It is really difficult to start a business in the Philippines especially if you are not ready and you have so many questions in your mind. You need to register your business no matter how small it is with various government agencies. From the Barangay to the BIR you must have permits before you can operate.
Even if you are a sari-sari store owner you still need to register it. Some of us are scared when we hear the BIR because paying taxes immediately enters our minds.
So it is no surprise that you find a small business without business permits and licenses. But what I usually see are businesses that have local business permits but do not have a Certificate of Registration from the BIR. As a result, they also do not have receipts issued to their respective customers.
The main reason why they do not have a Certificate of Registration is that they do not want to register with the BIR because they do not want to pay Tax.
So through this article, I want to help you or our fellow small business owners, freelancers, small online shops, or stores how you can avoid paying tax legally. You read that right, you can do business without paying taxes. And this is a big thank you to the TRAIN law that has lowered the income taxes of our Filipinos.
I want to let you know these basic things that are often overlooked by our fellow small business owners. Let’s dive into the discussion.
1. Have Your Business Registered Early
By early, I mean if you want to register with the BIR, you must do so at the beginning of the taxable year or before the due date for filing and/or payment of the percentage tax. Its purpose is for you to avail 8% Income Tax Rate. I will explain this in Number 2.
The deadline of the first quarter filing and payment of quarterly percentage tax is every April 15 of the taxable year.
Recommended Reading: Bir Form 2551Q Percentage Tax Filing and Payment (A Complete Guide)
2. Avail the 8% Income Tax Rate
Maybe you don’t know it yet if you are just a beginner because since the TRAIN law was passed, a lot has changed in our tax system.
The 8% income tax rate can only be availed by self-employed individuals or professionals. Your gross sales or gross receipts must also not exceed ₱3,000,000 for the entire taxable year. Because if you exceed this threshold, you’ll be forced to come, the VAT-registered taxpayer. As a result, you’ll not be able to avail of the 8% income tax rate.
Benefits of 8% Income Tax Rate
- Easy to compute income taxes.
- No need to file and pay percentage tax.
- You don’t need to keep track of your expenses regularly.
- You can use only one book for bookkeeping.
- Recommended for startup business owners or freeancers and professionals.
How to Avail the 8% Income Tax Rate
For New Registration
If you are not registered with the BIR but plan to avail of the 8% Income Tax Rate, you need to select YES in the BIR Form 1901 Item Number 23. Again, I would like to remind you that you must register with the BIR before the first due date of quarterly percentage tax returns which is on April 15.
For Existing Registration
If you currently have a certificate of registration and you pay percentage tax, you must signify your intention to avail of the 8% income tax rate. You need to download the BIR Form 1905 from the link below. In PART II – REASON/DETAILS OF REGISTRATION INFORMATION UPDATE/CORRECTION, in Other Updates, you need to select the Avail of 8% Income Tax Rate Option.
Fill up the other details and sign the form. Afterward, you need to submit it to the BIR office or RDO where your business is located.
How to Have Zero Taxes Using 8% Income Tax Rate?
This is probably the most awaited part of this article. This is how you can avoid paying tax legally. You may be wondering your tax will be zero if you have 8% tax to pay. The answer there is ₱ 250,000 non-taxable income due to the TRAIN law. Your first ₱ 250,000 gross sales or gross receipts for the entire year are non-taxable.
This is also the reason why this article is for startups, business owners, freelancers, small online shops, whose gross sales of receipts does not exceed ₱250,000 throughout the year.
No Percentage Tax
Because you use the 8% Income Tax Rate, you do not have to pay percentage tax and you do not have to file BIR Form 2551Q.
No Income Tax if Gross Sales or Gross Receipts Does not Exceed ₱250,000 for the Taxable Year.
If your sales or income does not exceed ₱250,000 for the entire taxable year, you will not have to pay income tax. Presented below is a sample computation.
For example, if you are a freelance writer and you earn ₱10,000 per month, the computation of your income tax is shown below.
All you have to pay now is the annual registration fee using BIR Form 0605. Take note that this method is only applicable to taxpayers whose gross sales or gross receipts do not exceed ₱250,000 per taxable year.
If you’re a large taxpayer, you can also save income taxes by reading this article.
Recommended Reading: 8% Income Tax Rate vs. 40% Optional Standard Deduction (OSD) vs. Itemized Deduction
3. File Your Tax Returns Normally
Now that you are availing of the 8% income tax rate, you still need to do your duty as a responsible taxpayer. Even if you do not pay taxes, you still need to file a quarterly income tax return and the annual income tax return using the BIR Form 1701Q and 1701A, respectively.
Recommended Reading: Install eBIRForms And Setup Your Company in 3 Easy Steps
Frequently Asked Questions
Do I need to file BIR Form 2551Q if I avail the 8% income tax rate?
Availment of the 8% income tax rate will exempt you from paying the quarterly percentage tax, You don’t also need to file the BIR Form 2551Q quarterly.
Do I need to file my income tax returns when availing the 8% income tax rate?
Taxpayers will file the BIR Forms 1701Q and 1701 income tax returns normally when availing of the 8% income tax rate. However, they are not required to file and pay percentage tax as the 8% tax already encompasses the two tax types.
I am a corporate taxpayer, can I avail of the 8%incme tax rate option?
Under Revenue Regulation No. 8-2018, only self-employed individuals and professionals are allowed to use the 8% income tax rate option.
Bureau of Internal Revenue. (n.d.-f). RR No. 8–2018. Retrieved January 13, 2022, from https://www.bir.gov.ph/images/bir_files/internal_communications_1/Full%20Text%20RR%202018/RR%20No.%208-2018.pdf