Many freelancers switch to independent contractor status for flexibility and better income.
The 8% income tax option is popular because it is simple and predictable.
But what happens when your income grows and may exceed ₱3,000,000?
This question matters because choosing the wrong tax option can lead to penalties, wrong filings, and stress.
This guide explains what to do, what changes, and how to stay compliant.
What Is the 8% Income Tax Option?
The 8% income tax is an optional tax rate for self-employed individuals and freelancers.
It replaces both:
- Graduated income tax rates, and
- 3% percentage tax
It is computed on gross sales or receipts, after a ₱250,000 exemption.
However, this option is only allowed if your gross income does not exceed ₱3,000,000 in a year.
Why the ₱3,000,000 Limit Matters
The ₱3,000,000 threshold is not random. It is the VAT threshold set by the BIR.
Once your income exceeds ₱3,000,000:
- You are automatically classified as VAT-registered
- You are no longer allowed to use the 8% income tax
- Your tax computation will change
Ignoring this rule can result in assessments, penalties, and back taxes.
How to Handle the 8% Income Tax If Income May Exceed 3M
- Step 1: Monitor Your Income Closely
Track your gross receipts monthly.
Do not wait until year-end.
- Step 2: Know When the 8% Option Ends
The moment your income exceeds ₱3,000,000, the 8% option no longer applies.
You will shift to:
- Graduated income tax rates, and
- 12% VAT on sales
This shift happens within the same taxable year.
- Step 3: Update Your Tax Computations
You must now:
- File VAT returns
- Compute output VAT
- Claim allowable deductions
- Use graduated income tax rates
This is a major change in compliance.
When and Who Should Be Extra Careful
This applies to:
- Freelancers with foreign clients
- Independent contractors paid in large projects
- Professionals with fast-growing income
If you expect to cross ₱3,000,000, plan early. The 8% income tax is best for small to mid-level earners, not fast-scalers.
Practical Tips for Freelancers
- Choose the 8% option only if income growth is predictable
- Review contracts before selecting your tax type
- Set aside funds for possible VAT registration
- Consult before the year starts, not after exceeding the limit
Tax choices should match your growth, not just convenience.
You may start with the 8% income tax, but it is not permanent. Once your income exceeds ₱3,000,000, the law requires a shift to VAT and graduated rates.
For freelancers, growth is good—but only if your tax setup grows with you. Planning early prevents costly mistakes and keeps your business compliant.
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