Filing quarterly income tax can feel overwhelming, but it’s an important step for staying on top of your tax game. Understanding how to compute quarterly income tax can help you avoid penalties and make the most of any deductions or credits. In this guide, we’ll breakdown the basic steps for computing your quarterly income tax.
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What’s your Taxpayer type?
First, you need to know which BIR form applies to you. BIR requires different forms based on your taxpayer classification:
- Sole-Proprietor or Professionals use BIR Form 1701Q.
- Corporations and partnerships use BIR Form 1702Q.
Using the right form is important as it determines the specific calculations and applicable tax rates. Each form has instructions that guide you through the computations for your quarterly income tax.
Identify if you have a deduction method
If you’re handling your quarterly income tax, you may have selected one of these deduction options. Be sure to confirm which deduction method you’ve applied for this calendar year. Depending on the form you’re filing, you’ll have a few options for calculating your deductions. Here’s a breakdown:
For Form 1701Q (Sole-Proprietor or Professionals):
- Itemized Deduction Method: You’ll be deducting actual business expenses from your gross income. This includes costs like rent, utilities, supplies, and salaries. Each of these expenses helps reduce your taxable income, so it’s essential to keep organized records and receipts. The BIR requires proof of these expenses, so having receipts and documentation will help if you ever need to show how you calculated your deductions.
- Optional Standard Deduction (OSD): You can skip itemizing each individual expense. Automatically deduct 40% of your gross revenue as an estimated expense.
- 8% Flat Rate Option: You calculate your tax by applying an 8% rate directly to your gross sales or revenue, without needing to itemize expenses.
For Form 1702Q (Corporations and Partnerships):
- Itemized Deduction Method: Corporations can deduct expenses from their gross income. The remaining amount is considered taxable income. To calculate the tax payable, multiply the taxable income by 25%.
- Optional Standard Deduction (OSD): For corporations using the Optional Standard Deduction (OSD), the process starts with calculating your taxable income. First, you subtract the cost of sales from your gross income, and then apply a 40% deduction to that amount. Once you have your taxable income, you multiply it by 25% to determine the tax payable. So it is computed as:
Gross Income (after cost of sales) – Deductions (40%) = Taxable Income
Then, Taxable Income * 25% = Tax payable
How to Compute Your Quarterly Income Taxes Based on the Income Tax Rates
With your taxable income calculated, apply the appropriate income tax rate:
- For self-employed individuals and freelancers with deduction methods: Rates range from 0% to 35% based on taxable income.
- For corporations: The tax rate of 25% is applicable for regular corporation however the tax rate still depends on the ATC of the Corporation.
- For Non-VAT Corporations: Simply follow the principle on how to compute your quarterly income taxes using 1701Q.
- For the 8% Flat Rate: Simply apply the 8% rate directly to your gross income.
And if you have had taxes withheld by clients or other sources, you can subtract these tax credits from your tax due. Make sure to include your form 2307 to your quarterly income tax filings.
To ensure the correct Withholding Tax Rate is applied to your income, check it here: http://help.taxumo.com/en/articles/2179184-withholding-tax-atc-s.