Income tax
How income tax works in the Philippines: the BIR rules, current rates, the 8% option and how to file.
Published Monday 31 August 2026
Table of contents
Key takeaways
- The Bureau of Internal Revenue (BIR) administers income tax under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law, CREATE and the Ease of Paying Taxes Act.
- Personal income is taxed at graduated rates from 0% to 35%, with annual taxable income up to PHP 250,000 exempt from tax.
- Small self-employed individuals and professionals below the VAT threshold can elect a flat 8% rate instead of the graduated rates and percentage tax.
- Corporations pay a regular rate of 25%, with a reduced 20% rate for smaller domestic corporations that meet the income and asset limits.
What is income tax?
Income tax in the Philippines is a tax on the income earned by individuals and businesses during the year. It is administered by the Bureau of Internal Revenue (BIR) under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law (RA 10963), CREATE (RA 11534) and the Ease of Paying Taxes Act (RA 11976).
For a small business owner, income tax is the share of your profit that goes to the government each year. How much you pay depends on who you are in the eyes of the BIR, how much you earn, and which tax option you choose. The sections below break down each of these so you can plan with confidence.
Types of income tax in the Philippines
The BIR taxes different taxpayers under different rules, so the first step is knowing which category you fall into. The four groups below cover most Philippine small businesses and the people who run them.
Individuals earning compensation income
Employees who earn salaries and wages are taxed on their compensation income at the graduated personal rates. Their employer usually withholds the tax each payday, so many purely salaried workers no longer need to file a separate annual return.
Self-employed individuals, professionals and sole proprietors
Freelancers, licensed professionals and sole proprietors are taxed on the net income from their trade, business or practice. You can be taxed at the graduated rates or, if you qualify, choose the flat 8% option covered further below.
Partnerships
Partnerships are taxed based on their type, and the distinction matters for how the partners themselves are taxed. A general professional partnership formed purely to practise a profession is treated as a pass-through entity, so its net income is not taxed at the partnership level and each partner reports their share at the graduated personal rates. An ordinary or commercial partnership, by contrast, is taxed as a corporation.
Corporations
Corporations are taxed on their net taxable income under the corporate income tax rules. This covers domestic corporations and the Philippine income of resident foreign corporations, with rates explained in the corporate section below.
Final tax on passive income
Some earnings are handled outside the annual return through a final withholding tax. Certain passive income, such as interest, dividends, royalties and prizes, is taxed at source, so the payer withholds the tax and you do not report that income again in your annual return.
Income tax rates in the Philippines
Annual taxable income up to PHP 250,000 is exempt from income tax, and anything above that is taxed progressively from 15% up to 35%. The graduated schedule below took effect on 1 January 2023 and remains in force for 2026.
The current Philippine graduated income tax rates apply to annual taxable income as follows:
- 0% on income up to PHP 250,000
- 15% on income over PHP 250,000 up to PHP 400,000
- 20% on income over PHP 400,000 up to PHP 800,000
- 25% on income over PHP 800,000 up to PHP 2,000,000
- 30% on income over PHP 2,000,000 up to PHP 8,000,000
- 35% on income over PHP 8,000,000
These are marginal rates, which means each rate applies only to the portion of income that falls inside its band, not to your whole income. Your effective rate, or the share of your total income that you actually pay, is lower than your top marginal rate because the first PHP 250,000 is always exempt and lower bands are taxed at lower rates.
The 8% income tax option for small businesses
Small self-employed individuals and professionals can choose a flat 8% rate instead of the graduated rates, which keeps the maths simple. You may elect this option if you are not VAT-registered and your gross sales or receipts and other non-operating income do not exceed the PHP 3 million VAT threshold.
Under this option, the 8% applies to your gross sales or receipts and other non-operating income in excess of PHP 250,000, in lieu of both the graduated income tax and the percentage tax. The BIR rules for the 8% income tax option also set out who it excludes, and you elect it each year rather than once. It does not apply to the following:
- VAT-registered taxpayers
- Individuals earning purely compensation income
- Partners in a general professional partnership
Corporate income tax
The regular corporate income tax rate is 25% of net taxable income. Smaller domestic corporations can pay less if they stay within set income and asset limits.
A reduced 20% rate applies to a domestic corporation whose net taxable income is not over PHP 5 million and whose total assets, excluding the land on which the business sits, are not over PHP 100 million. A minimum corporate income tax (MCIT) of 2% of gross income also applies from the fourth year of operations whenever it works out higher than the regular tax. You can review the current Philippine corporate income tax rates for the finer detail.
How to calculate income tax
Your income tax is based on your taxable income, which is your gross income minus your allowable deductions. Once you know your taxable income, you apply either the graduated rates or the 8% option.
To work out your income tax under the graduated rates, follow these steps:
- Add up your gross income or gross sales and receipts for the year.
- Subtract your allowable deductions, using either the optional standard deduction (OSD) of 40% of gross sales or receipts, or your itemised deductible business expenses.
- Apply the graduated income tax rates to the taxable income that remains, or apply the 8% option if you qualify and have elected it.
The deduction figures follow the BIR rules on allowable deductions and the optional standard deduction, so you can pick the method that gives you the lower tax.
Here is a worked example under the graduated rates. Suppose you are a sole proprietor with gross sales of PHP 1,000,000 and you use the OSD of 40%, giving a deduction of PHP 400,000 and taxable income of PHP 600,000. The first PHP 250,000 is exempt, the next PHP 150,000 is taxed at 15% for PHP 22,500, and the remaining PHP 200,000 is taxed at 20% for PHP 40,000, so your income tax is PHP 62,500.
Now compare the 8% option using the same figures. With gross sales of PHP 1,000,000 and a non-VAT status, you take PHP 1,000,000 less the PHP 250,000 allowance to get PHP 750,000, then apply 8% for a tax of PHP 60,000. Running both methods each year shows you which one costs less for your situation.
Reporting, filing and paying income tax
You report and pay income tax by filing income tax returns with the BIR. The form you use depends on whether you are an individual or a corporation, and most taxpayers file both quarterly and annual returns.
You can confirm the exact forms on the BIR forms page, and the main returns are as follows:
- Individuals use BIR Form 1701 or 1701A for the annual return, with Form 1701Q for the quarters
- Corporations use BIR Form 1702 for the annual return, with Form 1702Q for the quarters
The annual income tax return is due by 15 April of the year following the calendar year, with quarterly returns filed during the year, and the BIR may grant extensions in certain cases. The Ease of Paying Taxes Act modernised Philippine tax administration to make filing and paying simpler for small businesses. Keeping tidy small business accounting records throughout the year makes each filing far simpler, and a clear income statement or profit and loss report shows the income figures your return depends on. Recording depreciation on your assets also feeds into the deductions that lower your taxable income.
Simplify your Philippine income tax with Xero
Xero helps you track income and expenses as you go and pull together the reports you need for your BIR filing, so tax time takes less of your day. With your books up to date all year, you can see your profit clearly and hand accurate figures to your accountant. Explore how Xero accounting software keeps your finances organised, and get one month free when you start.
FAQs on income tax
These common questions cover the practical points Philippine small business owners ask most about income tax.
How much is income tax in the Philippines?
Personal income tax runs on graduated rates from 0% to 35%, with the first PHP 250,000 of annual taxable income exempt. Qualifying small self-employed taxpayers can instead pay a flat 8%, while corporations pay 25% or a reduced 20%.
Who is required to pay income tax in the Philippines?
Resident citizens are taxed on income earned both in the Philippines and abroad, while non-residents and foreign corporations are generally taxed only on their Philippine-sourced income. Employees, self-employed individuals, professionals, partnerships and corporations can all fall within the income tax rules.
What is the 8% income tax rate and who can use it?
The 8% rate is a simplified option on gross sales or receipts above PHP 250,000, taking the place of the graduated tax and the percentage tax. It is open to self-employed individuals and professionals who are not VAT-registered and stay within the PHP 3 million VAT threshold.
When is the income tax deadline in the Philippines?
The annual income tax return is due by 15 April of the following year, so income earned in 2025 is reported by 15 April 2026. Quarterly returns fall due during the year, and filing early leaves room to sort out any queries before the cut-off.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.