How to Compute Your Income Tax Return in the Philippines

To compute your income tax return in the Philippines, you classify your income, choose a rate method, apply the TRAIN Law brackets or the 8% flat tax to your taxable base, and then subtract any tax already withheld or paid during the year. The first ₱250,000 of taxable income is tax-free, and rates climb to 35% on income above ₱8 million. The annual return is due every April 15, and self-employed filers also pay quarterly.

Figure Out What Counts as Your Taxable Income

Before you can compute anything, you need to know what belongs on the return.

Resident citizens are taxed on worldwide income. Non-resident citizens and resident aliens are taxed only on Philippine-sourced income. If you spent part of the year working abroad but kept your Philippine residency, your foreign earnings still get reported.

Your income type then determines which rate schedule applies. Compensation earners receive a salary from an employer. Self-employed individuals and professionals earn from a business or from professional practice. Mixed-income earners have both.

Not everything you receive is taxable. Some items are excluded from the base entirely, and adding them back inflates your liability:

13th-month pay and other benefits are exempt up to a combined ₱90,000 per year. Only the excess is added to your taxable compensation.
De minimis benefits within BIR-prescribed ceilings are exempt. Revenue Regulations No. 29-2025, effective January 6, 2026, raised several of these limits, including a rice subsidy of up to ₱2,500 per month, uniform allowance of up to ₱8,000 per year, and actual medical assistance of up to ₱12,000 per year. Amounts over the ceilings are taxable.
Mandatory contributions to SSS, PhilHealth, and Pag-IBIG are deducted from your salary before it hits the graduated table.
Passive income under final withholding tax stays off your annual return entirely. Interest on bank deposits (20%), cash or property dividends from domestic corporations (10%), and capital gains on unlisted shares (15%) are taxed at source and never appear on Form 1700 or 1701.

That last point trips up many first-time filers who wonder whether to report their savings account interest. You don’t. It has already been taxed.

The Graduated Tax Brackets

Compensation earners and any self-employed taxpayer not using the 8% flat tax run their taxable income through the TRAIN Law brackets, effective January 1, 2023 onward:

₱0 – ₱250,000: 0%
₱250,001 – ₱400,000: 15% of the excess over ₱250,000
₱400,001 – ₱800,000: ₱22,500 plus 20% of the excess over ₱400,000
₱800,001 – ₱2,000,000: ₱102,500 plus 25% of the excess over ₱800,000
₱2,000,001 – ₱8,000,000: ₱402,500 plus 30% of the excess over ₱2,000,000
Over ₱8,000,000: ₱2,202,500 plus 35% of the excess over ₱8,000,000

The fixed peso amount in each bracket is the cumulative tax from all the lower brackets, so you only apply the marginal percentage to the portion of income within that specific range.¹ A taxpayer with ₱1,000,000 in taxable income owes ₱102,500 plus 25% of the ₱200,000 above ₱800,000, or ₱152,500.

The 8% Flat Tax Alternative

Self-employed individuals and professionals can elect a flat 8% on gross sales or gross receipts plus other non-operating income, in place of both the graduated rates and the 3% percentage tax under Section 116 of the Tax Code.¹ The 8% is applied to the amount exceeding ₱250,000, so the first ₱250,000 of gross sales is effectively tax-free.

You cannot use the 8% rate if:

Your gross sales or receipts exceed ₱3 million (the VAT threshold).
You are VAT-registered, regardless of your actual revenue level.
You earn purely compensation income.

You elect the 8% by marking the box on your first quarterly return (Form 1701Q) or first Form 2551Q of the year. Once chosen, it applies for the entire year.

Mixed-income earners can still elect the 8% on the business side. In that case, the ₱250,000 exemption is not applied again to gross sales, because the zero-rate bracket is already absorbed by your compensation income in the graduated computation. The 8% runs on the full gross receipts.¹

Pick a Deduction Method If You Have Business Income

If you report business or professional income and you’re using graduated rates, you have to choose between two deduction methods. This choice is locked in for the year once you file your first return or first quarterly return.²

The Optional Standard Deduction lets you deduct a flat 40% of gross sales or gross receipts with no need to itemize expenses or attach financial statements.² The remaining 60% is your taxable income. This works well when your actual expenses are under 40% of gross receipts.

Itemized deductions let you subtract every substantiated business expense: cost of goods sold, salaries, rent, depreciation, utilities. This wins when your real expenses exceed 40% of gross receipts, but you have to keep receipts, maintain books of accounts, and often submit audited financial statements through the eAFS system within 15 days of e-filing or the filing deadline, whichever is later.³

Work Through the Computation

The mechanics differ depending on which method you’re using. Three worked examples cover most situations.

Graduated Rates With OSD

Suppose you’re a self-employed professional with ₱1,500,000 in gross receipts, using the OSD:

Gross receipts: ₱1,500,000
Less OSD (40%): ₱600,000
Taxable income: ₱900,000

The first ₱800,000 of taxable income produces ₱102,500 in tax. The remaining ₱100,000 is taxed at 25%, adding ₱25,000. Total tax before credits: ₱127,500.¹

8% Flat Tax

Same ₱1,500,000 in gross receipts, no compensation income:

Gross receipts plus non-operating income: ₱1,500,000
Less ₱250,000 exemption: ₱1,250,000
Tax at 8%: ₱100,000

Here the 8% saves ₱27,500 compared to graduated rates with OSD.¹ The gap narrows or reverses depending on your expense ratio. If your actual deductible expenses exceed 40% of gross receipts, itemized deductions under the graduated table could produce a lower result than either. Run all applicable scenarios before you commit.

Mixed-Income

Suppose you earn ₱600,000 in salary and ₱800,000 in freelance gross receipts, and you elect the 8% on the business side. You compute two pieces separately:

Compensation tax: Run the ₱600,000 salary (after SSS, PhilHealth, and Pag-IBIG contributions) through the graduated brackets.
Business tax: ₱800,000 × 8% = ₱64,000. No ₱250,000 deduction here, because the graduated brackets on your salary already used it.
Total tax due: Sum of the two, minus creditable withholding taxes from Forms 2307 and 2316.

If instead you want graduated rates on everything, combine salary with net business income (after OSD or itemized deductions) into a single taxable figure and apply the brackets once.

Subtract Your Credits to Get the Balance Due

The tax you computed above is gross. Now subtract every tax already paid or withheld on your behalf during the year:

Compensation withheld (Form 2316): what your employer took out of each paycheck.⁴
Creditable withholding taxes (Form 2307): amounts withheld by clients or payors on professional fees, rentals, or similar payments.
Quarterly income tax payments (Form 1701Q): what you already remitted during the year.

If credits exceed the tax due, you can either claim a refund or carry the excess forward as a credit against next year’s tax. If tax due exceeds credits, the difference is payable when you file.

Quarterly Returns Feed Into the Annual Computation

Self-employed and mixed-income earners don’t wait until April. You file Form 1701Q for the first three quarters:

First quarter (January – March): May 15
Second quarter (April – June): August 15
Third quarter (July – September): November 15

Each quarterly return computes cumulative income and tax year-to-date, then subtracts what you already paid in prior quarters. The remainder is your incremental payment. When you file your annual return in April, those quarterly payments come off as credits against your final liability. Missing a quarterly deadline triggers the same surcharge and interest rules as missing the annual deadline.

Which Form to File and When

The BIR uses different forms depending on your income mix:

Form 1700: purely compensation income from a Philippine employer.
Form 1701A: business or professional income using either the 8% flat tax or the graduated rates with the OSD. Also for mixed-income earners meeting the same conditions.
Form 1701: self-employed and mixed-income filers using itemized deductions, or anyone whose situation doesn’t fit 1701A.

The annual deadline is April 15 following the close of the calendar year.⁵ You file through eBIRForms or, if you’re mandated, through eFPS. Payment channels include Authorized Agent Banks, the BIR’s online portal, GCash, Maya, and other accredited platforms. Attachments such as financial statements go through the eAFS system within 15 days of e-filing or the April 15 deadline, whichever is later.³

One boundary worth noting: if you earn purely compensation from a single Philippine employer, the tax withheld matches the tax due exactly, and your employer files Form 1604-C and issues you Form 2316, you may qualify for substituted filing and not need to file a return at all.⁴ Two employers in the same year, even if the jobs didn’t overlap, means you file yourself.

What Happens If You File Late or Underpay

The penalty layers add up quickly.

A 25% surcharge applies for failing to file on time, failing to pay by the deadline, or filing in the wrong office without BIR authorization. Willful failure or a fraudulent return raises the surcharge to 50%, and substantial underdeclaration of more than 30% is treated as presumptive fraud.⁶

Interest runs at double the prevailing legal interest rate set by the Bangko Sentral ng Pilipinas. With the legal rate at 6%, that means 12% per year on any unpaid tax, computed from the original due date until payment.⁷

A compromise penalty gets added on top. Under Revenue Memorandum Order No. 7-2015, the schedule runs from ₱1,000 for unpaid amounts up to ₱5,000, all the way to ₱50,000 for amounts exceeding ₱5 million.⁸

Willful failure to file, pay, or supply correct information is also a criminal offense under Section 255 of the Tax Code, carrying a fine of at least ₱10,000 and imprisonment of one to ten years on top of the civil penalties.⁹

1
Supreme Court E-Library. Republic Act No. 10963 (TRAIN Law)
2
Bureau of Internal Revenue. BIR Form 1701 – Guidelines and Instructions
3
Bureau of Internal Revenue. RMC No. 34-2025 Annex C – Attachments to Annual Income Tax Returns
4
Bureau of Internal Revenue. BIR Form No. 2316 – Certificate of Compensation Payment/Tax Withheld
5
Bureau of Internal Revenue. Revenue Memorandum Circular No. 34-2025
6
ChanRobles Virtual Law Library. National Internal Revenue Code of 1997 – Section 248 Civil Penalties
7
Department of Finance. TRAIN Removes Oppressive Rates for Delinquent Tax Payments
8
Bureau of Internal Revenue. BIR Penalties
9
Court of Tax Appeals. Section 255 of the National Internal Revenue Code