Individual Income taxation Part 2
Applicable taxes of Business and Compensation Income
Self-employed and Professionals (business income)
Income Tax Business Tax
Graduated rate or 8% Tax 12% VAT or 3% Percentage Tax
Compensation Income
Income Tax Business Tax
Graduated Rate Not Subject to business tax
Graduated Rate and 8% preferential tax
Individual Taxpayer
Self-employed and Professionals (SEP) Purely Compensation Income Earner
Purely SEP Mixed Income Earner
Business Income Business Income Compensation Income
Gross Sales/Receipts Gross Sales/Receipts Gross Sales/Receipts Gross Sales/Receipts
Greater than 3M Less than or equal 3M Less than or equal 3M Greater than 3M
Graduated or 8% preferential tax
Subject to Graduated Rate
Self-employed – sole proprietor or an independent contractor who reports income earned from self-employment
Professionals – certified by professional body belonging to specific profession, professional entertainers, professional athletes, directors,
producers, insurance agents, insurance adjusters, management and technical consultant, bookkeeping agents, and other recipients of
professional, promotional, and talent fees.
Gross sales – refers to the total amount of money or its equivalent representing the contract price, excluding VAT and other amounts which do
not redound to the benefit of the seller.
Requisites to avail the 8% Preferential tax rate
Requisites to avail 8% preferential tax
1. Gross Sales/receipts and other non-operating income does not exceed the VAT threshold of 3 Million.
2. The SEP shall be non-vat registered.
3. Gross Sales/Receipts were not derived from VAT-exempt sales and transactions.
4. The SEP is not subject to percentage tax other than under Section Of the Tax Code.
5. The SEP signifies his intention to elect the 8% income tax.
Computation of 8% tax
1. For Purely SEP – 8% of gross sales/receipts and other non-operating income in excess of 250,000
2. For Mixed Income Earner – 8% of gross sales/receipts and other non-operating income.
Purely SEP – not earning income from employment
Can choose either graduated tax rate or preferential tax rate if annual gross sales or receipts(AGSR) do not exceed 3 million
Purely SEP with ASGR of less than or equal to 3 million
Graduated Tax Rate 8% Preferential tax
Income tax Business tax Income tax Business tax
Graduated tax rate table Percentage tax under Sec. 116 8% tax based of ASGR Not subject to percentage tax
Of the tax code in excess of 250,000
If AGSR is more than 3 million, it can only use graduated tax rate, and is subject to VAT.
RR-8-2018 provides that a taxpayer should signify his intention to avail the 8% income tax on the 1st quarter return of the taxable year and such
election shall be irremovable for the taxable year.
If it does not signify his intention to avail the 8% tax, it shall be considered as having availed of the graduated tax rate.
Case A: Purely SEP whose AGSR and other non-operating income does not exceed 3M
1. Determine the income tax due in 2024 assuming the gross sales/receipts and other non-operating income was 240,000.
2. Using the data below, determine the income tax due:
Gross Sales 2,800,000
Cost of Sales (1,500,000)
Operating expenses (750,000)
Net income 550,000
a. How much is the income tax due if the taxpayer uses the graduated tax rate?
b. How much is the income tax due if the taxpayer uses the preferential tax rate?
Case B: Purely SEP whose AGSR and other non-operating income exceeds 3M
3. Using the data below, determine the income tax due:
Gross Sales 5,000,000
Cost of Sales (2,250,000)
Operating expenses (1,250,000)
Net income 1,500,000
c. How much is the income tax due if the taxpayer uses the graduated tax rate?
d. How much is the income tax due if the taxpayer uses the preferential tax rate?
Case C: Purely SEP whose AGSR and other non-operating income is less than 3M but SEP is VAT Registered
4. Using the data below, determine the income tax due:
Gross Sales 2,800,000
Cost of Sales (1,500,000)
Operating expenses (750,000)
Net income 550,000
e. How much is the income tax due if the taxpayer uses the graduated tax rate?
f. How much is the income tax due if the taxpayer uses the preferential tax rate?
g. How much is the business tax due ?
