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.
Keep Your Finances Organized From Day One
The 8% flat tax rewards the freelancer who can prove gross accurately and who knows their real margin before the first quarter is due.
Beancount.io keeps gross, OSD, and itemized options as reports from one ledger — version-controlled, BIR-ready, and comparable before you elect. Get started for free and make the election a calculation, not a habit.