8% Flat Rate Option for Self-Employed
Updated June 13, 2026
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Definition
The 8% flat rate option is an alternative income tax scheme for self-employed individuals and professionals in the Philippines whose gross sales or receipts and other non-operating income do not exceed ₱3,000,000 and who are not VAT-registered. They pay 8% on gross sales or receipts in excess of ₱250,000 instead of the graduated income tax rates and the 3% percentage tax.
Under Section 24(A)(2)(b) of the National Internal Revenue Code, as amended by the TRAIN Law (RA 10963), qualified self-employed individuals and professionals can opt to pay 8% on gross sales or receipts and other non-operating income in excess of ₱250,000 instead of computing tax on net taxable income at graduated rates. The 8% tax also replaces the 3% percentage tax under Section 116. The option is open only to taxpayers whose gross sales or receipts and other non-operating income do not exceed ₱3,000,000 and who are not VAT-registered. Because the base is gross, no expenses are deducted, so the tax can be lower or higher than the graduated route depending on actual business expenses.
Detailed explanation
Overview
The 8% flat rate option is a simplified income tax scheme introduced under the Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA 10963) and implemented by RR 8-2018. It permits self-employed individuals and professionals to compute their annual income tax as 8% of gross sales or receipts above ₱250,000, in place of both the graduated rates and the 3% percentage tax. It is open to those with gross sales or receipts of ₱3,000,000 or less who are not VAT-registered (NIRC §24(A)(2)(b), as amended by RA 10963).
This option tends to favor taxpayers with low actual expenses, whose net income would otherwise fall in higher graduated brackets. By electing the 8% flat rate, eligible individuals can simplify their tax compliance and potentially reduce their overall tax burden, provided their gross receipts do not exceed the threshold limits set by the BIR.
Eligibility and Scope
The 8% flat rate option is available to self-employed individuals and professionals who are not VAT-registered and whose gross sales or receipts and other non-operating income do not exceed ₱3,000,000 in a taxable year (RR 8-2018). This includes:
- Sole proprietors engaged in business or professional practice
- Independent contractors and consultants
- Professionals such as doctors, lawyers, engineers, and accountants operating as individuals
- Sole traders and small manufacturers who are not VAT-registered
Corporations, partnerships, and entities taxed as corporations are generally not eligible for this option. The option is also closed to taxpayers subject to other percentage taxes under Title V (other than Section 116) and to partners on their share from a general professional partnership. All business and professional receipts are counted together for the ₱3,000,000 limit (RR 8-2018).
Computation and Application
Under the 8% flat rate option, the annual income tax is calculated as follows:
Annual Income Tax = (Gross Sales or Receipts + Other Non-Operating Income − ₱250,000) × 8%
Mixed income earners do not subtract the ₱250,000.
Gross receipts include all revenue from the conduct of trade, business, or professional practice, without deduction of business expenses, cost of goods sold, or depreciation. This is a basic difference from the regular income tax system, which taxes net taxable income (gross income minus allowable deductions) at graduated rates ranging from 0% to 35% (NIRC §24(A)(2)(a), as amended by RA 10963).
The election is made on the first quarter income tax or percentage tax return (or the initial quarter return of a new business) and is irrevocable for that taxable year. The annual return is BIR Form 1701A for purely self-employed taxpayers or BIR Form 1701 for mixed income earners. A taxpayer can choose differently in a later year. If gross sales or receipts exceed ₱3,000,000 during the year, the graduated rates apply automatically for that year (RR 8-2018).
Advantages and Disadvantages
Advantages: The 8% flat rate option simplifies tax computation, reduces the need for detailed expense documentation, and may result in lower tax liability for businesses with high expense ratios. It also reduces the risk of audit adjustments related to deduction substantiation.
Disadvantages: Taxpayers with low expense ratios or high net profit margins may pay more tax under the 8% flat rate than under the graduated system. Also, the option is not available to corporations, to VAT-registered taxpayers, or to anyone with gross sales or receipts above ₱3,000,000.
Interaction with Other Taxes
The 8% tax replaces both the graduated income tax and the 3% percentage tax under Section 116. Self-employed individuals and professionals remain liable for other obligations, including:
- Registration for VAT and a return to the graduated rates if gross sales or receipts exceed ₱3,000,000 (NIRC §109(CC))
- Withholding tax on compensation paid to any employees
- Creditable withholding tax deducted by clients from income payments, which is credited against the 8% tax due (NIRC §57(B))
- Contribution to the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG), as applicable
The 8% flat rate does not exempt taxpayers from these obligations; it only simplifies the computation of income tax liability (RR 8-2018).
Record-Keeping and Compliance
Although the 8% flat rate option simplifies tax computation, taxpayers must still maintain adequate books of accounts and supporting documents to substantiate their gross receipts. The BIR may conduct audits to verify that reported gross income is accurate and that the taxpayer remains eligible for the option (NIRC §232, RR 8-2018).
Failure to maintain records or misreporting of gross receipts can result in assessment adjustments, penalties, and interest charges at 12% per annum (NIRC §249).
Why it matters
Self-employed Filipinos and professionals often struggle with complex tax computations and expense documentation. The 8% flat rate option provides a simpler, more predictable tax liability while potentially reducing their overall tax burden. Understanding when to elect this option versus the regular graduated system is critical for optimizing tax efficiency and ensuring compliance with BIR requirements.
How it works
Determine Eligibility
Confirm that your gross sales or receipts and other non-operating income for the taxable year do not exceed ₱3,000,000 and that you are a self-employed individual or professional (not a corporation or partnership). The option is not available if you are VAT-registered, if you are subject to other percentage taxes under Title V of the Tax Code (other than Section 116), or if the income is your distributive share as a partner of a general professional partnership (RR 8-2018).
Calculate Gross Receipts
Sum all revenue from your business or professional practice without deducting expenses, cost of goods sold, or depreciation. Include income from all sources related to your trade or profession. Add any other non-operating income. This total is the base used for the ₱3,000,000 limit and for the 8% computation.
Apply the 8% Rate
Subtract ₱250,000 from your total gross sales or receipts and other non-operating income, then multiply the excess by 8% to get your annual income tax. If you also earn compensation income, the ₱250,000 is not subtracted and the 8% applies to all of your business gross. The tax is due regardless of your actual net profit or loss.
File and Pay
Signify the 8% election on your first quarter income tax return or percentage tax return (or the initial quarter return of a new business). The election is irrevocable for that taxable year. Pay quarterly on BIR Form 1701Q, then file the annual return by April 15 of the following year on BIR Form 1701A (purely business or profession) or BIR Form 1701 (mixed income). Keep your books and invoices, because bookkeeping and invoicing rules still apply (RR 8-2018).
Examples
Freelance Graphic Designer, ₱1,800,000 Annual Income
Maria Santos, a freelance graphic designer who is not VAT-registered, earned ₱1,800,000 in gross receipts during the year. Under the 8% option, her income tax is ₱124,000 ((₱1,800,000 − ₱250,000) × 8%), and she pays no percentage tax. Under the graduated route with ₱800,000 in deductible expenses, her net taxable income is ₱1,000,000 and her income tax is ₱152,500 (₱102,500 + 25% of the ₱200,000 above ₱800,000), plus 3% percentage tax of ₱54,000, for a total of ₱206,500. The 8% option saves her ₱82,500 (NIRC §24(A)(2)(a) and (b), RA 10963).
Solo Practice Lawyer, ₱2,500,000 Annual Billings
Atty. Juan dela Cruz earned ₱2,500,000 in professional fees and is not VAT-registered. Under the 8% option, his income tax is ₱180,000 ((₱2,500,000 − ₱250,000) × 8%). His actual business expenses (office rent, staff, supplies) total ₱1,200,000, leaving a net profit of ₱1,300,000. Under graduated rates, his income tax would be ₱227,500 (₱102,500 + 25% of the ₱500,000 above ₱800,000), plus 3% percentage tax of ₱75,000, for a total of ₱302,500. The 8% option saves him ₱122,500 and removes the need to substantiate expenses for the deduction (RR 8-2018).
Retail Trader Exceeding Threshold
Anna Reyes operates a small retail store with ₱3,500,000 in annual gross sales. Because her gross receipts exceed ₱3,000,000, she is ineligible for the 8% flat rate option and must compute her income tax using the regular graduated system on her net taxable income. Her sales also exceed the ₱3,000,000 VAT threshold, so she must register for VAT. She must maintain detailed records of cost of goods sold and operating expenses (NIRC §24(A)(2)(a), RR 8-2018).
Consultant with Multiple Income Sources
Roberto Santos earned ₱1,200,000 from consulting services and ₱600,000 from leasing out a commercial unit, with no compensation income. His total gross is ₱1,800,000, within the ₱3,000,000 limit. If he elects the 8% option, it covers all of his business and other non-operating income, not just the consulting fees: (₱1,800,000 − ₱250,000) × 8% = ₱124,000. He cannot put one income stream on 8% and the other on graduated rates in the same year (RR 8-2018).
Common misconceptions
- Myth: The 8% flat rate option means I pay only 8% total tax on my business income.
- Fact: The 8% covers your income tax and replaces the 3% percentage tax, but other obligations remain: withholding tax on any employees' compensation, SSS, PhilHealth and Pag-IBIG contributions, and local business taxes. VAT does not apply, because VAT-registered taxpayers cannot use the 8% option (NIRC §24(A)(2)(b), RR 8-2018).
- Myth: I can deduct business expenses from my gross receipts before applying the 8% rate.
- Fact: No expenses are deducted under the 8% option. For a purely self-employed individual the only reduction is the first ₱250,000 of gross sales or receipts, and mixed income earners do not get even that. The graduated route, by contrast, taxes net income after deductions (NIRC §24(A)(2)(b), RA 10963).
- Myth: Once I elect the 8% flat rate option, I must use it forever.
- Fact: The election is made year by year on the first quarter return. Once made, it is irrevocable for that taxable year, but you may choose the graduated rates in a later year. If you do not signify the 8% election, you default to the graduated rates (RR 8-2018).
- Myth: The 8% flat rate option is available to all small businesses, including corporations.
- Fact: Only self-employed individuals and professionals who are not VAT-registered and whose gross sales or receipts and other non-operating income do not exceed ₱3,000,000 are eligible. Corporations, partnerships, and entities taxed as corporations cannot use this option (NIRC §24(A)(2)(b), RR 8-2018).
- Myth: If I have a net loss, I pay nothing under the 8% flat rate option.
- Fact: Under the 8% option, you pay 8% of gross receipts above ₱250,000 regardless of whether you have a net loss. This is a disadvantage if your expenses exceed your revenue (NIRC §24(A)(2)(b), RA 10963).
Questions people ask
Can I use the 8% flat rate option if my gross receipts are exactly ₱3,000,000?
Yes. The 8% option is open to taxpayers whose gross sales or receipts and other non-operating income do not exceed ₱3,000,000, so exactly ₱3,000,000 still qualifies. If the total exceeds ₱3,000,000 during the year, you are moved to the graduated rates for that year (RR 8-2018).
Which BIR form do I file if I use the 8% flat rate option?
You elect the 8% option on your first quarter return, pay quarterly on BIR Form 1701Q, and file the annual return by April 15 of the following year. Use BIR Form 1701A if you earn purely from business or profession, or BIR Form 1701 if you also earn compensation income. Form 1700 is only for purely compensation earners. Financial statements need not be attached to the annual return under the 8% option (RR 8-2018).
If I have both business income and employment income, can I use the 8% flat rate option for my business?
Yes. Your compensation income stays under the graduated rates, and you may elect the 8% option for your business or professional income. As a mixed income earner, you do not get the ₱250,000 reduction on the business part, so the 8% applies to your full business gross (NIRC §24(A)(2)(c), RR 8-2018).
What happens if the BIR audits me and finds that my gross receipts were understated?
If the BIR finds that you underreported gross receipts, it will assess additional income tax on the unreported amount at 8%, plus a 25% surcharge (50% if the underdeclaration is willful or fraudulent) and interest at 12% a year. Micro and small taxpayers pay a 10% surcharge and 6% interest instead. If total gross turns out to exceed ₱3,000,000, the graduated rates apply for the year (NIRC §248, §249, RA 11976).
Can I claim the standard deduction or itemized deductions if I use the 8% flat rate option?
No, the 8% flat rate option is a complete alternative to the regular income tax system. You cannot claim itemized deductions or the 40% optional standard deduction against it. Your tax is 8% of gross sales or receipts above ₱250,000, and it replaces both the graduated rates and the 3% percentage tax (NIRC §24(A)(2)(b), RA 10963).
If my business has a net loss, do I still pay 8% under the flat rate option?
Yes. Under the 8% option you pay 8% of gross receipts above ₱250,000 even if your actual expenses exceed your revenue. Under the graduated route with itemized deductions, a net operating loss can be carried over to later years. Compare both options before you make the election (NIRC §24(A)(2)(b)).
Who is not allowed to use the 8% flat rate option?
The option is not available to VAT-registered taxpayers, to taxpayers subject to other percentage taxes under Title V of the Tax Code (other than the Section 116 percentage tax), to partners on their distributive share from a general professional partnership, or to anyone whose gross sales or receipts and other non-operating income exceed ₱3,000,000 (RR 8-2018).
If I switch from the 8% flat rate to the regular graduated system, can I claim deductions for prior years?
No. The election is made on the first quarter return and is irrevocable for that taxable year, so you cannot switch to itemized deductions or OSD for a year already filed under 8%. You can choose differently in a later year by making a new election on that year's first quarter return (RR 8-2018).
In practice
- Self-employed professionals such as doctors, lawyers, and accountants often elect the 8% option when their actual deductible expenses are low, because the flat rate on gross then usually costs less than graduated rates plus 3% percentage tax.
- Freelancers and independent contractors use the 8% option to avoid the burden of substantiating home office expenses, equipment depreciation, and other deductions that the BIR scrutinizes closely.
- Taxpayers approaching the ₱3,000,000 gross receipts threshold often plan their business structure or timing to remain eligible for the 8% option, as exceeding the limit forces them into the more complex graduated system.
- The BIR can examine the books and invoices of 8% filers to check that reported gross receipts are complete and that the taxpayer stayed within the ₱3,000,000 limit.
- Many tax practitioners advise clients to compare their total tax under the 8% option and under graduated rates plus 3% percentage tax before the first quarter return is due, because that return is where the election for the year is made.
Next steps
Learn more
8% Flat Rate Vs Graduated Tax Calculator
Self Employed Tax Calculator
Quarterly Tax Payment Calculator
BIR Form 1701Q (Quarterly Income Tax Return)
BIR Form 1701 (Annual Income Tax Return)
BIR Form 1905 (Application For Registration)
Self Employed Tax Guide 2026
Quarterly Tax Filing Guide
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Sources & References (3)
Primary sources and the laws, regulations, and official issuances this page relies on. Each citation links directly to the issuing authority’s document.
- LawPhil Project (Arellano Law Foundation). “NIRC §24(A)(2)(b) as amended by RA 10963 to 8% on gross over P250k, GR/sales not over P3M.” lawphil.net. Republic Act No. 10963 (TRAIN), amending NIRC Sec. 24(A)(2). Accessed .
- Bureau of Internal Revenue. “BIR RR 8-2018 / RMC 50-2018: implementing the 8% income tax option.” bir.gov.ph. Bureau of Internal Revenue, RR 8-2018. Accessed .