TaxesHow to File Income Tax Returns in the Philippines: A Guide for Sole Proprietors and Individuals

Filing income tax returns (ITR) in the Philippines can be challenging for sole proprietors and self-employed individuals. However, it’s a legal obligation—and one that helps you avoid costly penalties or even audits. Staying compliant also improves your credibility, which can be valuable when dealing with large companies, government agencies, or applying for loans.

To help you better understand the process, we’ll explain what an ITR is, how to compute it, and where to file it.

1. Know What Type of Taxpayer You Are

In the eyes of the Bureau of Internal Revenue (BIR), individuals are generally classified as:

• Compensation earners – employees earning purely from salaries. Their tax obligations are generally handled by their employer (if they only have one).
• Self-employed individuals or sole proprietors – those who own and operate a business or practice a profession.
• Mixed-income earners – those who earn both compensation and self-employed income.

This guide is specifically for the second group: self-employed individuals, sole proprietors, and mixed-income earners who need to file taxes independently.

2. Understand Your Tax Obligations

As a sole proprietor, self-employed person, or mixed-income earner, you are required to:

• Register your business or profession with the BIR.
• File quarterly and annual income tax returns.
• Maintain books of accounts and issue receipts/invoices.
• Withhold and remit taxes (if applicable).

In 2025, your income will be taxed based on the graduated tax rates under the TRAIN Law or the optional 8% flat rate (if qualified).

3. Choose Between Graduated Rates or 8% Flat Tax

You have two main income tax options:

Option 1: Graduated Income Tax Rates (with OSD or Itemized Deductions)

• 0% to 35% based on net taxable income
• You may deduct either:
  • Optional Standard Deduction (OSD) – 40% of gross income
  • Itemized deductions – actual allowable expenses

For reference, here is the 2025 income tax table (updated since the release of the TRAIN Law):

**Income tax table for 2025**:

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

Option 2: 8% Flat Tax Rate

• Applies to gross sales or receipts exceeding ₱250,000
• Simpler computation—no need to track expenses
• Only available to non-VAT taxpayers (gross income must not exceed ₱3 million)

How to Compute Your Income Tax Return

The way you compute your tax depends on the method you choose:

If using Graduated Rates:

1. Calculate your Gross Income (total earnings from your business or profession).
2. Subtract Allowable Deductions:
   • Optional Standard Deduction (OSD): 40% of gross income
     Example: ₱500,000 gross income – ₱200,000 OSD = ₱300,000 taxable income
   • Itemized Deductions: Actual business expenses (rent, supplies, etc.)
3. Apply the graduated tax rates to your net taxable income:
   • Example: For ₱300,000, the tax is 15% of the amount exceeding ₱250,000 (see the table in the previous section for the rates)
     → (₱300,000 – ₱250,000) × 15% = ₱7,500

If using 8% Flat Rate:

1. Compute Gross Sales/Receipts
2. Subtract ₱250,000 exemption
3. Multiply the result by 8%

Example: ₱500,000 – ₱250,000 = ₱250,000 × 8% = ₱20,000 income tax due

Tip 1: If your allowable deductions are high, the graduated rates might save you more money. But if your business is simple with low expenses, the 8% flat tax could be easier and cheaper.

Tip 2: Businesses with high sales volumes often choose the graduated tax rates to take advantage of deductions. But with so many transactions, calculating and filing taxes can get very difficult. In situations like this, it’s best to get professional help. We’re here to make sure your income tax return is accurate, maximizes deductions, and is filed on time.

5. Prepare the Required Documents

Before filing, make sure you have:

• Certificate of Registration (BIR Form 2303)
• Books of accounts
• Official receipts/invoices
• Quarterly and annual income tax returns (Forms 1701Q and 1701)
• Financial statements (if using graduated rates with itemized deductions)

You can get BIR forms in the following ways:

• Online: Visit the BIR’s official website (www.bir.gov.ph) to download Form 1701 or 1701A.
• In person: Drop by your local Revenue District Office (RDO) to request physical copies.

There are also software tools available that let you fill out forms online. However, be cautious. Errors in filing can lead to penalties or an audit so seek expert assistance. To avoid mistakes and keep your tax burden as low as possible, book a tax consultation with us today.

6. File Using the Correct BIR Forms

Here are the main forms to file:

• BIR Form 1701Q – Quarterly Income Tax Return (file every May, August, and November)
• BIR Form 1701 – Annual Income Tax Return (file every April 15 of the following year)

If you opt for the 8% tax, you must also file a sworn declaration of your intention when you submit your first quarterly return or upon registration.

7. File and Pay Through the Right Channels

You can visit your Revenue District Office (RDO) and submit your completed forms there. You may also file your income tax returns online, although you won’t receive direct assistance or immediate validation upon submission.

8. Keep Proof of Filing and Payment

Always keep digital and physical copies of:

• Filed tax returns
• Confirmation emails or printed validation forms
• Official receipts or proof of online payments

These documents may be required in case of audits, renewals, or loan applications.

Final Thoughts

Filing your income tax returns in the Philippines as a sole proprietor or self-employed individual can be difficult. But by understanding your tax classification, selecting the most beneficial tax scheme, and filing through the proper channels, you can properly file your tax. Especially for those with high sales volumes and complex transactions, don’t hesitate to contact us for expert assistance. We can handle all the paperwork for you so you can focus on running your business.

Do You Need to Check if Your Business is Compliant? Find Help Here.

The Business Registration Philippines team offers legal and accounting services to help you with tax compliance. Outsourcing your bookkeeping, payroll, auditing, and other tasks to us is often more cost-effective than expanding your in-house accounting team. Reach out today to schedule an initial consultation with one of our experts. 

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