Income Tax (2026 Guide)

What is income tax?

Who pays income tax?

Required for

Resident citizens are taxed on worldwide income; resident aliens and non-resident citizens are taxed on Philippine-source income; self-employed individuals, professionals, and mixed-income earners are taxed on net business or professional income; domestic corporations are taxed on worldwide income and resident foreign corporations on Philippine-source income (NIRC sections 23-25, 27-28, as amended by RA 10963 and RA 11534).

Optional for

Employees earning purely compensation income that produces taxable income of P250,000 or less per year owe zero tax, but they may still file BIR Form 1700 to claim a refund of any over-withheld tax.

Exempt

Statutory minimum wage earners are exempt on their minimum wage, holiday pay, overtime pay, night-shift differential, and hazard pay (NIRC section 24(A)(2)); non-stock, non-profit organizations and government instrumentalities meeting NIRC section 30 conditions are exempt; and specific income items under NIRC section 32(B), such as qualified SSS, GSIS, and BIR-approved retirement benefits, are exempt.

Categories and rates

Deductions

Worked examples

1. Example 1

   Maria Santos, a salaried employee in Manila, earns P600,000 in annual taxable compensation with no other income.

   Taxable income is P600,000, which falls in the P400,001-P800,000 bracket of the TRAIN graduated table (NIRC section 24(A), as amended by RA 10963): P22,500 + 20% of the excess over P400,000. Tax = P22,500 + 20% x (P600,000 - P400,000) = P22,500 + P40,000 = P62,500. Note: the TRAIN Law repealed personal and additional exemptions, so no P50,000 personal exemption is subtracted; the relief is built into the P250,000 zero-tax band.

   Result: Maria's annual income tax is P62,500, withheld monthly by her employer (about P5,208 per month) under the BIR withholding tax tables. As a pure-compensation earner under substituted filing, she receives BIR Form 2316 and generally does not file Form 1700 herself.

2. Example 2

   Juan Reyes, a self-employed consultant in Cebu, reports gross receipts of P1,200,000 with itemized business expenses of P400,000, and elects the graduated rates rather than the 8% flat tax.

   Gross receipts P1,200,000 less itemized expenses P400,000 = taxable income P800,000. This sits at the top of the P400,001-P800,000 bracket: P22,500 + 20% of the excess over P400,000. Tax = P22,500 + 20% x (P800,000 - P400,000) = P22,500 + P80,000 = P102,500.

   Result: Juan's annual income tax is P102,500. He files Form 1701 (graduated rates with itemized deductions) by April 15 and pays quarterly income tax using Form 1701Q, due May 15, August 15, and November 15.

3. Example 3

   Liza Cruz, a freelance graphic designer in Davao, has gross receipts of P900,000, no VAT registration, and elects the 8% flat income tax option.

   Under the 8% optional rate (NIRC section 24(A)(2)(b), as amended by RA 10963), tax is 8% of gross receipts in excess of P250,000, in lieu of both the graduated tax and the 3% percentage tax. Tax = 8% x (P900,000 - P250,000) = 8% x P650,000 = P52,000.

   Result: Liza's annual income tax is P52,000. Because she availed of the 8% flat rate, she files Form 1701A (not Form 1701) by April 15 and files Form 1701Q quarterly. The 8% option is available only to those whose gross sales or receipts do not exceed the P3,000,000 VAT threshold.

4. Example 4

   ABC Corporation, a domestic corporation on a calendar year with total assets of P150,000,000, reports net taxable income of P5,000,000 for 2024.

   Because its total assets exceed P100,000,000, ABC does not qualify for the 20% small-business rate and is taxed at the regular 25% rate under CREATE (NIRC section 27, as amended by RA 11534). Tax = P5,000,000 x 25% = P1,250,000.

   Result: ABC Corporation's annual income tax is P1,250,000. It files Form 1702-RT by April 15 of the following year and pays quarterly using Form 1702Q by the 15th day of the 2nd month after each of the first three quarters.

5. Example 5

   Rosa Gonzales, a retiree, receives P300,000 in annual pension from a BIR-approved private retirement plan and P200,000 in taxable freelance bookkeeping income.

   Pension income from a BIR-approved plan is exempt under NIRC section 32(B)(6) and is not counted. Taxable freelance income is P200,000, which falls entirely within the first P250,000 bracket taxed at 0%. Tax = P0.

   Result: Rosa owes P0 in graduated income tax because her P200,000 of taxable income is below the P250,000 zero-rate threshold. She still files Form 1701 to report the freelance income. Bank interest, by contrast, is taxed separately at a 20% final withholding tax under NIRC section 24(B) and is not added to graduated income.

Common mistakes to avoid

• Filing the wrong individual return, for example using Form 1701 when you elected the 8% flat rate or the Optional Standard Deduction (which require Form 1701A), or assuming a form like '1701-C' or '1701-E' exists (neither does; Form 1701-C does not exist).

  Penalty:

  BIR may treat the return as not filed or require an amended return, exposing you to a 25% surcharge and 12% annual interest on any tax that ends up underpaid. BIR Form 1701-C does not exist, nor does 1701-E; the only individual income tax returns are 1700, 1701, 1701A, and 1701Q.

  How to avoid it:

  Match the form to your situation: Form 1700 for pure compensation income, Form 1701 for mixed income or business income under graduated rates with itemized deductions, Form 1701A for pure business or professional income under the 8% rate or OSD, and Form 1701Q for quarterly filing. Verify the current form on bir.gov.ph before filing.

• Still claiming a P50,000 personal exemption or P25,000 per-dependent additional exemption, which the TRAIN Law repealed effective January 1, 2018.

  Penalty:

  Claiming repealed exemptions understates taxable income, leading to a deficiency assessment plus a 25% surcharge and 12% annual interest on the underpaid tax (NIRC sections 248-249).

  How to avoid it:

  Do not subtract any personal or additional exemptions. The P250,000 zero-tax band already replaces them for all individuals. Self-employed taxpayers instead choose either itemized deductions, the 40% OSD, or the 8% flat rate.

• Failing to report all income sources, such as a side business, rental income, or freelance fees, on the annual return.

  Penalty:

  BIR may assess deficiency tax plus a 25% surcharge and 12% annual interest, and may impose a 50% surcharge for fraud where the omission is willful (NIRC sections 248-249).

  How to avoid it:

  Consolidate all taxable income on the correct return. Compensation-only earners use Form 1700; anyone with business, professional, or mixed income uses Form 1701 or Form 1701A. Reconcile your figures against your BIR Form 2316 and books of account.

• Missing the April 15 annual deadline or the quarterly Form 1701Q deadlines (May 15, August 15, November 15).

  Penalty:

  Late filing or payment triggers a 25% surcharge plus 12% annual interest, and a compromise penalty. Willful failure to file can lead to a fine of P10,000 or more and imprisonment of 1 to 10 years (NIRC sections 248, 255).

  How to avoid it:

  Calendar all four individual deadlines (annual April 15; quarters May 15, August 15, November 15) and file electronically through eBIRForms or eFPS to obtain a dated confirmation.

Ways to lower the tax legally

• Compare the 8% flat rate against the graduated rates each year if your gross sales or receipts are under the P3,000,000 VAT threshold. The 8% option taxes gross receipts above P250,000 and replaces the 3% percentage tax, while graduated rates allow deductions.

  Potential savings: A consultant with P1,200,000 gross receipts and only P150,000 in real expenses pays roughly P76,000 under the 8% rate versus about P127,500 under graduated rates with limited deductions, saving over P50,000. A taxpayer with heavy expenses should instead use graduated rates with itemized deductions or the 40% OSD.

• Use the 40% Optional Standard Deduction if you lack complete receipts. The OSD deducts 40% of gross sales or receipts with no documentation, and is claimed on Form 1701A.

  Potential savings: A professional with P1,000,000 gross receipts who cannot fully document expenses deducts P400,000 via OSD, cutting taxable income to P600,000 and removing income otherwise taxed at the 20% marginal bracket, saving roughly P40,000 versus claiming no deductions.

• Keep complete, organized records when you choose itemized deductions, so all ordinary and necessary business expenses (rent, utilities, supplies, professional fees) survive a BIR audit.

  Potential savings: A self-employed professional with P1,000,000 gross income who properly documents P300,000 of expenses cuts taxable income to P700,000, removing income taxed at the 20% marginal rate and saving about P60,000 (20% x P300,000) versus claiming nothing.

• Time discretionary income and deductible expenses around the P2,000,000 and P8,000,000 bracket thresholds, where the marginal rate steps up from 25% to 30% and from 30% to 35%.

  Potential savings: A business owner with P2,100,000 projected taxable income who defers P100,000 of income to the next year (bringing this year to P2,000,000) shifts that P100,000 from the 30% bracket to the 25% bracket, saving about P5,000 (5% x P100,000).