Are you a self-employed earning income purely from self-employment or practice of a profession? Here the facts that you should know before filing your income tax rate. This article will discuss things you should know about the train tax law in the Philippines. You will know how you can apply the new income tax of 8% for the practice of a profession.
What is Individual Income Tax Train Tax Law 2019?
Any individual earning income from self-employment/business and or practice of profession whose gross income/sales revenues and other non-operating income does not exceed the 3,000,000 VAT threshold shall have the following options:
- First, graduated income tax rates
- or 8% tax on gross receipts/sales and other non-operating income more than 250, 000 but not exceeding the VAT threshold.
What is the New Individual Tax Rate in the Philippines?
The 8% Income tax rate is not automatic to any self-employed, they must meet the following criteria:
- Individual whose gross receipts/sales including non-operating income should not exceed 3,000,000 VAT thresholds during the taxable year.
- The taxpayer who earning exclusively from self-employment or from a practice of a profession.
- Must clearly indicate the intention to opt 8% income tax rate upon registration or during the initial quarter return of the taxable year after the start of your business.
- Must be registered and subject to percentage tax and exempt from VAT (Value Added Tax)
Disqualified to Opt to 8%
Not all individuals can avail this 8% income tax rate for the practice of a profession. The following individuals who are disqualified to use the tax rate for practice or profession or self-employed because either:
- Individuals who are tax-exempt
- VAT registered individuals regardless as to the annual gross sales/receipts
- Under Employer-employee relationship
- Whose gross receipts/sales and other non-operating income exceed the VAT threshold of 3,000,000.
- Partners of a GPP (General Professional Partnership)
- Subject to Other Percentage Taxes
Tax Base for 8% Tax Rate
Taxable income of self-employed or practice of profession shall be based on the gross sales/receipts and other non-operating income. The tax rate is 8% more than 250, 000.
Self-employed or practice of profession individual can avail a reduction of 250, 000 from the gross sales/receipts. As long as their earnings are purely from the practice of profession or business.
The mixed-income earner cannot avail the reduction of 250, 000. In computing, the taxable compensation income is net of 250,000 as not taxable income. You cannot claim one deduction for two tax returns.
For filing of quarterly individual tax return who are practicing their profession cannot allocate the 250, 000 into four quarters. The 250, 000 deductions were considered in the design of the revised quarterly income tax rate returns which reflect the total quarterly computation.
Percentage Tax of 3%
Any individual who will meet the qualification to opt 8% income tax rate will not file and pay the 3% percentage tax rate. The 8% tax rate is in lieu of the income tax rates and the percentage tax rate.
Is an Individual under a contract of Service or Job Order Arrangement a self-employed? Well, any individual who is under the contract or job order arrangement is a self-employed. They are subject to the applicable withholding taxes depending on their employer.
If an individual who is working in a public or government sector, both income and the applicable business taxes shall be withheld. However, if the annual gross receipts are less than 250, 000 it is exempted from withholding tax upon submission of a Sworn Declaration of Gross Receipts/Sales
However, if the income is from private entity shall withhold only the income tax since the corresponding business tax shall be paid by the individual.
In addition, if the Job Order personnel received only 6, 000 or less per month from his employer. It shall be exempted and required to execute the sworn declaration so that no income tax withholding shall be made by the lone income payor on the stated income payment.
Applicable Withholding Tax Rate
Any individual who failed to submit a sworn declaration to the employer is subject to 10% for income tax. However, if the individual is employed by a government entity, the same income is also subject to either 3% percentage tax or 5% withholding VAT, whichever is applicable. Learn other passive incomes that are subject to withholding tax under the train tax law 2018.
Those things will help you to understand more about this new income tax rate for self-employed or practice or profession under the TRAIN Tax Law Reform. Learn more updates about train tax law in the Philippines.