8% Tax vs Graduated Rates with OSD vs Itemized: A Freelancer Worked Example
This post runs one freelance fact pattern through three lawful computations: (1) the 8% income tax rate on gross receipts, (2) graduated rates with OSD, and (3) graduated rates with itemized deductions. It does not re-argue the full eligibility primers in 8% Income Tax Rate vs Graduated Rates or Optional Standard Deduction vs Itemized Deductions — those remain the sibling guides for who qualifies and when each tool fits; here the job is the arithmetic.
Run Your Three Tax Paths Before Q1 FREE →The freelancer scenario (same facts for all three columns) #
Maya is a purely self-employed instructional designer for 2026:
- Gross receipts: ₱1,500,000
- Documented, receipted business expenses: ₱350,000 (software, contractors, coworking, travel)
- Not VAT-registered; projected gross stays under ₱3,000,000
- No compensation income (not a mixed earner)
- Will signify her choice on the first BIR Form 1701Q of the year
She cannot stack 8% with OSD — those paths are mutually exclusive under NIRC Sections 24(A)(2)(b) and 34(L) (see Can You Claim OSD If You Elect the 8% Income Tax Rate?).
Graduated rate table used (TRAIN Phase 2) #
Income tax on net taxable income uses the NIRC Section 24 schedule effective 1 January 2023 and onwards under the TRAIN Law (RA No. 10963) — the same Phase 2 brackets referenced across BIR and tax-summary tables:
| Net taxable income | Tax due |
|---|---|
| Not over ₱250,000 | 0% |
| Over ₱250,000 but not over ₱400,000 | 15% of the excess over ₱250,000 |
| Over ₱400,000 but not over ₱800,000 | ₱22,500 + 20% of the excess over ₱400,000 |
| Over ₱800,000 but not over ₱2,000,000 | ₱102,500 + 25% of the excess over ₱800,000 |
| Over ₱2,000,000 but not over ₱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 |
Column A — 8% income tax rate #
Under NIRC Section 24(A)(2)(b) and RMO No. 23-2018:
- Taxable base = ₱1,500,000 − ₱250,000 = ₱1,250,000
- Income tax = 8% × ₱1,250,000 = ₱100,000
- Section 116 percentage tax: none (8% is in lieu of graduated rates and Sec. 116 PT for a qualifying elector)
- Approximate total tax burden: ₱100,000
Column B — Graduated rates with OSD #
Under NIRC Section 34(L) and RR No. 16-2008, individual OSD = 40% of gross receipts (not after cost of services):
- OSD = 40% × ₱1,500,000 = ₱600,000
- Net taxable income = ₱1,500,000 − ₱600,000 = ₱900,000
- Income tax = ₱102,500 + 25% × (₱900,000 − ₱800,000) = ₱102,500 + ₱25,000 = ₱127,500
- Section 116 percentage tax (illustrative 3% on ₱1,500,000 gross for a non-VAT percentage-tax payer) = ₱45,000
- Approximate total tax burden: ₱172,500
Column C — Graduated rates with itemized deductions #
- Itemized deductions = documented expenses = ₱350,000
- Net taxable income = ₱1,500,000 − ₱350,000 = ₱1,150,000
- Income tax = ₱102,500 + 25% × (₱1,150,000 − ₱800,000) = ₱102,500 + ₱87,500 = ₱190,000
- Section 116 percentage tax (same ₱45,000 illustration) = ₱45,000
- Approximate total tax burden: ₱235,000
Side-by-side results #
| 8% rate | Graduated + OSD | Graduated + itemized | |
|---|---|---|---|
| Deduction / relief used | Flat 8% on gross above ₱250,000 | 40% OSD = ₱600,000 | Actual expenses = ₱350,000 |
| Net / 8% base | ₱1,250,000 (gross − ₱250,000) | Net income ₱900,000 | Net income ₱1,150,000 |
| Income tax | ₱100,000 | ₱127,500 | ₱190,000 |
| Sec. 116 PT (illustrative) | ₱0 | ₱45,000 | ₱45,000 |
| Approx. total | ₱100,000 | ₱172,500 | ₱235,000 |
On Maya’s numbers, 8% wins because expenses (₱350,000) are well below 40% of gross (₱600,000) and the 8% path avoids Section 116 percentage tax. OSD still beats itemizing inside the graduated path (₱600,000 standard deduction vs ₱350,000 actual costs), but graduated-plus-OSD remains more expensive than plain 8% here.
Flip the expense assumption — if Maya had ₱950,000 in fully substantiated costs — itemized net income would fall to ₱550,000, income tax would drop to ₱22,500 + 20% × ₱150,000 = ₱52,500, and even after ₱45,000 PT the graduated-plus-itemized total (~₱97,500) would undercut the ₱100,000 8% bill. That is why the election must follow your expense ratio, not Maya’s.
How to turn this example into a filing decision #
- Confirm 8% eligibility (not VAT-registered, ≤ ₱3,000,000, not a GPP partner, timely election) using 8% Income Tax Rate vs Graduated Rates.
- If staying on graduated rates, compare OSD vs itemized with Optional Standard Deduction vs Itemized Deductions and the correct individual base in OSD for Individuals vs Corporations.
- Signify the winning path on the first BIR Form 1701Q — see How to Elect OSD on BIR Form 1701Q and How to File BIR Form 1701Q.
- Avoid the error list in Common Mistakes When Electing the 8% Tax Rate or OSD.
Frequently asked questions #
Which is cheaper for freelancers: 8%, OSD, or itemized? #
It depends on documented expenses and whether you qualify for the 8% option. Low expenses usually favor 8%; expenses near or above 40% of gross often favor graduated rates with itemized deductions; OSD sits between them when expenses are modest but you remain on graduated rates.
What TRAIN graduated brackets does this example use? #
The example uses the NIRC Section 24 schedule effective January 1, 2023 and onwards under the TRAIN Law (RA No. 10963): 0% up to P250,000; 15% of the excess over P250,000 up to P400,000; P22,500 plus 20% of the excess over P400,000 up to P800,000; P102,500 plus 25% of the excess over P800,000 up to P2,000,000; and higher brackets above that.
Does the 8% path also replace percentage tax? #
Yes. For qualifying purely self-employed individuals, the 8% option under NIRC Section 24(A)(2)(b) and RMO No. 23-2018 is in lieu of both graduated income tax and the percentage tax under NIRC Section 116. Graduated-rate paths still carry Section 116 percentage tax when the taxpayer is not VAT-registered.
Can I use OSD in the same year as the 8% rate? #
No. OSD applies only under graduated rates. Choosing 8% means you do not claim OSD or itemized deductions against the 8% gross base.
Where do I elect each option on the return? #
Signify the 8% rate or the OSD-versus-itemized choice on the first BIR Form 1701Q of the taxable year. The elections are irrevocable for that year and must be made again in a later year if desired.
Summary #
On ₱1,500,000 gross and ₱350,000 expenses, Maya’s lawful totals are about ₱100,000 (8%), ₱172,500 (graduated + OSD including illustrative Sec. 116 PT), and ₱235,000 (graduated + itemized including PT). Re-run the three columns on your own expense ratio before the first 1701Q — the cheapest path flips when documented costs approach or exceed the 40% OSD amount.