Income Tax vs. Percentage Tax: What Should Freelancers Pay in the Philippines?

If you’re a freelance tutor or working online in the Philippines, you’ve probably heard of income tax and percentage tax. But with both being common BIR payment types, you might be wondering, which one should you pay? And what’s the difference between the two anyway?

This article will explain everything you need to know about income tax vs percentage tax in the Philippines, especially for freelancers like you. Let’s break it down in a simple way so you can choose the right tax type and file correctly.

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Overview of Percentage Tax

Percentage tax is a type of business tax based on your gross income, meaning your total earnings before subtracting expenses. This is usually paid by small businesses and self-employed individuals who are not VAT-registered.

• Rate: 3% of your gross income
• Who pays it? Self-employed individuals or freelancers with annual income of ₱3 million or below
• How to file: You pay this quarterly using BIR Form 2551Q
• Deadline: On or before the 25th day after the end of each quarter

For a more detailed guide, learn more about how to compute Percentage Tax as a freelancer. 

Overview of Income Tax

Income tax is based on your net income, which is your earnings after subtracting allowable business expenses. Freelancers can choose between two ways to compute income tax:

1. Graduated Income Tax Rates

• Follows the tax table (ranging from 0% to 35%)
• You can deduct business-related expenses to lower your taxable income
• Good for those with high expenses

2. 8% Flat Income Tax

• Only available for those earning PHP 3 million and below per year
• Applies to gross income minus PHP 250,000
• Simpler computation but you can’t deduct other expenses

This is filed quarterly and annually using BIR Form 1701Q (quarterly) and 1701/1701A (annual) depending on the income tax type you chose.

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Differences Between Income Tax and Percentage Tax

Here’s a quick look at how the two compare:

Best Choice for Online Tutors: What Makes Sense?

So, what’s better for freelance tutor taxes?

Here are some common scenarios:

• You have little to no business expenses and want simple taxes: 8% income tax is usually the best.
• You earn below PHP 250,000 a year: You won’t pay anything under either system, but income tax filing is still needed.
• You spend a lot on work tools (software, laptop, etc.): Consider graduated income tax so you can deduct those expenses.
• You don’t want to track expenses or deal with too much paperwork: Go for percentage tax + income tax (8%) combo

Remember, if you choose the 8% income tax, you don’t have to pay the 3% percentage tax anymore. You just need to mark your choice when filing your first quarterly income tax return.

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How to File Either Tax Type

Whether you choose income tax or percentage tax, here’s what you need to do:

1. Register with the BIR as a freelancer/self-employed
2. Choose your tax type (Percentage Tax or 8% Income Tax)
3. Use eBIRForms or BIR online payment platforms
4. File your taxes on time every quarter and once a year
5. Keep your receipts, invoices, and books of accounts updated

For extra help, many freelancers also use apps like Taxumo or consult with tax advisors to stay compliant.

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Income Tax and Percentage Tax in the Philippines: Is One Better Than The Other?

There’s no one-size-fits-all answer when it comes to income tax vs percentage tax in the Philippines. The right choice depends on your income, expenses, and how much effort you want to put into managing your taxes.

For most freelance tutors, the 8% income tax is a practical, stress-free option. But if you have high costs related to your work, graduated income tax could help you save more in the long run.

Whichever you choose, make sure to file properly and pay on time to avoid penalties. A little effort goes a long way in keeping your freelance career smooth and BIR-compliant.

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