When you register with the BIR, one box on Form 1901 sets how your income is taxed for the whole year. Pick well and you may file fewer returns and pay less. Pick without checking and you can lock yourself into the costlier option until January.
This guide is the hinge between registering and filing. The two options are the 8% flat rate and the graduated rates. Here is how each works, who each suits, and the math that decides it.
Key Takeaways
- The 8% flat rate taxes gross receipts above P250,000 and replaces both income tax and the 3% percentage tax.
- Graduated rates tax net income at 0% to 35% after deductions, plus a separate 3% percentage tax.
- Low-expense work usually wins on 8%. A business with real costs often wins on graduated rates with deductions.
- The election is made in your first quarter and is irrevocable for the taxable year.
- The 8% option is only for non-VAT individuals under the P3 million threshold. Cross it and you move to VAT and graduated rates.
The Complete BIR Registration Process
The full path from unregistered to filing. Grey steps are for everyone; tagged steps apply to specific registrants.
Sole proprietors start here
Register your business name (DTI)
Register your trade name in the DTI BNRS. Valid five years.
Barangay clearance and Mayor's Permit
Local clearances for a physical business, secured before the BIR.
The BIR process, for everyone
Secure or update your TIN
One TIN for life. If you had a job, transfer your RDO with Form 1905.
File BIR Form 1901
Apply at the New Business Registrant Counter, by email via NewBizReg, or online via ORUS.
Pay the P30 DST
The only fee at registration. The P500 annual fee was abolished in 2024.
Get your COR (Form 2303)
Your certificate of tax types. You choose 8% or graduated here.
Register your books of accounts
A journal and ledger, manual, loose-leaf, or through ORUS.
Get an ATP, then invoices
Form 1906, printed by a BIR-accredited printer, or a registered e-invoicing setup.
Online earners add this
Display your Registration Seal Badge
A QR-coded badge on your storefront and channels, generated through ORUS.
File and pay your taxes, every quarter
Registration is one-time. Filing is the ongoing part. This is where you go next.
The Two Options at a Glance
Both are open to a self-employed individual whose gross receipts stay under the P3 million VAT threshold and who is not VAT-registered.
| 8% Flat Rate | Graduated Rates | |
|---|---|---|
| Taxed on | Gross receipts over P250,000 | Net income after deductions |
| Rate | Flat 8% | 0% to 35%, progressive |
| Percentage tax | Included, none separately | Separate 3% (Form 2551Q) |
| Expense tracking | Not needed | Itemized or 40% OSD |
| Returns filed | 1701Q, 1701 | 1701Q, 1701, 2551Q |
| Best for | Low-expense services | Cost-heavy businesses |
The Graduated Brackets (2026)
If you do not elect 8%, these are the rates applied to your net taxable income. They are the TRAIN Law rates in force from 2023 onward.
| Annual net taxable income | Tax due |
|---|---|
| Up to P250,000 | 0% |
| Over P250,000 to P400,000 | 15% of the excess over P250,000 |
| Over P400,000 to P800,000 | P22,500 + 20% of the excess over P400,000 |
| Over P800,000 to P2,000,000 | P102,500 + 25% of the excess over P800,000 |
| Over P2,000,000 to P8,000,000 | P402,500 + 30% of the excess over P2,000,000 |
| Over P8,000,000 | P2,202,500 + 35% of the excess over P8,000,000 |
Under graduated rates you may deduct actual itemized expenses or take the flat 40% Optional Standard Deduction, whichever gives the lower tax, then apply the brackets to what remains.
Two Worked Examples
The right choice turns on your expense ratio. These two cases show each option winning.
Low-expense freelancer, P600,000 gross
Under 8%
Under graduated + 40% OSD
8% saves about P6,500.
Goods business, P1,500,000 gross, P1,000,000 costs
Under 8%
Under graduated, itemized
Graduated saves about P12,500.
The pattern: when your real expenses are low, the 8% rate wins, helped by the fact that it also absorbs the 3% percentage tax. When expenses are a large share of revenue, deducting them under graduated rates pulls your taxable income down far enough to win, even with the percentage tax added back. A rough line is that expenses above about 40% of gross start to favor graduated rates, but always run your own numbers.
How and When You Elect
You choose the 8% rate at registration on Form 1901, or by marking the option on your first quarterly return for the year. If you do nothing, you default to the graduated rates.
The election is irrevocable for the year
Once you elect the 8% rate for a taxable year, you are locked into it until the year ends, and it covers all business income under your TIN. You revisit the choice each January. This is why picking without doing the math can be costly: you cannot correct it in July.
Two limits to keep in view. The 8% option is only for non-VAT individuals under the P3 million threshold, and a mixed-income earner computes the 8% on full gross business receipts because the P250,000 is already used on the salary side.
Which Returns Each Path Files
Your choice here decides your filing calendar, which is covered in full in the tax filing guide.
| Return | 8% Flat | Graduated |
|---|---|---|
| 1701Q, quarterly income tax | Yes | Yes |
| 1701, annual income tax | Yes | Yes |
| 2551Q, quarterly percentage tax | No | Yes, at 3% |
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Common Mistakes to Avoid
The most common is choosing 8% because it sounds simplest, without checking it against real expenses. For a cost-heavy business it can be the more expensive option.
The second is forgetting the election is irrevocable for the year. There is no mid-year switch, so the decision deserves a few minutes with a calculator up front.
The third, on graduated rates, is filing income tax but forgetting the separate 3% percentage tax on Form 2551Q. Missing it accrues penalties even when your income tax is paid.
The fourth is assuming the 8% covers you above P3 million. Cross the VAT threshold and the 8% option closes, you register for VAT, and you move to the graduated table.
One Last Thing
There is no universally better option, only the one that fits your expense ratio this year. Estimate both against your real numbers before you tick the box on registration, remember the choice locks for the year, and revisit it each January as your costs change. Once chosen, it sets the returns you file, so continue to how to file and pay your taxes.
Frequently Asked Questions
Who can use the 8% flat income tax rate?
An individual, self-employed or a professional, who is not VAT-registered and whose annual gross sales or receipts do not exceed the P3 million VAT threshold. The 8% is not available to a partnership or corporation, and it closes the moment your gross crosses P3 million, at which point you move to VAT and the graduated rates.
Is the 8% rate really simpler?
Yes. It applies 8% to your gross receipts above P250,000 and replaces both the graduated income tax and the 3% percentage tax, so you file fewer returns and do not need to track expenses. Graduated rates require computing net income, tracking deductions or using the 40% OSD, and filing a separate quarterly percentage tax return.
When do I choose, and can I change my mind?
You elect the 8% rate at registration on Form 1901, or by marking it on your first quarterly return (Form 1701Q) for the year. The election is irrevocable for that taxable year, so you cannot switch mid-year. You revisit the choice at the start of each new year.
How does the P250,000 deduction work for a mixed-income earner?
For a purely self-employed person, the 8% applies to gross receipts in excess of P250,000. For a mixed-income earner who also has a salary, the P250,000 is already applied to the compensation income, so the 8% is computed on the full gross business receipts with no P250,000 reduction.
What is the 40% Optional Standard Deduction?
Under graduated rates, instead of itemizing and substantiating every expense, you may deduct a flat 40% of your gross sales or receipts as the Optional Standard Deduction, no receipts required. You then apply the graduated rates to the remaining 60%. It is useful when your real expenses are below 40% or hard to document.
Which returns do I file under each option?
Under the 8% rate you file quarterly income tax (Form 1701Q) and annual income tax (Form 1701), and no percentage tax. Under graduated rates you file 1701Q and 1701 for income tax, plus quarterly percentage tax (Form 2551Q) at 3%.
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