🇵🇭 Simple Guide: 3% vs 8% Tax for Small Businesses
This guide compares 3% percentage tax + graduated income tax against 8% Gross Income Tax (GIT) for non-VAT taxpayers in the Philippines, with simple examples so you can discuss options with your accountant.
Who can use the 3% and 8% options?
Both the 3% percentage tax and the 8% Gross Income Tax (GIT) apply only to non-VAT taxpayers whose annual sales do not exceed ₱3,000,000.
Choosing correctly can save you money and simplify your tax filing, but the best choice depends on your expense level and business model.
✅ 1. 3% Percentage Tax + Graduated Income Tax
How it works
- You pay 3% percentage tax every quarter (BIR Form 2551Q).
- You also pay Income Tax using graduated rates (0%–35%) based on net income (sales minus expenses).
- You can deduct business expenses (itemized) or use 40% Optional Standard Deduction (OSD).
Best for
- Businesses with high expenses.
- Freelancers/professionals who track receipts.
- Those who want to reduce taxable income through deductions (OSD or itemized).
✅ 2. 8% Gross Income Tax (GIT)
How it works
- You pay 8% tax on gross sales above ₱250,000 per year.
- No 3% percentage tax is paid.
- No expense deductions (no OSD or itemized deductions).
Best for
- Businesses with very low expenses.
- Service businesses with minimal cost of goods.
- People who want simpler paperwork.
🧮 Sample tax computations
These examples are simplified for illustration only. Always check the latest BIR tables and consult a tax professional for your exact situation.
Assumptions:
- Monthly sales: ₱10,000; ₱100,000; ₱1,000,000.
- For 3% option: estimated expenses = 40% of sales (for illustration).
- Income tax uses an approximate rate in the brackets (example: 8% on taxable amounts in certain ranges).
- For 8% option: annual ₱250,000 exemption applies.
📌 Scenario A: ₱10,000 monthly sales (₱120,000 per year)
3% + Graduated ITR
Percentage tax: 3% × 120,000 = ₱3,600
Income tax (net income = sales – 40% expenses):
- Net income = 120,000 – 48,000 = 72,000
- Income tax = 0% (below ₱250,000)
➡ Total tax = ₱3,600
8% GIT
Taxable = 120,000 – 250,000 = 0
➡ No tax due
✔ Winner: 8% (₱0 tax)
📌 Scenario B: ₱100,000 monthly sales (₱1,200,000 per year)
3% + Graduated ITR
Percentage tax = 3% × 1,200,000 = ₱36,000
Income tax (net income = sales – 40% expenses):
- Net income = 1,200,000 – 480,000 = 720,000
- Graduated income tax (approx) ≈ ₱95,000 (using BIR brackets)
➡ Total tax ≈ ₱131,000
8% GIT
Taxable = 1,200,000 – 250,000 = 950,000
Tax = 8% × 950,000 = ₱76,000
✔ Winner: 8% (₱76,000 vs ₱131,000)
📌 Scenario C: ₱1,000,000 monthly sales (₱12,000,000 per year)
⚠️ Not eligible for 8% — exceeds the ₱3M VAT threshold; such a business must be VAT-registered.
For illustration only:
3% + Graduated ITR
- Percentage tax = 3% × 12,000,000 = 360,000
- Net income = 12,000,000 – 4,800,000 = 7,200,000
- Estimated income tax ≈ ₱2.1M–₱2.4M (top bracket up to 35%)
➡ Likely around ₱2.46M total tax.
8% GIT (if it were allowed, which it is not)
- Taxable = 12,000,000 – 250,000 = 11,750,000
- Tax = 8% × 11,750,000 = ₱940,000
This shows why the ₱3M limit exists — otherwise, the 8% option would be too advantageous for very high-revenue businesses.
⭐ Simple comparison table
| Feature | 3% + Graduated ITR | 8% GIT |
|---|---|---|
| Tax base | Gross sales (3%) + Net income (ITR) | Gross sales – ₱250,000 |
| Expenses | Deductible (itemized or 40% OSD) | Not allowed |
| Paperwork | More (2551Q + 1701/1701A) | Less (1701/1701A only) |
| Best for | High-expense businesses | Low-expense businesses |
💡 Practical tips: choosing the best option
Choose 8% GIT if:
- You have little to no expenses (online services, freelancers, consultants).
- You prefer simple paperwork.
- Your income is predictable and mostly profit.
Choose 3% + Graduated ITR if:
- You have many deductible expenses.
- You sell goods with high cost of sales (retailers, resellers).
- You want to reduce taxable income through OSD or itemized receipts.
⚠️ Why investing in an accountant is important
Hiring an accountant can save you more than their fee. They help you avoid penalties, choose the right option, and keep your books clean.
1. Avoid big penalties
BIR penalties can be large:
- ₱1,000 per incorrect receipt
- 25–50% surcharge on wrong tax computations
- Interest on unpaid tax (per BIR rules)
A small mistake can cost thousands to hundreds of thousands of pesos.
2. Proper tax planning
Accountants help you decide whether 8% or 3% will save you more money overall.
Choosing incorrectly can lead to higher taxes and the need to amend past returns.
3. Accurate books = better loans
Banks and lenders usually require:
- financial statements
- correct ITR filing
- bank reconciliation
Poor bookkeeping often leads to loan rejections.
4. Peace of mind
You focus on making sales and running operations. Your accountant handles on-time filing, correct forms, and BIR compliance, so you are safer and calmer during any audit.
✅ Summary
- 3% percentage tax + graduated income tax is often better if you have many expenses and want to use deductions.
- 8% GIT is usually better if you have low expenses and prefer simpler paperwork, and your sales stay within the ₱3M non-VAT threshold.
- Working with an accountant helps you avoid costly mistakes and lets you focus on growing your business.