If you are using a graduated income tax rate (meaning you're not using the 8% Flat Income Tax Rate), then you have to choose between Itemized Deduction or Optional Standard Deduction.

Itemized Deduction is the tax that we're familiar with: you deduct your expenses from your revenues to get your taxable income. You then compare this taxable income versus the income tax table.

An example of income tax computation using Itemized Deduction:
Income: 1,000,000
Expenses: 20,000
Taxable Income: 1,000,000 - 20,000 = 980,000
Tax Due: 130,000 + 30% * (980,000 - 800,000) = 184,000

Optional Standard Deduction, on the other hand, is a method that should make things a lot easier for many people. Instead of having to get itemized expenses (and receipts for each), you basically have to just declare that your expenses are 40% of your income:

An example of income tax computation using Optional Standard Deduction:
Income: 1,000,000
Actual Expenses: 20,000
Expenses as per OSD: 400,000
Taxable Income: 1,000,000 - 400,000 = 600,000
Tax Due: 30,000 + 25% * (600,000 - 400,000) = 80,000

An added benefit of OSD is that you don't have to provide an Audited Financial Statement so your tax submissions are easier.

Note that whichever method you choose for your very first quarterly filing for the year, that's the method you're stuck with for the rest of the year. No more changing until the next year. :)

If you're choosing between Itemized Deduction or Optional Standard Deduction, you can read this article to see which one is a more tax efficient option: Which is better?  Itemized or OSD?

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