Starting a small business in the Philippines? If your gross sales are below ₱3 million annually, you're probably subject to Percentage Tax—not VAT. But what exactly is Percentage Tax, and how do you file and pay it?
This simple guide will walk you through everything you need to know about Percentage Tax: who needs to pay, how to compute it, and how to stay compliant with the BIR.
What is Percentage Tax?
Percentage Tax is a business tax imposed on individuals or entities who sell or lease goods or services in the Philippines and are not VAT-registered. Instead of charging 12% VAT, you pay a small percentage (usually 3%) of your gross sales/receipts directly to the government.
It’s sometimes called a non-VAT business tax and is governed by Section 116 of the National Internal Revenue Code (NIRC).
Who Needs to Pay Percentage Tax?
You are required to pay Percentage Tax if:
You are self-employed, a sole proprietor, or a professional
Your annual gross sales/receipts do not exceed ₱3 million
You did not opt to register for VAT
Common examples:
Sari-sari store owners
Online sellers and freelancers
Consultants and service providers
Small café or retail store operators
Note: If you're under the 8% income tax option, you’re exempt from Percentage Tax—but only if you chose that explicitly when you registered or filed your annual return.
How Much is the Percentage Tax?
As of the CREATE Law:
3% of gross quarterly sales or receipts
Example:
If your gross income for the quarter is ₱150,000:
₱150,000 x 3% = ₱4,500 Percentage Tax due
When and How to File
Form to Use:
BIR Form 2551Q – Quarterly Percentage Tax Return
Filing Deadlines:
Filed quarterly, on or before the 25th day after the close of each taxable quarter:
Q1: April 25
Q2: July 25
Q3: October 25
Q4: January 25 (of the following year)
Where to File:
Use eBIRForms or file manually at your RDO (Revenue District Office)
Pay through authorized agent banks (AABs), GCash, Maya, or other BIR-accredited payment channels
Important Reminders
You must still file BIR Form 2551Q even if you had no sales ("zero return")
Always issue BIR-registered official receipts or invoices
Keep records of all your sales/receipts
Keep a copy of the return and proof of payment
Percentage Tax vs. VAT
| Feature | Percentage Tax | VAT |
|---|---|---|
| Rate | 3% | 12% |
| Income Threshold | ≤ ₱3M | > ₱3M |
| Tax Basis | Gross sales/receipts | Output – Input VAT |
| Input Tax Credit | Not allowed | Allowed |
| Complexity | Simple | More complex |
If you expect to grow past ₱3M in annual income, consider voluntarily switching to VAT for long-term planning.
Common Mistakes to Avoid
Missing quarterly deadlines
Forgetting to file even with zero income
Failing to register properly with BIR
Not keeping a record of transactions and receipts
Paying under the wrong tax classification
Is the 8% Tax Better for You?
If you're a freelancer or self-employed professional, the 8% flat income tax might be a better option.
You can avail of it instead of paying 3% Percentage Tax + graduated income tax—but only if:
You’re earning below ₱3 million
You opt-in during registration or annual income tax filing
Final Thoughts
Percentage Tax is simple, but non-compliance can lead to penalties, surcharges, and unnecessary stress. As a small business owner, staying on top of your tax responsibilities ensures you grow your business the right way.
When in doubt, it's a good idea to consult with a tax advisor or accountant who’s familiar with small business tax in the Philippines.
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