When it comes to paying income taxes in the Philippines, one of the options available to taxpayers is the graduated income tax rate. If you’re earning from your profession, freelancing, or running a business, it’s important to know what this means and whether it applies to you.
What Is the Graduated Income Tax Rate?
The graduated income tax rate is a tiered system of taxation where the tax you pay depends on how much you earn for a specific quarter. Instead of a flat percentage applied to your entire income, your taxable income is divided into brackets, and each bracket is taxed at a specific rate.
This system ensures that those with lower income pay a smaller percentage in taxes, while those who earn more contribute a higher portion.
The Current Tax Brackets (TRAIN Law)
Under the TRAIN Law (Tax Reform for Acceleration and Inclusion), the graduated income tax rates for individual taxpayers are structured as follows:
From 2023 onwards:
- ₱250,000 and below – 0% (exempted)
- Over ₱250,000 up to ₱400,000 – 15% of the excess over ₱250,000
- Over ₱400,000 up to ₱800,000 – ₱22,500 + 20% of the excess over ₱400,000
- Over ₱800,000 up to ₱2,000,000 – ₱102,500 + 25% of the excess over ₱800,000
- Over ₱2,000,000 up to ₱8,000,000 – ₱402,500 + 30% of the excess over ₱2,000,000
- Over ₱8,000,000 – ₱2,202,500 + 35% of the excess over ₱8,000,000
⚠️ Important: This graduated tax table is only for individuals (employees, professionals, freelancers, and sole proprietors). Corporations do not use this system. Instead, they are subject to flat corporate income tax rates.
How to get the Graduated Income Tax Rate
As a self-employed individual, freelancer, or business owner, you can choose the graduated income tax rates instead of the 8% flat tax. If you don’t choose, BIR will assume you are using Itemized Deductions by default.
To do this, you’ll need to declare your taxable income using one of two deduction methods:
- Itemized Deductions – You list down all your actual and necessary business expenses (rent, utilities, supplies, salaries, etc.) and subtract them from your income. Your net taxable income after deductions will then be taxed using the graduated income tax rates.
- Optional Standard Deduction (OSD) – Instead of tracking all expenses, you can simply claim a flat 40% deduction of your gross sales/receipts. The remaining 60% is treated as your taxable income, which will then be applied to the graduated income tax table.
Important things to note about graduated income tax rate:
- You’ll pay income tax based on the brackets plus percentage tax (filed using Form 2551Q).
- If you’re a BMBE (Barangay Micro Business Enterprise), you’re automatically under graduated and cannot choose 8%.
- You can’t change tax options in the middle of the year. You may only switch at the start of a taxable year.
When Should You Choose Graduated Income Tax Rates?
Graduated tax rates may be the better choice if:
- You spend a lot on your business, so you can deduct those allowable expenses before the tax applies.
- Your net taxable income (after deductions) falls within the lower tax brackets.
- You want to maximize tax deductions and exemptions available under the law.
On the other hand, if your business has very few expenses to deduct, the 8% flat rate may be simpler and cheaper. As a self-employed individual or freelancer, you can choose between two tax setups:
a) 8% flat income tax, or
b) Graduated income tax + percentage tax (filed using Form 2551Q).
💡 To know which option fits you best, it’s always a good idea to talk to one of our accountants so you can make an informed decision before filing.