How much is the new withholding tax rate on incomes of self-employed and professionals and how to compute the income tax that they are supposed to pay?
We explain the answers in this easy-to-read guide below.
Under the TRAIN law or Republic Act (RA) No. 10963, self-employed individuals and professionals will be subjected to the following tax regulations:
If annual gross sales or income is P3 Million or below
Self-employed and professionals with annual gross sales or income receipts not exceeding the VAT threshold of P3 Million have the option to choose between these two tax rates:
- Eight percent (8%) of gross sales or receipts and other income, in excess of P250,000 instead of the graduated income tax rates and percentage tax (no option to register for VAT); OR
- Graduated income tax rates of 0% to 35% on net taxable income, plus 3% percentage tax (No change in computation of Net Taxable Business Income)
The graduated income tax rates are the same as the Personal Income Tax Rates and Tax Tables here and summarized below.
BIR Income Tax Table (for the years 2018-2022)
| Taxable Income per Year | Income Tax Rate (Year 2018-2022) |
|---|---|
| P250,000 and below | 0% |
| Above P250,000 to P400,000 | 20% of the excess over P250,000 |
| Above P400,000 to P800,000 | P30,000 + 25% of the excess over P400,000 |
| Above P800,000 to P2,000,000 | P130,000 + 30% of the excess over P800,000 |
| Above P2,000,000 to P8,000,000 | P490,000 + 32% of the excess over P2,000,000 |
| Above P8,000,000 | P2,410,000 + 35% of the excess over P8,000,000 |
| Source: | BIR and PinoyMoneyTalk.com |
BIR Income Tax Table (from year 2023 onwards)
| Taxable Income per Year | Income Tax Rate (Year 2023 onwards) |
|---|---|
| P250,000 and below | 0% |
| Above P250,000 to P400,000 | 15% of the excess over P250,000 |
| Above P400,000 to P800,000 | P22,500 + 20% of the excess over P400,000 |
| Above P800,000 to P2,000,000 | P102,500 + 25% of the excess over P800,000 |
| Above P2,000,000 to P8,000,000 | P402,500 + 30% of the excess over P2,000,000 |
| Above P8,000,000 | P2,202,500 + 35% of the excess over P5,000,000 |
| Source: | BIR and PinoyMoneyTalk.com |
8% Withholding Tax for Self-employed and Professionals
The 8% withholding tax rate replaces the two-tier rate of 10% (for self-employed and professionals earning less than P720,000 income every year) or 15% (for those earning more than P720,000 per year).
The 8% withholding rate is applied on the income, regardless of the amount, and is reiterated in BIR’s Revenue Memorandum Circular No. 1-2018 issued on January 4, 2018 which states that:
“Change in the Creditable Withholding Tax Rate on lncome Payments to Self-employed lndividuals or Professionals
The following lncome Payments to Self-employed lndividuals or Professionals shall be subject to Eight Percent (8%):
1. Professional fees, talent fees, commissions, etc. for services rendered by individuals;
2. lncome distribution to beneficiaries of Estates and Trusts;
3. lncome Payment to certain brokers and agents;
4. lncome Payments to partners of general professional partnership;
5. Professional fees paid to medical practitioners; and
6. Commission of independent and/or exclusive sales representatives, and marketing agents of companies.”
If annual gross sales or income is above P3 Million
However, the tax rule is simpler and more straightforward for self-employed and professionals receiving annual gross sales or receipts exceeding the P3 Million VAT threshold. If their gross income or sales receipts total more than P3 million, they do not have a choice and they must follow the graduated income tax rates (as shown above) on the net taxable income, plus VAT.
(UPDATE Feb. 2018): The BIR released Revenue Regulation RR 8-2018 which details the implementation of income taxes under the TRAIN law. Click here to see a sample computation, as explained by BIR, of how income taxes are calculated for Professionals and Self-Employed individuals: BIR Sample Computation: Income Tax for Self-Employed and Professionals under TRAIN
(UPDATE May 2018): The BIR has released a new Revenue Memorandum Order covering the availment of 8% tax rate for self-employed and professionals. Read about it here: 8% BIR Tax Rule for Self-Employed and Professionals (RMO 23-2018)
* * * For more UPDATED resources on the approved TRAIN Tax Reform, click below:
