Introduction

In the Philippine tax system, self-employed professionals—such as lawyers, doctors, accountants, engineers, consultants, and other individuals engaged in the practice of a profession—are subject to income tax obligations under the National Internal Revenue Code (NIRC), as amended by Republic Act No. 10963 (TRAIN Law) and Republic Act No. 11534 (CREATE Law). These professionals are classified as self-employed if they derive income from the independent practice of their profession without being employed by another entity.

A key threshold in Philippine tax law is the PHP 3 million annual gross sales or receipts limit, which aligns with the Value-Added Tax (VAT) registration threshold under Section 109 of the NIRC. For self-employed professionals whose gross receipts do not exceed this amount, simplified tax options are available to ease compliance burdens. This article comprehensively explores the applicable income tax rates, available options, and compliance requirements for such professionals, drawing from relevant provisions of the Tax Code, Bureau of Internal Revenue (BIR) regulations, and related jurisprudence.

Taxable Income and Classification

Self-employed professionals are taxed on their gross income derived from the practice of their profession, less allowable deductions. Gross income includes fees, commissions, and other compensation for services rendered. Under the NIRC, professionals are considered "non-VAT taxpayers" if their annual gross receipts are PHP 3 million or below, exempting them from the 12% VAT but subjecting them to other taxes.

The PHP 3 million threshold is computed based on gross sales or receipts from the preceding taxable year. If receipts exceed this amount, the professional must register for VAT and shift to standard income tax computations. For those below the threshold, the tax regime offers flexibility to choose between graduated rates or a flat rate option.

Income Tax Rates

Graduated Income Tax Rates

By default, self-employed professionals are subject to graduated income tax rates on their taxable income, as outlined in Section 24(A) of the NIRC, as amended. Taxable income is computed as gross income minus allowable deductions (itemized or optional standard deduction) and personal exemptions where applicable. The current graduated rates, effective since January 1, 2018, under the TRAIN Law, are as follows:

Not over PHP 250,000: 0%
Over PHP 250,000 but not over PHP 400,000: 15% of the excess over PHP 250,000
Over PHP 400,000 but not over PHP 800,000: PHP 22,500 + 20% of the excess over PHP 400,000
Over PHP 800,000 but not over PHP 2,000,000: PHP 102,500 + 25% of the excess over PHP 800,000
Over PHP 2,000,000 but not over PHP 8,000,000: PHP 402,500 + 30% of the excess over PHP 2,000,000
Over PHP 8,000,000: PHP 2,202,500 + 35% of the excess over PHP 8,000,000

These rates apply to net taxable income after deductions. Additionally, a 3% percentage tax under Section 116 of the NIRC is imposed on gross receipts, unless the professional opts for the 8% flat tax (discussed below).

Optional 8% Flat Tax

Introduced by the TRAIN Law and clarified in Revenue Regulations (RR) No. 8-2018, self-employed professionals with annual gross sales or receipts not exceeding PHP 3 million may elect an 8% tax on gross sales or receipts in lieu of the graduated income tax and the 3% percentage tax. This option simplifies taxation by basing the tax on gross amounts without requiring deductions.

Key features:

The 8% rate is applied to gross sales or receipts exceeding PHP 720,000 (the income tax exemption threshold adjusted under TRAIN Law).
For gross receipts of PHP 720,000 or less, no income tax is due, but other compliance requirements remain.
This election must be indicated in the first quarterly income tax return (BIR Form 1701Q) for the taxable year, and once chosen, it is irrevocable for that year.
Professionals who initially opt for graduated rates can switch to the 8% option in subsequent years, but not vice versa within the same year.

This flat rate is particularly beneficial for professionals with high deductible expenses, as it eliminates the need for detailed record-keeping of deductions.

Tax Options and Elections

Self-employed professionals under the PHP 3 million threshold have two primary options:

Graduated Rates with Deductions:
- Allows itemized deductions (e.g., business expenses like rent, utilities, supplies, and professional fees) or an optional standard deduction (OSD) of 40% of gross income under Section 34(L) of the NIRC.
- Requires substantiation of expenses through official receipts and invoices.
- Subject to 3% percentage tax on gross receipts, filed quarterly via BIR Form 2551Q.
- Suitable for those with significant allowable expenses that reduce taxable income below what the 8% flat tax would impose.
8% Flat Tax:
- No deductions allowed; tax is purely on gross amounts.
- Exempt from the 3% percentage tax.
- Simplifies filing but may result in higher tax if expenses are low relative to income.
- Professionals must still withhold and remit taxes on payments to suppliers if applicable.

Mixed income earners (e.g., professionals with both employment and self-employment income) can apply the 8% option only to their business income, while employment income remains under graduated rates with personal exemptions.

Under RR No. 11-2018, professionals who fail to signify their election in the first quarter are deemed to have chosen the graduated rates. New professionals must register with the BIR within 30 days of starting practice and indicate their choice upon registration.

Compliance Requirements

Compliance is enforced by the BIR through registration, bookkeeping, filing, and payment obligations. Non-compliance can lead to penalties, including fines, surcharges, and interest under Sections 248-257 of the NIRC.

Registration

All self-employed professionals must register with the BIR using Form 1901, obtaining a Taxpayer Identification Number (TIN), Certificate of Registration (COR), and Authority to Print (ATP) for receipts.
Annual registration fee of PHP 500 is required under Section 236(B).
If opting for the 8% tax, this must be reflected in the registration update.

Bookkeeping and Accounting

Professionals under graduated rates must maintain books of accounts (e.g., cash receipts journal, cash disbursements journal) registered with the BIR.
Those under the 8% option may use simplified bookkeeping, such as a sales book, but must issue official receipts for every transaction.
Retention of records for at least three years is mandatory, extendable in cases of audit.

Filing and Payment

Quarterly Income Tax Returns: Filed using BIR Form 1701Q on or before the 15th day of the month following the close of the quarter (e.g., May 15 for the first quarter).
Annual Income Tax Return: Filed using BIR Form 1701 on or before April 15 of the following year.
For the 8% option, quarterly declarations reflect 8% on gross receipts, with payments due simultaneously.
Percentage tax (if applicable) is filed quarterly via Form 2551Q.
Payments can be made through electronic means via the Electronic Filing and Payment System (eFPS) or over-the-counter at authorized banks.

Withholding Taxes

Professionals must withhold creditable expanded withholding tax (EWT) on certain payments, such as 10% on professional fees paid to other professionals (RR No. 2-98).
As payees, their clients (if corporations or top withholding agents) must withhold 5% or 10% EWT on fees paid to them, creditable against their income tax.

Audits and Penalties

The BIR may conduct audits under the Tax Compliance Verification Drive (TCVD) or Letter of Authority (LOA).
Common penalties include:
- 25% surcharge for late filing or payment.
- 50% surcharge for willful neglect or fraud.
- Interest at 12% per annum (reduced from 20% under TRAIN Law).
- Civil penalties up to PHP 50,000 for failure to issue receipts.
Criminal liabilities may arise for tax evasion under Section 255, with fines up to PHP 100,000 and imprisonment.

Special Considerations

Home Office Deductions: If using a home office, proportional deductions for rent, utilities, and depreciation are allowed under graduated rates, subject to substantiation.
Professional Partnerships: Income from partnerships is taxed at the partner level, with options applying individually.
COVID-19 and Economic Relief: Under BAYANIHAN Laws and CREATE Act, temporary relief like extended deadlines and reduced rates were provided, but as of 2023, standard rules apply unless extended.
Jurisprudence: Cases like CIR v. Philippine Global Communications (G.R. No. 167146) emphasize the need for proper documentation of deductions, while BIR rulings clarify that the 8% option does not apply retroactively.

Conclusion

The Philippine tax framework for self-employed professionals under PHP 3 million offers a balance between progressive taxation and simplification. Choosing between graduated rates and the 8% flat tax depends on individual circumstances, such as expense levels and administrative capacity. Strict adherence to compliance ensures avoidance of penalties and supports the integrity of the tax system. Professionals are encouraged to consult BIR issuances for updates, as tax laws evolve.