Computing income tax as a mixed income earner in the Philippines means running two calculations and adding them. Your salary is always taxed under the graduated income tax table. Your business or professional income is taxed either under that same graduated table or at a flat 8% on gross sales, if you qualify and elect it at the start of the year. Total tax equals the tax on your compensation plus the tax on your business income, less any taxes already withheld.
The choice on the business side is where the money moves. Getting it right can save tens of thousands of pesos a year.
The Graduated Tax Table That Always Applies to Your Salary
Your compensation income has no flexibility. It runs through the graduated table under Section 24(A)(2) of the National Internal Revenue Code, as amended by the TRAIN Law. The rates below took effect on January 1, 2023 and remain in force:
- ₱250,000 and below: 0%
- Over ₱250,000 to ₱400,000: 15% of the excess over ₱250,000
- Over ₱400,000 to ₱800,000: ₱22,500 plus 20% of the excess over ₱400,000
- Over ₱800,000 to ₱2,000,000: ₱102,500 plus 25% of the excess over ₱800,000
- Over ₱2,000,000 to ₱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 first ₱250,000 is tax-exempt. For a mixed income earner, that exemption is already absorbed on the compensation side of the return, which becomes important when you pick the 8% option for business income.1Lawphil. Republic Act No. 10963
The 8% Flat Rate: Who Can Use It
You can elect a flat 8% tax on your business or professional gross sales or receipts if two conditions hold: your annual gross sales stay at or below the ₱3,000,000 VAT threshold, and you are not VAT-registered. The 8% replaces both the graduated income tax on business income and the 3% percentage tax under Section 116 of the Tax Code.2Bureau of Internal Revenue. Revenue Regulations No. 8-2018
You have to elect it early. New registrants indicate the choice on BIR Form 1901 or their first quarterly return. Existing taxpayers elect through their first quarterly income tax return (Form 1701Q) or by updating registration through Form 1905 at the start of the taxable year.3Bureau of Internal Revenue. Revenue Memorandum Order No. 23-2018
Once elected, the 8% rate locks in for the full year. If your gross sales cross ₱3,000,000 mid-year, you lose eligibility, revert to graduated rates on the business side, and pick up VAT registration obligations.
Computing Tax Under the 8% Method
Three steps. The trap is in step two.
Step 1. Tax on compensation. Take taxable compensation from BIR Form 2316 and apply the graduated table. Say your taxable compensation is ₱450,000. The tax is ₱22,500 plus 20% of ₱50,000 (the amount over ₱400,000), which is ₱32,500.
Step 2. Tax on business income. Multiply gross sales or receipts by 8%. A mixed income earner does not subtract the ₱250,000 before applying the rate. Purely self-employed taxpayers get to reduce their gross by ₱250,000 first; you do not, because that exemption is already sitting on the compensation side. If your gross receipts are ₱600,000, the business tax is ₱600,000 × 8% = ₱48,000.3Bureau of Internal Revenue. Revenue Memorandum Order No. 23-2018
Step 3. Add and subtract credits. Total tax is ₱32,500 + ₱48,000 = ₱80,500. From that, subtract employer withholding on Form 2316 and creditable withholding from clients on Form 2307. The remainder is your balance due or refund.
Computing Tax Under Graduated Rates on Both Sides
Here the two incomes are combined into a single taxable base and run through the same table.
Step 1. Taxable compensation. Use the figure from Form 2316. Continuing the example, ₱450,000.
Step 2. Net business income. Subtract deductions from gross sales. Under the Optional Standard Deduction, you deduct a flat 40% of gross without documenting expenses: ₱600,000 − ₱240,000 = ₱360,000. Under itemized deductions, you subtract documented actual expenses instead.
Step 3. Apply the table to the combined total. ₱450,000 + ₱360,000 = ₱810,000. From the table: ₱102,500 plus 25% of ₱10,000 (the excess over ₱800,000) = ₱105,000.
Step 4. Add the 3% percentage tax. Because you did not take the 8% option, your business gross sales still owe the percentage tax under Section 116: ₱600,000 × 3% = ₱18,000. Total: ₱105,000 + ₱18,000 = ₱123,000.
Step 5. Apply credits. Subtract withholding from Forms 2316 and 2307 to find the balance due.
Which Method Saves You More
In the example above, the 8% method produces ₱80,500 in total tax while graduated rates produce ₱123,000. That is a ₱42,500 gap on identical income, driven by two things: the 8% rate replaces the 3% percentage tax, and it applies to gross rather than pushing added net income into a higher bracket.
The graduated option wins in narrower situations. If your deductible business expenses are large enough to shrink net business income well below 40% of gross, itemized deductions under the graduated method can undercut the 8%. It can also come out ahead when business gross sales are very low relative to compensation, because the tax on a tiny net addition may be less than 8% of gross.
Run both computations before your first quarterly filing. That is when your election locks in.
OSD or Itemized Deductions
This sub-choice only matters if you go graduated. The OSD lets you deduct 40% of gross sales or receipts without documentation. It is calculated on gross, before any cost of goods sold or cost of services, and it needs no receipts. Multiply by 0.40 and subtract.4Supreme Court E-Library. BIR Revenue Regulations No. 16-2008
Itemized deductions let you subtract actual documented business expenses. If real expenses exceed 40% of gross, itemized produces a lower taxable base. If expenses are modest, OSD usually wins, and service professionals with low operating costs generally find OSD both simpler and cheaper. You cannot mix methods on the same return.
When and What to File
Business income is reported quarterly on BIR Form 1701Q. Deadlines:
- First quarter (January–March): May 15
- Second quarter (April–June): August 15
- Third quarter (July–September): November 15
There is no separate fourth-quarter return. The annual return, BIR Form 1701, is due April 15 of the following year and reconciles the full year against what you already paid quarterly.5Supreme Court E-Library. BIR Revenue Regulation No. 7-93 – Filing of Quarterly Income Tax Returns
Only business or professional income goes on the quarterly returns. Compensation is reported only on the annual return, using data from Form 2316.6Bureau of Internal Revenue. BIR Form 2316 – Certificate of Compensation Payment/Tax Withheld If you chose graduated rates, you also file the quarterly percentage tax return (Form 2551Q) to remit the 3% on gross sales. If you elected 8%, you skip 2551Q entirely because the 8% already covers it. A quarter with zero business income still requires a zero return.
Client-side withholding on your professional fees comes back to you as tax credits through BIR Form 2307. Collect one from every client who withheld and apply the total against your liability on the quarterly and annual returns.7Bureau of Internal Revenue. BIR Form No. 2307 Certificate of Creditable Tax Withheld at Source The annual return itself is BIR Form 1701, which has separate schedules for compensation and business income.8Bureau of Internal Revenue. BIR Form 1701 – Annual Income Tax Return
What Late Filing Costs
Three penalties can stack. A 25% surcharge applies when tax shown on the return is not paid by the due date, or when a deficiency assessment goes unpaid after the BIR demands payment.9Bureau of Internal Revenue. Revenue Memorandum Circular No. 43-2022
Interest of 12% per annum runs on unpaid tax from the prescribed payment date until settled. The rate is double the 6% legal interest rate set by the Bangko Sentral ng Pilipinas.10Bureau of Internal Revenue. Revenue Regulations No. 21-2018
A compromise penalty may also apply, in amounts set by BIR schedules according to the violation. If you know you will miss the April 15 deadline, pay your estimated tax by then anyway; that stops interest from accruing on the amount you send in, even if the return itself follows later.