SAN NGA BA MAS MAKAKATIPID NG TAX? | Graduated Rates versus 8% Optional Rate

Summary

In this informative video, Real Hraz, a Certified Public Accountant and educator, guides small business owners and self-employed individuals in the Philippines through the process of choosing between two tax options: graduated tax rates and the 8% optional tax rate. Using the hypothetical example of a milk tea business, Juan de la Cruz, he demonstrates how to calculate taxes under both systems and offers practical tips on making the right choice based on expected income, expenses, and sales. The video is a valuable resource for understanding tax-saving strategies and making informed decisions.

Takeaways

• 😀 Juan de la Cruz is a new entrepreneur running a milk tea business, with annual sales under 3 million pesos in both 2019 and 2020.
• 😀 Small business owners in the Philippines can choose between two taxation options: graduated rates or the eight percent optional rate, provided their gross sales and other income do not exceed 3 million pesos.
• 😀 The graduated rates tax system applies a progressive tax scale from 20% to 35%, based on net taxable income, and requires additional payment for percentage tax if the business is non-VAT registered.
• 😀 The eight percent optional rate combines both the income tax and percentage tax (3%), simplifying the process for businesses with gross sales under 3 million pesos.
• 😀 Under the graduated rates, income tax is calculated based on net taxable income after deducting costs of sales and expenses, while percentage tax is also applicable to sales and receipts.
• 😀 The eight percent optional rate applies to businesses with gross sales under 3 million pesos and is available only to non-VAT registered individuals, excluding certain business types like banks and insurance companies.
• 😀 Self-employed individuals who earn income through their own business or professional services are eligible for the eight percent rate, provided their gross sales and other income do not exceed 3 million pesos.
• 😀 A simulation is recommended before the start of the year to estimate which tax regime (graduated rates or eight percent) will result in lower taxes based on projected income and expenses.
• 😀 The graduated rates system includes various income tax brackets, with exemptions for the first 250,000 pesos of taxable income, and escalating tax rates for income above that threshold.
• 😀 To help with tax planning, entrepreneurs are advised to maintain records and prepare simulations, enabling them to choose the most tax-efficient option at the start of the year or before filing quarterly returns.

Q & A

What is the purpose of this video?

The video aims to help small business owners and self-employed individuals in the Philippines understand their tax options, particularly the differences between graduated income tax rates and the 8% optional tax rate.

Who is the target audience of this video?

The target audience includes self-employed individual taxpayers and small business owners in the Philippines whose annual gross sales do not exceed 3 million pesos.

What are the two tax options available for small business owners in the Philippines?

The two tax options available are the graduated income tax rates and the 8% optional tax rate. The choice depends on factors such as gross income and expenses.

How are taxes calculated under the graduated tax rates?

Under the graduated tax rates, taxes are calculated based on net taxable income, which is the gross income minus cost of sales and other business expenses. The tax rate varies from 20% to 35%, depending on the taxable income.

What is the 8% optional tax rate?

The 8% optional tax rate is a flat rate applied to a business's gross income, which includes both income tax and percentage tax. It is available to non-VAT registered taxpayers with annual gross sales not exceeding 3 million pesos.

What is the main advantage of choosing the 8% optional tax rate over the graduated tax rates?

The main advantage of the 8% optional tax rate is its simplicity. It covers both income tax and the 3% percentage tax, providing a straightforward tax calculation with a single rate, making it easier for small business owners to manage.

How do the graduated rates and the 8% tax rate differ in terms of percentage tax?

Under the graduated rates, businesses must pay a separate 3% percentage tax on gross sales in addition to the income tax. However, the 8% optional tax rate combines both the income tax and percentage tax into one flat rate of 8%.

Can a business owner choose the 8% tax rate if their gross income exceeds 3 million pesos?

No, the 8% optional tax rate is only available to businesses whose annual gross sales, combined with other non-operating income, do not exceed 3 million pesos.

How do you determine which tax option is better for a small business owner?

To determine which tax option is better, a small business owner should estimate their annual gross sales, expenses, and net income. If their gross sales are below 3 million pesos and expenses are low, the 8% rate may be simpler and more beneficial. However, if their expenses are higher, the graduated rates might result in lower taxes.

What should business owners do before the start of a new year to choose the right tax option?

Before the start of the year, business owners should estimate their income and expenses for the upcoming year to determine if they will remain below the 3 million pesos threshold for the 8% optional tax rate. They should also simulate their tax liability under both options to make an informed decision.