it cannot be amended. It is only on 2022, when Mr. A will be automatically subject to the
graduated income tax rate, unless opted to elect the 8% income tax rate.

Illustration 2:

On April 2022, Mr. A filed BIR Form 2551Q for the 1 st quarter of 2022 and indicated that he
will be taxed using the graduated income tax rate. In May 2022, Mr. A filed BIR Form 1701Q
for the 1st quarter of 22 and elected the 8% income tax rate.

What income tax rate will Mr. A will be subject to?

Answer: Mr. A will be taxed using the graduated income tax rates. The election made on April
2022, is irrevocable and it cannot be amended in any subsequent returns.

Self-employed or professional (SEP)

A self-employed individual is a sole proprietor or an independent contractor who reports

income earned from self-employment. They controls who they work for, how the work is done
and when it is done. It includes those hired under a contract of service or job order.

A professional is a person certified by a professional body by virtue of having passed an exam

or course of studies and/or practice. It also refers to a person who engages in some art or sport
for money, as a means of livelihood, rather than as a hobby.

Professionals includes but is not limited to doctors, lawyers, architects, CPAs, professional
entertainers, artists, professional athletes, directors, producers, insurance agents,
management and technical consultants, bookkeeping agents, and other recipients of
professional, promotional and talent fees.

SEP under the 8% income tax

Gross sales/receipts P xxx

Other non-operating income xxx
Total income xxx
Exempt portion (250,000)

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TAXATION: 8% Income Tax Option R.C.Pendon

Net Taxable Income xxx

Tax Rate 8%
Tax Due P xxx

Illustration:

Cairo Lazaro operates a convenience store while he offers bookkeeping services to his clients. In
2020, his gross sales amounted to P800,000. In addition, his receipts from bookkeeping
services of P300,000 and other non-operating income of P150,000. He already signified her
intention to be taxed at 8%. Compute for his tax liability if her cost of sales and cost of services
is P153,000 & P142,000 respectively with operating expenses of P120,000.

Answer: P80,000

Solution:

Gross sales/receipts (800k + 300k) P 1,100,000

Other income 150,000
Total income 1,250,000
Exempt portion (250,000)
Net Taxable Income 1,000,000
Tax Rate 8%
Tax Due P 80,000

*Cost of Sales/services & operating expenses is ignored because it is not part of the formula

8% Tax for a Mixed Income Earner

Mixed income earner earns income from both self-employment & from compensation.

Graduated
Compensation
income tax
Mixed Income
Earner
Business &
8% income tax
other income

The 8% tax will be applied ONLY to income from self-employment because the compensation
income will be subjected to the graduated income tax table.

The formula for 8% will be modified as follows:

Gross sales/receipts P xxx

Other income xxx
Total income xxx
Tax Rate 8%
Tax Due – Business Income xxx
Tax Due – Compensation income xxx
Total Tax Due P xxx

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TAXATION: 8% Income Tax Option R.C.Pendon

The P250,000 was removed from the formula because such exemption is already reflected in
the graduated income tax table. If the 250,000 in the above formula was not removed, it will
result to a double exemption hence the taxpayer will have a tax-exempt income of P500,000.

Illustration:

Gavreel Olarcon, a financial controller of a company and a businessman had the following data
pertaining to his income during 2020:

Compensation Income P 1,520,000

Gross Sales 2,530,000
Cost of Sales 1,820,000
Non-operating Income 150,000
Operating & Administrative 421,500
Expenses

How much is the taxed due applying the 8% tax regime?

Answer: 560,400

Solution:

When it comes to a mixed income earner, you will compute the Income tax using the 8% for the
business income and the graduated income tax for the compensation income.

1.) 8% Tax

Gross sales P 2,530,000

Other income 150,000
Total income 2,680,000
Tax Rate 8%
Tax Due – Business Income P 214,400

2.) Graduated income tax

Compensation Income P 1,520,000

Less: Tax bracket (800,000)
Excess 720,000
Tax Rate 30%
Tax on excess 216,000
Additional tax 130,000
Tax Due – Compensation Income P 346,000

3.) Final Answer

8% tax Due P 214,400

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TAXATION: 8% Income Tax Option R.C.Pendon

Graduated Income Tax Due 346,000

Total tax due 560,400

Additional Note: You will notice that if you add the gross sales and compensation income, it
exceeded P3 million, so does it mean that he is not entitled to the 8% tax regime? NO. The
basis of the P3m threshold is the GROSS SALES/RECEIPTS and NOT including Compensation
Income.

What if the individual exceeded the P3m threshold or become disqualified to use the 8%
tax in the middle of the year?

The income tax will be recomputed using the income tax table & the previously paid 8% during
the year tax will be applied as a tax credit to the revised income tax due. Also the taxpayer will
be liable for VAT if he breached the P 3 million threshold.

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 NIRC, shall be imposed from the beginning of the year until
taxpayer is liable to VAT. VAT shall be imposed prospectively.

Illustration:

Elijah Canlas provided to you the following information for each quarter:

  Q1 Q2 Q3 Q4 Total
Gross Sales 500,000 650,000 1,000,000 1,300,000 3,450,000
COGS (200,000) (340,000) (545,000) (700,000) (1,785,000)
Gross Income 300,000 310,000 455,000 600,000 1,665,000
Operating Expenses (120,000) (160,000) (210,000) (285,000) (775,000)
Net Taxable Income 180,000 150,000 245,000 315,000 890,000

How much is the tax due & tax payable per quarter applying the 8% tax regime?

Solution:

1.) 1st Quarter

Gross sales P 500,000

Other income -0-
Total income 500,000
Exempt portion (250,000)
Net Taxable Income 250,000
Tax Rate 8%
Tax Due 20,000
Previously Paid Tax* -0-
Tax Payable P 20,000

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*Since the question also asked for the tax payable, the formula is expanded to reflect
tax credits or the previously paid taxes during the quarter.

2.) 2nd Quarter

Gross sales (500k + 650k) P 1,150,000

Other income -0-
Total income 1,150,000
Exempt portion (250,000)
Net Taxable Income 900,000
Tax Rate 8%
Tax Due 72,000
Previously Paid Tax 20,000
Tax Payable P 52,000

*When it comes to income tax, it is computed on a cumulative basis, meaning I should

reflect all sales from the start of the year up to the end of Q2. That is why I added the
sales on Q1 & Q2 together to reflect the total sales so far.

*For the previously paid tax, since we added Q1 and Q2 together, we will also reduce
the liability by the amount we paid on Q1

3.) 3rd Quarter

Gross sales (1.15m + 1m) P 2,150,000

Other income -0-
Total income 2,150,000
Exempt portion (250,000)
Net Taxable Income 1,900,000
Tax Rate 8%
Tax Due 152,000
Previously Paid Tax 72,000
Tax Payable P 80,000

4.) 4th Quarter

Gross sales (500k + 650k) P 3,450,000

COGS (1,785,000)
Gross Income 1,665,000
Operating Expenses (775,000)
Net Taxable Income 890,000
Tax Bracket 800,000
Excess 90,000

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Tax Rate 30%

Tax on Excess 27,000
Additional Tax 130,000
Tax Due 157,000
Less: Previously Paid Tax (152,000)
Tax Payable 5,000

* as you can see I did not applied the 8% tax because gross sales has exceeded P
3million, hence he became disqualified to apply the 8% tax so we should use the
graduated income tax table to compute his tax.

Filing & Payment

If an individual taxpayer choose the 8% income tax option. They shall file the following:

SEP Mixed Deadline

Quarterly Returns 1701 Q 1701 Q Q1 – May 15
Q2 – August 15
Q3 – November 15
Annual Returns 1701A 1701 April 15

Unlike those subjected to graduated income tax, the Financial Statements (FS) is not required
to be attached in filing the annual income tax return. However, existing rules and regulations
on bookkeeping and invoicing/receipting shall still apply.

Further, for BIR Form 2551Q, only the 1 st quarter return shall be filed on or before April 25.
The subsequent returns quarterly returns (2nd, 3rd and 4th) shall be required to be filed.

Lastly, the taxpayer is still required to maintain books of accounts and issue receipts/invoices.

If a taxpayer breach the P3,000,000 threshold, they will be required to attached an audited FS
in filing of the annual income tax return. They also shall immediately update their registration
within the month following the month they exceeded the VAT threshold to reflect the change in
tax profile from non-VAT to a VAT taxpayer (subject to the rules in VAT). Percentage tax shall
be imposed from the beginning of the year until taxpayer is liable to VAT.

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Practice Questions

True or false

1. By default, individual taxpayers are taxed using the schedular income tax rates.
2. All individual taxpayers are entitled to avail the 8% special income tax rate.
3. A purely compensation income earner does not have the option to be taxed at 8%.
4. An individual taxpayer who availed the 8% special income tax rate has the choice to
return to being taxed using the regular income tax rate at any time.
5. If a taxpayer exceeds the three-million-peso threshold at any time during the year, the
8% tax shall be revoked and the taxpayer shall automatically be subject to the regular
income tax rates.
6. NRA-NETBs cannot avail the 8% income tax.
7. An individual who owns a business that is registered as a BMBE is not entitled to the
8% income tax.
8. All partners of any partnership cannot be taxed at 8%.
9. If a taxpayer is a MWE and a business owner, they will be classified as a SEP for their
compensation income is exempt.
10. If the taxpayer breached the VAT threshold, they will be liable for VAT based on the
gross sales/receipts for the entire taxable year.

Multiple Choice

1. What BIR Form should be filed by a mixed income earner who availed the 8% tax
option?
a. 1701
b. 1701A
c. 1700
d. 1702

2. When should an individual taxpayer signify his choice of being taxed using the 8%
special income tax rate?
a. 1st quarter income tax return
b. 2nd quarter income tax return
c. 3rd quarter income tax return
d. Annual income tax return

3. Who among the following can avail the 8% income tax rate?
a. A self-employed individual who is registered with PEZA
b. A business partnership
c. A non-resident citizen who establishes a business in the Philippines
d. A resident citizen who derives his income purely from his jeepney operations

4. In determining whether or not a taxpayer exceeds the P3,000,000 VAT threshold, the
following shall be considered, except
a. Gross sales
b. Sales discount and allowances
c. Net capital gains
d. Compensation income

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5. X is a doctor with his own clinic. During the 1st quarter, he receive gross receipts of
P370,000 from his patients. He also received P210,000 from renting out the available
space in his clinic to various concessionaires. If he is to be taxed at 8%, how much will
he pay for the 1st quarter?
a. 46,400
b. 29,600
c. 26,400
d. X should be subject to the graduated income tax rate

6. A mixed income earner derives a taxable income of P 300,000 from employment and a
net income of P 750,000 from a business. During the year, the taxpayer has sales of P
1,250,000 gross of sales discount and allowances of P210,000. If total creditable taxes
withheld by the employer is P25,000, how much is the income tax due under the 8%
tax rate?
a. 110,000
b. 93,200
c. 85,000
d. 68,200

7. A VAT-registered self-employed individual has gross sales of P 2,500,000 and cost of

sales of P 1,750,000 during the year. If he elected to be taxed at 8%, how much is the
income tax due?
a. 200,000
b. 180,000
c. 40,000
d. None of the choices

8. Ms. Pengoy has gross receipts, cost of services, and operating expenses amounted to
P2,950,000, P286,000, and P335,000, respectively during the year. In the same year,
she also earned P198,000 as his share in the net income of a general professional
partnership (GPP) by providing accounting and bookkeeping services. Can she avail of
the 8% income tax rate option?
a. No, she is not qualified to be taxed at 8% due to the fact that she is a partner in
a GPP
b. Yes, because her gross receipts plus other non-operating income does not
exceed P3 million
c. No, because her gross receipts plus other non-operating income exceed P3
million
d. Yes, as long as it was signified in the 1 st quarter returns that she is to be taxed
at 8%
9. Mr. Lumanas is a sole proprietor who is selling fresh fish and vegetables thus making
him exempt from paying percentage tax and VAT. Can he avail the 8% income tax
option?
a. Yes, as long as his gross sales/ receipts and other non-operating income did not
exceed the P3,000,000.
b. No, to avail the 8% tax option, the gross sales/receipts must be subject to the
percentage tax under sec. 116.
c. Yes, as long as he entered into transactions that may be subject to the
percentage tax under sec. 116.

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d. No, taxpayers who are enjoying any form of tax exemption are not qualified to
the 8% income tax option.

Problem 1

Eson is a mixed income earner. He owns a small milk tea shop and worked as an
administrative head in a private corporation. The data during the year 2022 for each 3-month
quarter are as follows:

Q1 Q2 Q3 Q4
Compensation Income P 145,000 P 181,000 P 174,000 P 200,000
Sales 450,000 320,000 500,000 410,000
Non-operating Income 50,000 30,000 40,000 -0-
Creditable withholding tax:
- per BIR Form 2307 3,290 1,810 2,450 4,910
- per BIR Form 2316 38,360

Compute his income tax payable in his 1st, 2nd, 3rd Quarterly ITRs and in his Annual ITR
using the 8% income tax rate.

Problem 2

Danny is a sole proprietor of a business located in the Philippines and in Japan. He has the
following data for the taxable year 2022:

PH Japan
Gross sales P 1,550,000 P 1,040,000
Cost of sales 1,100,000 1,000,000
Non-operating income 94,000 106,000
Operating expenses 310,000 285,000

He avail of the 8% income tax rate. How much is the income tax due if he is a
1. Resident Citizen
2. Resident Alien
3. Non-resident Citizen
4. Non-resident Alien engaged in trade or business
5. Non-resident Alien not engaged in trade or business

Problem 3

An individual realized the following income during the year:

Capital Gains (long-term) 220,000

Capital Loss (short-term) 60,000
Sales 1,890,000
Discounts & Allowances 120,000
Cost of Goods Sold 650,000

He opted to be taxed at 8%. During the year, he has the following additional information:

 Paid income taxes of P52,000 during the first three quarters

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 Creditable Withholding Taxes (CWTs) amounted to P 29,000 (P10,000 of which pertains

to 4th quarter CWTs)

How much is the tax payable?

Problem 4

An individual has the following data for taxable year 2021:

Basic Compensation Income P 360,000

SSS, PhilHealth, & HDMF Contributions 32,000
13th month pay 31,000
Overtime Pay 40,000
Midyear Bonus 29,000
Revenue from business 320,000
Cost of goods sold 200,000
Dividend income from an RFC 30,000
Operating Expenses 87,000
Gain on sale of equipment 26,000

How much is the income tax due if the taxpayer opted to be taxed at 8%?

Problem 5

Ms. Jean is a Financial Director of BLK Inc. During the year 2022, she earned an annual
compensation of P1,500,000, inclusive of 13th month and other benefits in the amount of
P120,000.00 but net of mandatory contributions to SSS and Philhealth of P 96,000. Aside from
employment income, she owns a small grocery store, with gross sales of P2,400,000. Her cost
of sales and operating expenses are P980,000 and P543,000, respectively, and with non-
operating income of P145,000.

In February 2023, she tendered her resignation to concentrate on her business. Her total
compensation income amounted to P150,000, inclusive of benefits of P20,000. Her business
operations for taxable year 2023 remains the same but non-operating income increased to
P210,000.

She opted the eight percent (8%) income tax rate for taxable year 2022 and 2023.

1. How much is the tax due for 2022?

2. How much is the tax due for 2023?

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Problem 6

Edward derived the following income during the year 2021:

Compensation income before deductions P 570,000

SSS, HDMF, and Phil Health contributions 23,000
Voluntary contributions to SSS made by Edward 5,000
Income tax withheld by the employer during the year 20,000
Capital gain from sale of car (held for 3 years) 60,000
Capital loss from sale of other capital assets (held for 7 months) 20,000
Interest income from bank deposit 8,500
Interest income from FCDU deposit 12,000
Sales 940,000
Sales discount and allowances 152,000
Cost of goods sold 374,000
Rent Income 275,000
Operating expenses 365,000
Prizes from a competition 9,000

If during the first 3 quarters, Edward has paid and remitted income taxes of P35,000, how
much is the income tax payable at year end if he is to be taxed at 8%?

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Answer Key

True or False

1. True 6. True
2. False 7. True
3. True 8. False
4. False 9. False
5. True 10. False

Multiple Choice

1. A 6. B
2. A 7. D
3. C 8. A
4. D 9. A
5. C

Problems

Problem 1 - 1st Q: 36,710

- 2nd Q: 62,900
- 3rd Q: 103,650
- Annual: 198,180

Problem 2 - RC: 203,200

- RA: 111,520
- NRC: 111,520
- NRA-ETB: 111,520
- NRA-NETB: 136,000

Problem 3 P44,600

Problem 4 P53,680

Problem 5 1. 516,000
2. 208,800

Problem 6 153,310

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