Sole prop: 8% or graduated?
A sole proprietor at ₱3 million or less can pay 8% of sales instead of graduated rates plus 3%. Two sellers with the same sales show which wins, and when.
← 7.1 From sales to taxable incomeTwo sellers, one choice
Liza and Ben are sole proprietors, not registered for VAT (value-added tax). Each sold ₱2.4 million last year. Liza sells handmade candles at a 40% profit margin; Ben resells gadgets at 10%.
A sole proprietor at ₱3 million or less has two ways to pay income tax. Which is cheaper depends on the margin.
Option 1: graduated rates, plus 3%
The default. Income tax is charged on profit, in slices: the first ₱250,000 is tax-free, then 15%, 20%, 25% and up. On top, a non-VAT seller pays 3% percentage tax on sales, on the quarterly 2551Q.
Liza's profit is ₱960,000: income tax ₱142,500, plus 3% of ₱2.4 million, ₱72,000. Total: ₱214,500.
Option 2: 8% of sales
The 8% option is charged on sales above ₱250,000, and it replaces both the graduated income tax and the 3%. Liza: (₱2,400,000 − ₱250,000) × 8% = ₱172,000.
| Graduated + 3% | 8% option | |
|---|---|---|
| Taxed on | Profit, in slices | Sales |
| Tax-free first ₱250,000 | Of profit | Of sales |
| 3% percentage tax | Yes, on the 2551Q | No |
For Liza, 8% is ₱42,500 less than ₱214,500. Note that it doesn't look at profit at all.
Ben: a thin margin
Same sales, so Ben's 8% is also ₱172,000. But his profit is only ₱240,000, inside the tax-free first ₱250,000.
On graduated rates he pays no income tax, only the 3%: ₱72,000. For Ben, the 8% would cost ₱100,000 more.
Where the line is
At ₱2.4 million of sales, the two options cost the same at a margin of about 33%. Above it, 8% is cheaper; below it, graduated rates are.
Below ₱400,000 of sales, 8% is cheaper at any margin. Your accountant can find your line from your books; the last step lets you try your own numbers.
Who can choose 8%
All three must be true:
| ✓ | An individual: a sole proprietor or a professional |
| ✓ | Sales and other non-operating income of ₱3 million or less |
| ✓ | Not VAT-registered |
| ✗ | A VAT-registered seller, even below ₱3 million |
| ✗ | A company: a One Person Corporation (OPC) pays 20% or 25% of profit |
Lesson 7.3 compares a sole proprietor with a company.
Also employed? No ₱250,000
If you also earn a salary, you're a mixed-income earner. You can still choose 8% for the shop, but without the ₱250,000 deduction: your salary already uses the tax-free first slice.
If Liza had a day job, her 8% would be on all ₱2.4 million: ₱192,000.
When you choose, and when you lose it
New sellers choose at registration or on their first quarterly return. Existing sellers choose on the first-quarter return of the year: the 1701Q (quarterly income tax return) due 15 May, or the first-quarter 2551Q. Don't choose, and graduated rates apply.
On the 1701Q it's item 16. Liza's first quarter: ₱600,000 of sales, less the ₱250,000, × 8% = ₱28,000. The form's own footnote spells out both rules: the choice holds for the whole year, and past ₱3 million it switches to graduated rates.
Passing ₱3 million also means registering for VAT (Lesson 1.4). Whether your choice carries into the next year varies; check your 2303, the certificate of registration, with your Revenue District Office (RDO).
Pop Quiz: who can choose 8%?
Pick how each seller's 8% would work, if they can have it.
Dani, a sole proprietor, non-VAT, sold ₱1.8 million.
An individual at ₱3M or less, non-VAT, with no salary: 8% on sales above ₱250,000.
Elle Home OPC, non-VAT, sold ₱2.4 million.
The 8% option is for individuals only. A company pays corporate income tax (Lesson 7.3).
Fe, a sole proprietor who registered for VAT by choice, sold ₱2.5 million.
VAT-registered sellers can't use 8%, whatever their sales.
Ben takes an office job and keeps his shop, at ₱1 million of sales.
A mixed-income earner can choose 8%, but with no ₱250,000 deduction: his salary uses the tax-free slice.
Pop Quiz: your numbers
Move the sliders: your yearly sales, up to ₱3 million, and your profit margin. Watch which option wins, and where the line sits.
Then choose on your first-quarter return, and keep the books either way: the 8% is on sales, so every sale must be recorded.
General information for learning, not tax advice. Simplified estimates with 2023-onward graduated rates, the 8% option and 3% percentage tax; profit = sales × margin, with no optional standard deduction. The sellers are fictional; ask your accountant to run your own figures.
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