The 8% tax for self-employed individuals

April 16, 2018 | 9:38 pm

Let’s Talk Tax

By Eleanor Lucas Roque

Now that the tax filing deadline has passed, many taxpayers can breathe a sigh of relief.
Taxpayers have gone through one of the most grueling deadlines for the year and have
lived to tell about it. Yesterday’s deadline was a bit nostalgic, as it was the last return filed
under the old tax system. From now on, we can totally immerse ourselves in the new rules
under the Tax Reform for Acceleration and Inclusion (TRAIN) Law. Taxes will now be
referred to as “before TRAIN” (BT) and “after TRAIN” (AT).

With April 16 gone, the next income tax filing deadline for individuals will be the first-quarter
Income Tax Return (ITR) due on May 15, 2018. Before that date, self-employed individuals
need to make a crucial decision. Do they avail of the 8% special tax rate, or follow the
regular income tax rate for individuals?

Since the start of the year, when the TRAIN law became effective, many self-employed
individuals and small business owners have been keenly following the developing rules for
the 8% tax applicable to them. Every time I attend a family gathering, someone would
always ask me about the 8% tax and ask how he can avail of it. There have been issuances
from the Bureau of Internal Revenue (BIR) that have helped shed light on some of the
questions of taxpayers. Since this is a new tax rate, the BIR has to develop rules specifically
for implementing this special tax rate. Taxpayers are grappling with the various issuances,
trying to understand and comply with them.

The 8% tax is applicable only to self-employed individuals (sole proprietors and

professionals) whose gross receipts or gross sales and other non-operating income for the
year do not exceed the three million pesos (P3,000,000) value-added tax (VAT) threshold
and are not subject to other types of percentage tax. If the small business is owned by a
corporation, the 8% tax will not apply. The 8% tax is applicable to various types of business
activities that can be undertaken by a sole proprietor, such as the practice of a profession,
consultancy services, or convenience store business.

The taxpayer availing of the 8% tax gets to enjoy simplified taxation. He does not need to
pay separate income tax and percentage tax, as the 8% tax rate answers for both taxes. He
also does not need to account for various expenses when computing taxes. If the self-
employed individual is earning purely business income, he simply needs to add up his gross
sales or receipts, deduct the non-taxable P250,000, and multiply the difference with the 8%
to arrive at his tax payable to the BIR. It’s that simple.

A word of caution, however; the 8% rate should not be an automatic choice for all self-
employed individuals. The 8% tax rate is imposed on the gross sales or receipts; no
deductions for business expenses are allowed. Hence, the self-employed individual should
do his math and check what option would benefit him most. He should compare his tax
liability under the 8% tax and the regular income tax of 0% to 35%. However, should he
elect to pay under the regular rate of 0% to 35%, he shall continue to pay the 3%
percentage tax in addition to the income tax.

The 8% tax is generally preferred for professionals or those engaged in the sale of services
where business expenses are normally minimal. For those in businesses that have huge
costs of sales and operating expenses, the 8% tax on gross may yield a higher tax payable.
However, even with the higher tax, the taxpayer can also factor in his decision making that
fact the administrative requirements under the 8% are also simplified.

Partners of a general professional partnership are also not allowed to avail of the 8% tax, as
their distributive share from the general professional partnership is already net of cost and
expenses.

To avail of the 8% tax, the taxpayer must first cancel his VAT registration or his percentage
tax registration. Once that is done, he must elect to apply the 8% income tax rate in his first-
quarter income tax return, which is due on May 15. For those who are excited to file their
first- quarter income tax return for 2018, a little patience is required; the appropriate form
has not yet been released by the BIR. We expect the BIR Form to be issued before the
deadline. Hence, taxpayers need to check the BIR website for the announcement of the
availability of the form.
Section 12 of Revenue Regulations No. 8-2018 requires percentage taxpayers to submit
their taxpayer registration update form (BIR Form 1905) to the BIR to end-date the
percentage tax. If taxpayers fail to end-date their percentage tax registration, they must
continue to file the percentage tax return reflecting zero-amount of tax with a notation that
they are availing of the 8% income tax rate for the taxable year. I have received some
messages that there are some BIR offices that refuse to end-date the percentage tax return
for taxpayers availing of the 8% tax, despite the regulatory requirements. This situation is
probably part of the birthing pains we are still experiencing with the new tax system.

If the taxpayer is VAT-registered and wishes to avail of the 8% tax, he must cancel his VAT
registration no later than April 30, 2018. The taxpayer must submit his registration update
form to the BIR and surrender his unused VAT invoices and receipts.

In view of the lower income tax rate, the withholding tax collected by clients and customers
from their payments of professional, promotional, talent fees, and similar payments for
services rendered by self-employed professionals availing of the 8% has also been
decreased to 5%. The individual must submit to his client a sworn declaration that his gross
sales or receipts for the year do not exceed P3 million, together with a copy of his
Certificate of BIR registration showing that he is not VAT-registered. The sworn declaration
must be submitted no later than Jan. 15 of each year or at least prior to the initial payment
of the fees or commissions subject to 5% withholding tax. Failure to comply will result in the
payment of a higher rate of 10% withholding tax.

The 8% tax rate for small business owners is a welcome development in the simplification
of our tax system. It is especially helpful to individuals who may be very talented and
knowledgeable in their chosen field but may have difficulty in coping with the complicated
requirements of taxation. With tax simplification, self-employed individuals can concentrate
on making their businesses grow and on improving their skills until, one day, they are small
businesses no more.

Eleanor Lucas Roque is the head of the Tax Advisory and Compliance of P&A Grant
Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing
services firms in the Philippines.

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