The advent of the Internet challenged almost all the traditional rules of society. It also challenged the need for physical presence in working environments. It bred a new working class.
The digital nomad, a freelancer who uses the web to provide services wherever s/he might be; the freedom of having almost full autonomy over your working conditions. But this freedom is not yet one hundred percent. A higher power precedes us. And that is the iron hand of taxes.
Back then, filing was mostly done by our employers. But when we became our own entity, the need to fulfill this obligation arose. The understanding of these alien terms and mathematical formulas might be a daunting task. But need not be worried. I will show you a basic step-by-step guide on filing your taxes in the Philippines as a freelancer.
The need to explain this part is essential because most of the freelancers are not registered as a taxpayer for their endeavors. Registration is quite a simple process.
You just have to bring these requirements and form to your designated Revenue District Office (RDO) registered under your Tax Identification Number (TIN) and register:
(If you don’t have a TIN Number yet, just go to the BIR TIN registration website to register.)
NSO Birth Certificate
NSO Birth Certificate of Dependents
Community Tax Certificate
Billing statement with Address
Philippine-issued valid ID
Professional Tax Receipt (for PRC Licensed Profession) or Occupational Tax Receipt (for those professions without)
For the forms, you can get them online, or you can ask the BIR ticket officer (the one that gives the queuing number) for the forms. Tip, you always pass these forms in TRIPLICATE. Saves you the time of going back and forth the photocopying lady.
Form 1905 (Update of Registration for those with an existing TIN)
Form 0605 (Payment Form for the Registration)
As for the projected expenses, the total estimated expense for registration is as follows:
1500 One Dozen Receipt Booklets (Roughly 1000 – 1500 PHP)
500 Registration Fee
100 Books of Accounts (General Journal, General Ledger, Cash Receipts Journal, Cash Disbursements Journal)
100 Miscellaneous (Printings, Documentary Stamp Taxes, etc.)
Do not worry about the complexities of the form items. There will be an officer of the day to guide you in the process. It is almost the same as filling out a form for a bank account except it just looks a little bit confusing.
It is a good tip also to wear a simple innocent friendly smile to make the most hostile officer help you wholeheartedly. In my experience, generally, they are nice and approachable people. Please ask questions about anything that comes out of mind. It would be a precursor to a smooth sailing registration and stress-free-future filing of payments.
After successfully filing the forms, you pay P500 pesos to an Authorized Agent Bank (AAB) listed by your RDO. And then, you are scheduled for a BIR seminar and date of pick up for the Certificate of Registration (COR).
To save time, it is best also to bring your books of accounts for registration upon pick up of your COR. Usually, this includes a General Journal, General Ledger, Cash Receipts Journal, and Cash Disbursements Journal.
Next, you register for the “authority to print” for printing your receipts. It is important to note that only Accredited Printers are allowed to print the receipts you can issue. There is a list of Accredited Printers in every RDO. These receipts are valid for five years of usage.
And with that, you are registered as a freelancer.
As what Peter Drucker postulated, “what you can’t measure, you can’t improve. It is just as true in business as well as in freelancing. Freelancing is like selling yourself as a business. And almost, if not all, wants a profitable business. Record keeping of our transactions is imperative to be successful. And it is good that we are “forced” to maintain these books of accounts. But for starters, let me explain the purpose of each book of account.
General Journal is simply the record of your daily transactions.
General Ledger is a summary of all the transactions PER ACCOUNT TITLE.
Cash Receipts Journal is the summary of cash received.
Cash Disbursement Journal is the summary of the cash paid.
There are certain accounting rules for recording. For the purpose of this article, let’s assume that our bookkeeper will just record for us. But, this is not an excuse to not have a simple record of our transactions.
For the fellow time-constrained and/or arithmophobic, you can simply record your income and expenses in an excel file. It may look like something like this:
Please be cautious to only include expenses, which are NORMAL and NECESSARY to the endeavor. Do not include your salon expenses or your gym subscriptions.
For an online worker, some expenses may be your internet bill or electric bill. Just make sure that it is justifiable again as a NECESSARY and NORMAL expense for the business. It is good practice also to keep ALL your receipts for record keeping just in case. Just to be safe also, I keep a digital copy of all my receipts saved in Google drive.
You may further consult an accountant for other deductible expenses because some expenses have limitations in Philippine Tax Laws. Interest Expense, Representations and Entertainment Expense, and Charitable Contributions are these types. For simplicity, we will assume that you are not incurring these expenses.
Also, take note of the “Cash Received” Column total and “Cash Paid” Column total as these might be the figures to input in the filing.
Filing and Payment of Taxes 2018
Now, for the most important part, how do we really file taxes as a freelancer? It is but necessary to know that ALL FILINGS for the Bureau of Internal Revenue (BIR) are all ONLINE. Yes, the BIR is moving to streamline the filing process via web. Download the “Offline eBIR Forms Package v7.1” program here.
This is an example screenshot of the Offline eBIRForm program.
Aside from the online filing, we can now pay our taxes thru the online payment portal for taxes. Talk about convenience!
Tax Reform 2018
With the coming Philippine Tax Reform dubbed as “Tax Reform for Acceleration and Inclusion (TRAIN)“, the New Taxation system amended the two-decade-long tax brackets. The new tax table is as follows:
For both tax schemes, the new law removes personal exemptions for all individuals. But with the lowered income tax rates, it ultimately decreased the taxes for everyone across the board even without the exemptions. The law also increased nontaxable benefits to 90,000 PHP per year from 82,000 PHP.
As a freelancer, we also have an additional perk. We have the option to choose either this Graduated Income Tax or a FLAT 8% on your GROSS INCOME in excess of 250,000 PHP.
You have to choose at the START OF THE YEAR the tax scheme you will adhere to. Check this memorandum for more information.Related Article: Frequently Asked Questions: How to Avail the 8% Tax Rate
The difference in Filing: Graduated Income Tax vs. Flat 8% on Gross Income
Before choosing which scheme to follow, we have to know the implications of these changes in the taxation process. The differences are as follows:
Required Taxes to File and Deadlines
These are the required forms and payment deadlines to file in a year for almost all freelancers for both schemes:
We should take note of these deadlines because late filing in any given month is fined at least 1000 PHP per form plus compromise, surcharge, and interest. What if we don’t have income for that month? We are still required to file even if the payment is zero.
As you can see, the first advantage of the 8% flat rate scheme is convenience as to filing. With this scheme, you are required to just file your Quarterly Income tax Return and Annual Income Tax Return. The deadline for 1701Q for the first quarter is also moved to May 15.
Some people might opt for the 8% tax scheme just for its convenience alone. But for those who want better financial backing for their decision, these are sample computations:
20,000 PHP Salary:
50,000 PHP Salary:
100,000 PHP Salary:
With this, you can try a similar computation to estimate your taxes for next year. If you have estimated relevant business expenses higher than 250,000 PHP (including percentage tax) in a given year, try computing for the taxable income for both schemes to check which is best.
Moreover, you are required to submit AUDITED financial statements prepared by an independent CPA when your gross earnings reach 3,000,000 PHP per year. The requirement threshold increased from the previous 150,000 PHP per quarter (or 600,000 PHP per year).With that, to save some accounting costs, we will give you guidelines on the preparation of the simpler forms. For the purpose of this blog, we will only discuss forms 2551Q and 1701Q because preparation of form 1701 requires a deeper understanding of the accounting process. Please consult with an accountant for more information.
2551Q – Quarterly Percentage TaxFor simplicity, as most fall under this category, we will assume that you are a NON-VAT taxpayer (meaning your gross annual income is below 3,000,000 PHP). With this assumption, we are subjected to only 3% percentage tax on our gross income. You are exempted from filing the quarterly percentage tax if you opt for the 8% Tax Rate. To file your percentage tax:
First, choose form 2551Q on the dropdown menu. And then, fill up this form for the proper period. Click Calendar and then choose the year and quarter the form is attributed to.Afterward, click the hyperlinked Alphanumeric Tax Code or “ATC”. Choose the first option – “Person Exempt from VAT”. Input the total cash received from your client on the taxable amount input box. The Taxable amount input box will show up after choosing your proper ATC. The total amount of percentage tax you paid will show up. Press Save and Validate. The program will scan for errors in input. If it passed the validation, press “Submit Final Copy”.
After receiving the BIR email confirmation, print triplicate copies of the accomplished 2551Q form and you can now pay your Percentage Taxes on Accredited Banks of your RDO. Also, save a screenshot of your email confirmation for record purposes.
1701Q – Quarterly Income Tax Return
For simplicity, we will only discuss the taxpayers’ column. We will not include your spouse’s side.
Preparation of the Quarterly Tax Return is relatively simple. The steps are:
1. Choose the form – 1701Q and input the required personal information.
2. Next, choose the Alphanumeric Tax Code that relates to you. It will either be
- Business Income – Graduated Rates
- Business Income – 8% IT Rate
- Income from Profession – Graduated Rates
- Income from Profession – 8% IT Rate
- Mixed-Income – Graduated Rates
- Mixed-Income – 8% IT Rate
Itemized Deduction means you can deduct ALL the expenses incurred during the quarter. And Optional Standard Deduction means you will be deducted a fixed percentage of 40% from your total income. These are the pros of using either.
When to use Optional Standard Deduction:
If you want to have a convenient filing process, use optional standard deduction. Just input your income, and the system will assume that you have 40% of your total income as your total expenses. No questions asked.
For tax savings, you can use this option if you assume that your justifiable expenses would be below 40% of your total income.
When to use Itemized Deduction:
If you want to maximize all your expenses, and you are assuming that, for the year, you will incur expenses more than 40% of your total income.
If you have chosen Optional Standard Deduction, just input the total collection from your clients in the “Sales/Revenues/Receipt/Fees” box. And the program will automatically show a 40% deduction from your income.
Likewise, for Itemized Deduction, just input your total collection in the “Sales/Revenues/Receipt/Fees”. And then, input the total expenses you incurred in the “Cost of Sales/Service” box. Once again, the program will automatically compute the tax due this quarter.
Press “Save” and “Validate”. The program will scan for errors in input. If it passed the checking, press “Submit Final Copy”.
Afterward, wait for the BIR email confirmation. And then, print triplicate copies of the accomplished form and you can now pay your Quarterly Income Tax on Accredited Banks of your RDO.
After the battle for this cryptic process, this “iron hand” proves to be not that tough. The responsibility to pay taxes might be a tedious process. But tax filing and paying need not be expensive.
With this guide, I hope we shed light on one of the most questioned predicaments of this new workforce. And I hope we see more of you in the new digital workplace.
Disclaimer: This article is not by any means a substitute for an expert opinion. This only serves as a general guideline for the readers. It is best to consult with an accountant for your taxes. Also, subsequent rulings of the BIR might hold the content completely obsolete. Please be guided accordingly.