Taxes are a vital part of a functioning society. Whether you’re an employee, freelancer, or business owner, understanding your tax obligations is crucial — not just for compliance, but also for financial planning. Two of the most common yet often misunderstood tax types in the Philippines are income tax and business tax.
This article explains their key differences, how they are computed, and why it’s important to distinguish one from the other.
What is Income Tax?
Income tax is a tax imposed on an individual or entity’s net income or profit. It applies to both individuals and juridical persons (e.g., corporations, partnerships).
For Individuals:
Employees, professionals, freelancers, and sole proprietors are subject to graduated income tax rates based on their annual taxable income, as prescribed by the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
For example:
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If your annual income is ₱250,000 or below, you are exempt from paying income tax.
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Above that threshold, rates range from 15% to 35%, depending on your income bracket.
For Non-Individuals (Corporations, Partnerships):
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Domestic corporations are generally subject to a 25% corporate income tax (or 20% for small corporations under certain conditions).
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Partnerships (except general professional partnerships) are taxed similarly to corporations.
Income tax is computed on net income, meaning:
Gross Income – Allowable Deductions = Taxable Income
What is Business Tax?
Business tax is a tax on gross sales or receipts, regardless of whether your business made a profit. It applies mainly to businesses registered with the BIR as VAT or Non-VAT taxpayers.
There are two primary types:
1. Value-Added Tax (VAT)
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Rate: 12%
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Applies to businesses with annual gross sales or receipts over ₱3 million
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VAT is computed based on the selling price of goods or services
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Collected from customers and remitted to the BIR
2. Percentage Tax (Non-VAT)
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Rate: 1% or 3% (depending on business size and if covered by special rules)
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Applies to businesses with annual gross receipts below ₱3 million
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Based on gross sales/receipts, not net income
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Paid quarterly using BIR Form 2551Q
Important: You may have to pay business tax even if you incur a loss, because it’s based on gross earnings.
Key Differences at a Glance
| Basis | Income Tax | Business Tax |
|---|---|---|
| What’s taxed | Net income or profit | Gross sales or receipts |
| When due | Quarterly and annually | Monthly or quarterly |
| Who pays | Individuals and corporations | Business operators (VAT or non-VAT) |
| Type of Tax | Direct tax | Indirect tax (VAT) or direct (percentage tax) |
| Computation | Income – Deductions = Taxable income | Sales x Rate (1%, 3%, or 12%) |
Why the Distinction Matters
Failing to understand the difference between income and business tax can lead to:
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Underpayment or overpayment of taxes
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Penalties and interest for incorrect filings
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Mistaken reliance on exemptions (e.g., ₱250K exemption applies only to income tax, not business tax)
Additionally, taxpayers must file different BIR forms:
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1701 / 1701A / 1702 for income tax
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2550M/Q (VAT) or 2551Q (Percentage Tax) for business tax
Every taxpayer — whether employed, self-employed, or incorporated — must understand the basic distinction between income tax and business tax. Knowing which applies to you, and how to compute each properly, is essential for compliance, avoiding penalties, and managing your finances responsibly.
At the National Institute of Taxation (NIT), we simplify tax education for Filipinos. Whether you’re a student, a small business owner, or an aspiring tax professional, NIT offers structured learning programs to help you understand and apply Philippine tax laws with confidence.
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