BIR 8% vs Graduated Income Tax: Which Is Cheaper for Your Small Business?
If you are self-employed or run a small business in the Philippines, you may be able to choose how your income tax is computed: the 8% flat option or the graduated income tax rates. Picking the right one can save you real money every year — here is how to tell which fits your business.
The two options at a glance
How the 8% option works
Under the 8% option, you skip the percentage tax and pay a single flat 8% on your gross sales or receipts that exceed ₱250,000 for the year. Because it is charged on gross — not net — it does not matter how you document expenses, which makes it wonderfully simple. It tends to win for service-based businesses with low overhead: freelancers, consultants, online professionals, and small service providers.
How the graduated rates work
The graduated option taxes your net income — sales minus your allowable business expenses — using tiered rates that rise as income grows. You also pay percentage tax (or VAT, if applicable) separately. This route can win when your business has genuinely high, properly receipted expenses that shrink your taxable net, such as a store that spends heavily on inventory, rent, and staff.
A rough comparison
Say your annual gross sales are ₱600,000. Compare a low-expense service business under both options:
8% option on ₱600,000 sales
Less exemption — −₱250,000
Taxable — ₱350,000
× 8% — ₱28,000 total tax
Under the graduated route, that same business would compute tax on its net income after expenses plus percentage tax. When expenses are low, the graduated total often lands higher than ₱28,000 — so the 8% option wins. Flip it around: a business spending ₱400,000 on inventory and rent has a much smaller net, and the graduated route can come out cheaper. The deciding factor is almost always how high your documented expenses are.
Important: confirm before you choose
This is a simplified guide, not tax advice. Eligibility for the 8% option, filing deadlines, VAT thresholds, and the exact rules change over time and depend on your registration. Always confirm your correct tax type with the BIR or a licensed accountant before you elect an option — the choice is usually made at the start of the taxable year and can be hard to reverse.
Frequently asked questions
Who can use the 8% tax option?
Generally, self-employed individuals and professionals whose gross sales do not exceed the VAT threshold and who are not VAT-registered may elect the 8% option. Since eligibility rules and thresholds change, confirm your specific case with the BIR or your accountant.
Is the 8% option always cheaper?
No. It usually wins for low-expense service businesses, but a business with high, well-documented expenses (inventory, rent, staff) can pay less under the graduated rates because those expenses shrink its taxable net income.
Can I switch between the two options?
The choice is typically made at the start of the taxable year and generally applies for that year. Switching mid-year is restricted. Plan the election deliberately and confirm the current rules with the BIR before deciding.
Track your tax as you earn
Our BIR Tax Tracker logs your taxable sales, estimates your 8% tax with the ₱250,000 exemption, and shows what to set aside each quarter. Works in Excel and Google Sheets. Pay via GCash, Maya, or Maribank.