Running a small or medium enterprise (SME) already comes with enough challenges.
Between handling customers, staff, inventory, and day-to-day operations, dealing with taxes might feel like just another hurdle.
But here’s the good news:
There are specific tax rules and benefits designed just for SMEs like yours.
If your business earns below ₱5 million in taxable income yearly and has total assets under ₱100 million (excluding land), you qualify for reduced income tax rates and other benefits.
Some programs are even free to join, like the Barangay Micro Business Enterprise (BMBE) program, which gives eligible businesses an income tax break.
Types of Taxes SMEs Need to Pay
Whether you’ve been running your business for years or just getting started, it helps to know what taxes apply to you.
Here are the key ones:
- Income Tax
If your net taxable income is below ₱5 million and your total assets (except land) are below ₱100 million, you can enjoy a reduced income tax rate of 20%.
The regular rate is 30%, so this is a big savings. - Value-Added Tax (VAT)
If your gross annual sales go over ₱3 million, you must register for VAT.
VAT is charged at 12% and passed on to your customers. - Percentage Tax
Not earning more than ₱3 million in gross sales?
You can register as a non-VAT taxpayer and just pay a 1% percentage tax instead.
This is simpler and often cheaper for smaller businesses. - Local Business Taxes
On top of national taxes, local government units (LGUs) may charge fees depending on your business type and location.
Always check with your city or municipal hall so you don’t miss any payments.
Tax Incentives That Help SMEs Save
Tax doesn’t always have to be a burden.
In fact, there are some built-in ways to lessen what you pay—if you qualify.
Barangay Micro Business Enterprises (BMBE)
If your business has total assets of ₱3 million or less, you can apply as a BMBE.
Once approved, your business gets an exemption from paying income tax.
However, you still need to pay percentage tax or VAT, depending on your registration.
CREATE Act
Thanks to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, eligible SMEs now enjoy a lower 20% corporate income tax instead of 30%.
This applies if you meet the income and asset limits mentioned earlier.
Ease of Paying Taxes Law
Recently passed in 2024, the Ease of Paying Taxes Law introduced digital solutions to help businesses file and pay taxes faster.
It also classifies businesses into micro, small, medium, or large taxpayers.
This means rules and requirements are now more tailored to your size and capacity.
Tax Compliance Requirements to Keep in Mind
Tax compliance isn’t just about paying.
It’s about staying registered, organized, and on schedule.
Here’s a checklist:
Registration with the BIR
Every business must register with the Bureau of Internal Revenue (BIR) to receive a Taxpayer Identification Number (TIN).
Filing and Payment
Depending on your business type, you’ll need to file monthly, quarterly, and annual returns.
Thanks to the Ease of Paying Taxes Law, you can now file and pay online.
Official Receipts and Invoices
Only BIR-authorized receipts and invoices should be used for sales and transactions.
This is required for proper documentation and audits.
Books of Accounts
You must maintain a book of accounts—either manually or digitally—to track your business income and expenses.
This helps in both tax filing and business planning.
Changes That Make Tax Filing Easier
Tax rules are changing to support growing businesses like yours.
In 2024, Republic Act No. 11976 (the Ease of Paying Taxes Law) was passed.
This law brought a few helpful updates:
- Digital Options: SMEs can now file and pay taxes online, making the process faster and less stressful.
- Size-Based Categories: The BIR now categorizes businesses by size, so smaller businesses don’t face the same burden as large corporations.
- Clearer Guidelines: Forms and filing requirements are now simpler and more consistent across regions.
These reforms mean fewer surprises and better tools to stay on track.
Smart Strategies to Lower Your SME Taxes
Once you’ve covered the basics, you can begin exploring ways to legally reduce your tax bill.
Here are some tried-and-tested methods:
- Track Legitimate Business Expenses
Don’t miss the chance to deduct these from your taxable income:
- Salaries and employee benefits
- Rent, water, electricity, and other utilities
- Advertising and promotional costs
- Professional fees and business loan interests
- Use Your BMBE Accreditation
If you’re a micro business, apply for BMBE status through your LGU.
Once accredited, you can skip income taxes and focus on reinvesting that money into your business. - Choose the Right Business Type
Sole proprietors and corporations are taxed differently.
For example, corporations with assets below ₱100 million benefit from the lower 20% rate under the CREATE Act.
Talk to a tax expert before registering or changing your business type. - Give to Accredited Charities
Donating to recognized foundations can give you tax deductions.
This not only helps your community but also cuts your tax bill. - Explore Industry-Specific Deductions
If you’re involved in research, renewable energy, or education, you may be eligible for enhanced tax deductions.
Check with the BIR or your accountant about these options. - Pay Attention to Withholding Tax
Are you hiring freelancers or paying suppliers?
Make sure to apply the right withholding tax.
Mistakes can lead to penalties and delays. - Contribute to Retirement or Health Plans
Employers who provide contributions to staff retirement or health benefits can claim these as deductions.
This builds trust with your team while helping you save on taxes.
Who Should You Talk to?
Navigating tax rules doesn’t mean doing it alone.
There are experts who can help:
- Certified public accountants (CPAs)
- Business development officers at DTI or your local LGU
- BIR representatives at your nearest Revenue District Office (RDO)
Even a one-time consultation can clarify your obligations and help you avoid costly mistakes.
Frequently Asked Questions
- Do I need to register my business even if I only sell online or part-time?
Yes. Even part-time businesses or online sellers must register with the BIR and LGU to avoid penalties. - How do I apply for BMBE status?
You can apply at your city or municipal hall by submitting a completed application form, business documents, and proof of assets. - What happens if I miss a tax deadline?
Late filing comes with penalties and interest charges.
It’s best to pay on time or settle any delays quickly to avoid larger fines. - Can I shift from VAT to percentage tax if my income drops?
Yes, if your gross sales fall below ₱3 million, you may change your registration.
Just coordinate with your BIR office for the process.
Conclusion
Managing taxes is one of those things that seem hard—until you learn the basics.
By understanding your tax responsibilities and using the incentives available, you give your business room to grow.
You don’t need to be an accountant to stay compliant.
You just need to stay informed, organized, and willing to ask for help when needed.
The right tax strategies can protect your income, strengthen your operations, and support your business goals.
Start small.
Plan well.
And take advantage of the systems now in place to support SMEs.