A freelancer in Manila with ₱2.4 million in gross sales faces a binary choice at BIR registration: pay 8% on gross, or pay graduated rates on net with optional deductions and a higher paperwork load. The right answer is math, not habit.
The Two Regimes
8% flat on gross (optional under Section 24A): If you are a self-employed individual or mixed-income earner with gross under ₱3,000,000 and you are not VAT-registered, you can elect 8% income tax on gross in lieu of graduated rates and percentage tax. It covers income tax; you still handle withholding and registration correctly.
Graduated + OSD or itemized: Progressive rates from 0% to 35% on net, with either the 40% optional standard deduction (OSD) on gross or itemized deductions with receipts, plus 3% percentage tax (if non-VAT) unless exempt. VAT registration is required at ₱3,000,000 and changes the analysis.
Choosing With Numbers
Low deductions: A designer with ₱2,400,000 gross and ₱200,000 in real costs has gross-base cost of 8% × ₱2,400,000 = ₱192,000. Graduated on net with OSD: 40% × ₱2,400,000 = ₱960,000 OSD deduction, taxable ₱1,440,000 at graduated rates ≈ ₱208,000 + percentage tax. Flat wins.
High deductions: A seller with ₱2,400,000 gross and ₱1,200,000 in costs has flat ₱192,000 but graduated on net of ₱1,200,000 (or ₱480,000 with itemized) yields lower liability. Itemized wins.
Run the comparison every January with the prior year's actual margin, not with a guess.
Bookkeeping That Supports Either Election
- Track gross vs. net: Every invoice gross, every expense receipt. The flat election still requires you to keep books, even though deductions don't reduce the tax base.
- VAT threshold watch: Gross approaching ₱3,000,000 triggers VAT registration and removes the 8% option. Set an alert at ₱2,600,000.
- Quarterly filings: Both regimes require quarterly income tax (1701Q) and annual (1701). The flat election is made on the first quarter filing and is irrevocable for the year.
