TAX 301 – SELF EMPLOYED AND/OR PROFESSIONALS

SELF EMPLOYED AND/OR PROFESSIONALS (SEP) 

Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration
and Inclusion Law (TRAIN LAW) , regular income of Self- Employed and Professionals
(SEP) amounting to more than P250,000 in a taxable year but with a gross sales/receipts and
other non-operating income not exceeding the revised vat threshold of P3,000,000 shall have
the option to avail of 8% tax on gross sales/receipts and other operating income in excess of
P250,000 IN LIEU of the graduated income tax rate and business tax. 

Self Employed – is defined as a sole proprietor or an independent contractor who reports

income earned from self employment. He or she controls who he/she works for. It includes
professionals whose income is derived purely from the practice of profession and not under an
employer-employee relationship”
Professional- is a “person formally certified by a professional body belonging to a specific
profession by virtue of having completed a required course of studies and/or practice, whose
competence can usually be measured against an established set of standards. It also refers to a
person engaged in some art or sport of money. 

RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP) 

Purely SEP with gross sales/receipts 

₱3M and Below 

Regular Income Tax OR 8% tax on Gross Sales/ Receipts and other operating income in
excess of 250,000 in LIEU of the graduated tax rate and SECTION 116 

Above ₱3M-regular income tax 

Mixed Income Earner 
➔ Compensation - regular income tax 
➔ Business Professional Income 
₱3M and below 
Regular Income Tax +Regular income tax OR 8% tax on Gross sales and other
operating income in LIEU of the graduated tax rate and Sec. 116 

₱3M and above-regular income tax 

ILLUSTRATION - SELF EMPLOYED AND/OR PROFESSIONALS (SEP) Case A -

PURELY SEP whose gross sales/receipts and other non-operating income does not exceed
the VAT threshold of ₱3,000,000. 
1. Determine the income tax due assuming the gross sales/receipts and other non-operating
income for 2018 is ₱240,000. 
 ❖ Answer: ₱0, exempt from income tax 

2. Using the data below, calculate the income tax due for 2018: 
Gross sales ₱2,800,000 
Cost of sales (1,500,000) 
Operating expenses ( 750,000 ) 
Net income ₱550,000 
➔ answer : ₱67,500 
First ₱400,000 income 30,000 
Excess of 400,000 37,500 
150,000 x 25% ₱67,500
PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating
income exceeds the VAT threshold of ₱3,000,000 during the year. 

Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his 1st quarter
income tax return. However, his gross sales during the year exceeded the VAT threshold of
₱3M as follows: 
Q1  Q2  Q3  Q4/Annual

8%  8%  8%  Graduated

Sales  ₱500,000  ₱500,000  ₱2,000,000  ₱3,500,000

Cost of sales  (300,000)  (300,000)  (1,200,000)  (1,200,000)

Gross income  200,000  200,000  800,000  2,300,000

Operating expenses  (120,000)  (120,000)  (480,000)  (720,000)

Net taxable income  ₱80,000  ₱80,000  ₱320,000  ₱1,580,000

Question: How much is Pedro’s annual income tax payable? 

❖ Answer: ₱289,200 
➢ Solution: 
Sales ₱6,500,000 
Cost of sales (3,000,000) 
Gross income 3,500,000 
Operating expenses (1,440,000) 
Net taxable income ₱2,060,000 

Income tax due using graduated rate ₱509,200 

 Less: quarterly payments (Q1-Q3) based 
on 8% tax rate (₱3M-₱250,000) x 8% (220,000) 
Annual income tax payable ₱289,200 

Mixed Earner whose gross sales/ receipts and other non-operating income does not exceed the
VAT threshold of ₱3,000,000 
Assume the following data for 2018: 
Compensation income ₱900,000 
Gross sales 2,800,000 
Cost of sales (1,500,000) 
operating expenses (750,000) 
Total taxable net income ₱1,450,000
Determine the correct income tax due: 
❖ Answer: ₱325,000 
Tax on first ₱800,000 ₱130,000 
Excess of 800,000 (650,000 x 30%) 195,000 
Tax due ₱325,000 

Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax due.
❖ Answer: ₱384,000 
On his compensation income: 
First ₱800,000 ₱130,000 
In excess of 800,000 30,000 ₱160,000 
₱100,000 x 30,000 

On his business income 224,000 

₱2.8M x 8% 
Total tax due ₱384,000 

Mixed income earner whose gross sales/receipts and other non-operating income exceeds the
VAT threshold of ₱3,000,000. 

Determine the income tax due assuming the following data for 2018: 
Compensation income ₱900,000 
Gross sales 5,000,000 
Cost of sales (2,250,000) 
operating expenses (1,250,000) 
Total taxable net income ₱2,400,000 
❖ Answer: ₱618,000 
Tax on first ₱2,000,000 income ₱490,000 
In excess of 2M income (400,000 x 32%) 128,000 
Tax due ₱618,000