Filing an Income Tax Return (ITR) in the Philippines is a legal requirement for most entrepreneurs and individuals. It ensures accurate tax payments, enabling the government to fund public services like infrastructure, healthcare, and education. Today you’ll learn what an ITR is, who is required to file, where to get the forms, how to compute them, and the critical deadlines to meet.
We’ll focus on sole proprietorships and individuals here. Our website has another guide focused on ITR for partnerships and corporations.
What is an Income Tax Return?
An Income Tax Return (ITR) is a document filed with the BIR to report your income, expenses, and tax liability for a specific year. For sole proprietors, it details earnings from their business or profession, allowing the BIR to assess whether the correct amount of income tax has been paid. The ITR ensures compliance with tax laws and helps determine if you owe additional taxes or are eligible for a refund.
Who Needs to File an ITR?
Sole proprietors, including freelancers, small business owners, and self-employed professionals (e.g., doctors, lawyers, or consultants), must file an ITR if they earn income from their trade or profession. The BIR requires filing for those with annual gross income above PHP 250,000 or any registered business, regardless of income level. Failure to file can result in penalties or audits.
Employees with only one source of income (compensation income from a single employer) generally do not need to file an ITR. The employer typically files their tax.
Where to Get Income Tax Return Forms
BIR forms are available through:
- BIR Website: Download BIR Form 1701 or 1701A from www.bir.gov.ph.
- Revenue District Office (RDO): Visit your local RDO to obtain physical copies of the forms.
Certain software enables you to fill out forms online but be careful. Inaccurate filing may result in penalties or audits. Book a tax consultation us to ensure your documents are accurate while maximizing deductions.
Choosing the Right BIR Form
Sole proprietors typically use one of two BIR forms:
- BIR Form 1701A: For those earning income solely from business or profession, use either the graduated tax rates or the 8% flat tax rate.
- BIR Form 1701: For those with mixed income (e.g., from employment and business) or opting for itemized deductions.
Tax Rates and Options
Sole proprietors can choose between two tax regimes:
- Graduated Tax Rates: Rates range from 0% (for taxable income up to PHP 250,000) to 35% (for income over PHP 8 million). This option suits those with significant deductible expenses.
- 8% Flat Tax Rate: Available for sole proprietors with gross sales or receipts not exceeding PHP 3 million annually. This simplifies tax computation by applying an 8% tax on gross sales or receipts, minus a PHP 250,000 exemption.
If your annual gross sales or receipts are below PHP 3 million, BIR Form 1701A with the 8% flat tax option is often the better choice, as it reduces the need for detailed expense tracking.
How to Compute Income Tax Return
Computing your ITR depends on the tax regime:
- 8% Flat Tax Rate:
- Calculate your total gross sales or receipts for the year.
- Subtract the PHP 250,000 basic personal exemption.
- Apply the 8% tax rate to the remaining amount.
Example: If your gross sales are PHP 1,000,000, subtract PHP 250,000 (exemption) to get PHP 750,000. Then, 8% of PHP 750,000 = PHP 60,000 (tax due).
- Graduated Tax Rates:
- Calculate gross sales or receipts.
- Deduct allowable expenses (e.g., rent, utilities, supplies) and the PHP 250,000 exemption to get taxable income.
- Apply the graduated tax rates based on the BIR tax table. Please note we now use the updated tax rate from the Tax Reform for Acceleration and Inclusion (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
Example: For a sole proprietorship in the Philippines, such as a freelance graphic designer with ₱800,000 in gross sales and ₱300,000 in deductible expenses.
- Net income is ₱500,000 (₱800,000 – ₱300,000).
- The first ₱250,000 is tax-free (0%), the next ₱150,000 (₱250,001–₱400,000) is taxed at 15% (₱22,500), and the remaining ₱100,000 (₱400,001–₱500,000) at 20% (₱20,000)
- Total tax of ₱42,500 (₱22,500 + ₱20,000).
Key Deadlines
Sole proprietors must adhere to the following deadlines for 2025:
- Annual ITR (BIR Form 1701 or 1701A): Due by April 15, 2026, for 2025 income.
- Quarterly ITR (BIR Form 1701Q): Required for those under graduated tax rates, due on:
- May 15 for Q1.
- August 15 for Q2.
- November 15 for Q3.
Those on the 8% flat tax rate only need to file the annual ITR.
Steps to File Your Income Tax Return
- Register with the BIR: Ensure you have a TIN and your business is registered.
- Maintain Records: Track gross sales, receipts, and expenses using BIR-registered books or accounting software.
- Prepare the Form: Use BIR Form 1701 or 1701A (also 1701Q for those under graduated tax rates) available online or at your RDO.
- Compute Taxes: Follow the computation method for your chosen tax regime.
- File and Pay: Submit at your RDO. Pay taxes through BIR-authorized banks, online platforms, or apps like GCash.
- Keep Records: Retain filed ITRs and payment receipts for at least three years for potential BIR audits.
Final Thoughts
Filing an Income Tax Return as a sole proprietor in the Philippines is a mandatory requirement. Choose the tax regime that suits your business, keep accurate records, fill out the right forms, and meet the deadlines. Especially if your business handles a high volume of transactions each month, don’t hesitate to reach out. We’ll ensure your taxes are filed accurately and on time.
Do You Need to Ensure Your Business is Compliant? Our Expert Assistance Is Ready to Support You.
Navigating Philippine business regulations can be challenging. Beyond securing the necessary permits, proper accounting must be handled by a qualified professional. Unfortunately, failure to adhere to these strict regulations can lead to costly fines or even get your business suspended.
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