The Freelance Pinoy

Expert Advice for Freelancers

Guide #3: 3 Kinds of Taxes for Pinoy Freelancers

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After a successful visit and registration process with the BIR, the next step is to identify the kinds of taxes you’ll be paying and how to compute for them.

If you already have an accountant in mind who can take care of your taxes, that’s great. But if you’d still like to know where a percentage of your professional fees are going to, continue reading this post.

There are three major kinds of taxes that a Pinoy freelancer must file and pay: the annual registration fee, income tax, and business tax. To make things easy for you, let’s tackle each one at a time.

1. Annual Registration Fee

After registering at the BIR, you are required to pay an annual registration fee of P500. This is paid on the first or last day of the month of January. The RF is paid after payment of initial registration as a tax payer.

You’ll be using BIR form 605 for this. You can pay at your accredited agent bank under your RDO, through G-Cash, or through the BIR’s eFPS system. Again, I suggest paying directly at an AAB to avoid the risks of paying online.

2. Income Tax

Income tax is a percentage of our income paid to the BIR. Since we are registered as professionals, we can declare how much our taxable income is by computing for our gross income minus the allowable deductions.

According to the table on BIR form 1701 (Quarterly Income Tax Return for Self-employed Individuals, Estates, and Trusts), income tax for individuals is between 5% to 32%. Use the tax table on page 2 as your reference every time you compute for your taxable income.

A freelancer can apply two types of allowable deductions to their gross income:

  • Optional Standard Deduction – the professional applies a maximum of 40% deduction to their gross income. Doing so will not require you to prepare an Account Information form/Financial Statement. I’m guessing that this type of allowable deduction is for professionals who don’t have the time, patience, and energy to itemize their expenses.
  • Itemized Deduction – all ordinary and necessary expenses made for your business are accepted as itemized deductions. These expenses must be made during the taxable year and at a time when your business is operational.Some good examples are transportation fees, postage fees, rental expenses, etc. The catch here though is that you need to provide proof that you made these expenses in the form of receipts, vouchers, sales invoices, and bank statements.

You can hire a CPA to compute for your income taxes if you feel that this is too much for you to handle. Just remember that your taxable income is gross income less your allowable deductions.

3. Business Taxes

The third and final type of tax we freelancers are required to pay are business taxes. As explained by the BIR officer who handled my briefing, the difference between the business tax and the income tax is that the former is applied to every transaction made between you and your clients. The latter focuses only on your taxable income.

There are two types of business taxes:

  • Value Added Tax – the infamous VAT is applied if your annual gross income is P1.5M and above per year. VAT is 12% of every transaction.
  • Percentage/Non-VAT tax – this is used if the tax payer is non-VAT registered and if his gross income is not more than P1.5M per year. The percentage tax is a minimum of 3%.

The VAT or percentage tax is filed using BIR form 2550M and 2551M.

Important Reminders for You, the Professional

I’m no expert when it comes to computing for taxes and filing them to the BIR, but I did pick up a couple of good reminders that every freelancer should keep in mind.

  1. You have to file for an income tax return EVEN when you didn’t earn income for that specific time period. If you don’t, the BIR will assume you are still operating and earning income and will investigate your case if they noticed the lapses.
  2. If your clients are all dollar-paying customers, you are exempted from paying the 12% value added tax. It is only when you’re transacting with local/Philippine-based clients that you are required to pay VAT.
  3. As soon as you receive your COR and TIN, start recording every single sale or expense made for your business. Save all of your receipts, vouchers, and invoices so that you have complete proof for your declared allowable deductions.
  4. Don’t be tempted NOT to pay your taxes. You’ve gone this far and are now under the watchful eye of the BIR, so do your best to diligently pay your taxes OR file a return if you believe you didn’t earn income for the current tax period. If you have questions, contact the BIR or your CPA for clarification.

A Copy of the Professional’s Tax Guide

All this information I picked up from the BIR briefing and from this tax guide provided by the BIR. I encourage you to download this document right now:

Tax Guide for Professionals: A Quick and Easy Primer for Paying Your Taxes

This helpful guide covers most of the basic information regarding taxation for professionals. It also contains step-by-step instructions on how to compute for your income and business taxes, where to file for taxes, and when the due dates for each form is.

Use this as your reference whenever you feel lost or confused about your taxes. I also suggest consulting with a CPA to help you compute and file for taxes to ensure that you aren’t making the wrong computations and you are paying the right amount in taxes every year.

>> GUIDE #4: HOW TO COMPUTE FOR YOUR INCOME TAX RETURNS <<

Comments

  1. Ryan Delos Reyes says

    Hi Stef!

    I stumbled on your post in odesk blog awhile ago and I’m very happy to find out that you’re a pinoy freelancer on odesk. I’ll be checking this site from now on. Cheers!

  3. Doe says

    Hi Stef,

    Do you have an idea if we still have to go to that process if our source of income is online?

    I’ve tried talking to one of their representatives but they keep on telling me that I should have an invoice. How could I provide an invoice for my offshore clients.

    • Stef G. says

      Hi Doe,

      Well, I still believe we should make our freelance businesses legit by registering as tax-paying individuals. Invoices are only being used for local clients though, so if your clients aren’t from around you don’t need to issue a physical invoice (unless you wish to do so yourself).

      Hope this helps!

      • rbien says

        Hi,

        1. If we as professional online workers do not need an invoice what documents should we attached? (printout from paypal history, odesk transaction records? etc)

        2. If we don’t issue invoice since we have offshore clients does it mean we skip Step 4: Apply for Invoices/Receipts using BIR Form No. 1906 – Authority to Print?

        Two thumbs for you Stef! This is just in time for me

        • Stef G. says

          Hello rbien,

          Issuing invoices is actually a standard procedure and must be done even if your clients are all from abroad. You need these as well in case a Philippine-based client comes to you for your services because these invoices are made specifically for local transactions. For filing taxes, if I’m not mistaken you only need to show digital receipts from PayPal or oDesk. But I will check again with my accountant. 🙂

          • McPhee says

            If you are paying, why don’t you know the answer to this question?

            I’m just curious because I want to pay taxes as well.

          • Stef G. says

            McPhee,
            Issuing receipts is important and must be done as the BIR conducts tax mapping once a year. It’s important to show them that you are issuing receipts since you are operating as a freelance business, especially when filing your annual income tax return.

          • Jane says

            I’m in wreck these past weeks because I don’t know where to start on this! This article is very informative.
            I’m also an oDesker, so what substitute doc I can send in such invoice less environment? Would the trascation history be enough? What do you use in your case? Please advise.
            Thanks in advance,
            Jane

          • Stef G. says

            Jane,

            When registering as a tax payer, you need to have printed receipts ordered as this is part of the process of filing your taxes. With every payment you receive from your client via oDesk, record that in a receipt. You can discard the client’s copy, but keep the BIR’s copy for recording purposes.

      • Blessie says

        No, I do mean vouchers, which we issue when we send out payments rather than receive them. Do you do all your work yourself, or do you have other people helping you out?

          • Blessie says

            No, I haven’t, that’s why I wanted to know if they’re really necessary. So you haven’t either? And you pay freelancers? That’s great news 🙂 Thanks much!

          • Mac says

            You only need to send out vouchers only if the freelancer you’re sending payment doesn’t issue any receipts or invoice. Otherwise you won’t have any proof of your expenses.

  5. jhOy says

    Hi Stef,

    great post. especially your other article, Taxes for Pinoy Freelancers. finally a based on experience guide. I was just wondering, when you start paying for your monthly taxes, is it after you have registered or does it also cover your previous months prior to your date of registration? thanks much 🙂 and great site too!

    • Stef G. says

      Thank you, Jhoy! My ITR and Monthly VAT returns cover only the months I after my registering at the BIR. You can begin filing for your taxes for next month as soon as you are registered as a tax payer. 🙂

      • Francis says

        Stef,
        VAT for foreign currency payments of clients who are outside and do business outside the Philippines are zero-rated but such payments are to be accounted in accordance with Bangko Sentral (BSP) rules.
        How do you or your accountant comply with such VAT BSP rules?
        Thanks,
        Francis

        • Stef G. says

          Francis,

          Could you explain your question further? What do you mean by “to be accounted in accordance with BSP rules”?

          • Francis says

            I think it means that for every zero-rated VAT transaction, there’s a Certificate of Inward Remittance issued by your bank to prove that you were paid in foreign currency by a foreign-addressed client. That’s to support the zero-rated VAT official receipt.

  6. Arger says

    Hi! It’s me again! Until now, I don’t know what to do with my case. But upon browsing BIR site, I learned that they have this ‘Mixed Income Earner’. If you still remember me, I am actually problematic because I don’t know which category I will fall. Few months from now, I will be working as a staff nurse in a government hospital. From there, I will be classified as government employee. But, I am an Odesk freelancer at the same time. Hence, I would like to declare my income since that would be beneficial for me in the long run. But, I already have an existing BIR number due to the fact that I worked as a call center agent in IBM (private employee). Hope I can find a solution to this very soon! 🙁

  7. Joy says

    Hi! I’d like to know what to do in case I no longer earn anything online or I just decided to go abroad. Do I still need to file BIR forms even if I don’t earn anything anymore? Is there a procedure to declare I’m no longer in business as a self employed individual?

  8. rbien says

    Hi Stef,

    How are you? hope everything is great!

    Well, finally my application is accepted. I talked with their “big boss” hehhe, and it was pretty explained. No need for any documents except, birth, marriage cert.

    I am now looking to pay required tax ASAP as my time runs that I need to submit as part of bank loan. Is it possible that next week, after I have my accountant do the math and have it all on 1701 form will I have the ITR?

    2. My clients are all USD paying so I am not require the business tax? How about if I have less 1.5M for Percentage Tax?

    3. I just received my COR today, can I pay income tax from the month of January to October this year?

    thanks again.

    • Stef G. says

      Hi rbien! That’s great! I’m glad it turned out well. 🙂

      You can take a look at this article on how to file for your taxes at the BIR: Taxes for Freelancers: How to File Your Taxes at the BIR

      The only exemption I know for income in USD is the VAT. You can ask the BIR officer regarding the business and percentage taxes, just to be sure. 🙂

      Income tax is paid every quarter. It’s not advisable to pay and file your taxes too early. The officers at RDO 33 warned me about that, so I do my best to stick to the usual schedule.

      Hope this helps!

  9. Raffy says

    Hi Stef! You indicate that that Optional Standard Deduction is 10%, but when I checked the BIR Form it says 40% is this the same thing?

  10. Ryan says

    I don’t really get this tax thingy for us freelancers. We pay for our internet connection which includes tax. We pay for our electricity which also includes tax. I mean we don’t need or even get any support from the gov’t people. So why care paying tax if it will only get wasted on these people. They don’t care about us they only care for their own. Unless there is a really good reason

  11. emignatius says

    Good reasons to pay your taxes
    1. You get to file your ITR, a legal document, that can serve as proof that you are indeed an earning individual.
    2. It is every citizen’s obligation to pay taxes. It doesn’t matter if you think that it is not being put to good use, which unfortunately is most likely, but still the money collected in taxes keeps our country afloat, although possibly not all of it.
    3. It is the law.

  12. rbien says

    Hi Stef,

    I just thought you might know if what procedure in case I want to discontinue to pay taxes for whatever reasons.

    What documents should I provide?

    • Ghar says

      Let me share thought rbien. As a registered freelance taxpayer, you can discontinue paying and dissolve your registration by filing a Registration Update with the BIR using BIR Form 1905. You will be required to submit your unused official receipts, your books of accounts, and other documents. BIR will examine your books and will cancel your registration if it will find no additional tax liability.

  13. Slice says

    Hi Ms. Stef,

    I badly need your help. I’m not sure if I can consider myself a professional or a freelancer since I only participate in design contests (99designs.com, crowdspring.com). If I win something, that’s the only income I have and I’m not sure if that is taxable or not. I have no need for invoices or receipts as everything is made on the internet. When I win something, I am paid via Paypal and then I withdraw the money to a local bank as remittance. Please enlighten me. Thanks in advance!

    • Stef G. says

      Hello, Slice. Yes, you won’t be considered a self-professional or a freelancer if your income comes from design contests. Also, the money you receive is technically prize money, not income for work done.

  14. ayaka chan says

    Hi Stef your own opinion,
    What would the government and the people do to address the problems that have been raised?

    • Stef G. says

      Hi, Ayaka. We’ve actually had some discussion about the Philippine tax system on a different but similar blog post: http://thefreelancepinoy.com/getting-paid/taxation-online-trade

      In my opinion, it’s really how backward the taxation system is. The BIR is still way behind in streamlining their processes as they’re still stuck with doing their paperwork manually. Also, the classification and specific laws should expand to include tax payers who receive income from online trade.

  16. Daile says

    Hello, Ms. Stef! I am a college student who is currently working as a home-based online english teacher. The company I am working for now requires us to pay 2%tax and to submit the BIR form 2307. The problem is, I don’t even have a TIN to start with. I tried to go to BIR to register but even the employee there didn’t really know how to classify me as a taxpayer since this type of job I have is freelance. I told the staff in my company about it, but even they cannot help. How did you register for a TIN at the BIR? Thank you very much.

  18. John says

    Hi Stef,

    If I say, ‘Okay, i’ll start paying my taxes starting this year’, and then the BIR finds that you haven’t been paying your taxes on the earlier years, won’t you get investigated and chase by the BIR for their lost years of income to you?

    Thanks
    John

    • Stef G. says

      John, I can’t say that they won’t ask you about your working history, and if they do find out there will be penalties as told by my accountant. But you can always approach the BIR as a new business owner with the intention of starting with a clean slate.

  19. Aaron Jeffrey says

    Hi! I just want to share with you some tips with regards to filing income tax return. This applies to any self-employed individuals, whether those working online as freelancers or those who actually have brick and mortar businesses. There are several important things to bear in mind that will help save a lot in taxes. First, self-employed individuals play two roles for the business, the first being the business owner, and second being an EMPLOYEE of the business. Being an employee, the self-employed individual is entitled to all the benefits of any regular employee, including a fixed monthly salary, thirteenth month pay, allowances, etc. Second, minimum wage earners are not required to pay taxes, meaning if you pay a minimum salary to yourself, you will not be required to pay taxes on that salary, and the total amount of your salary and thirteenth month pay as well as SSS/PHIC/Philhealth contributions will help lower the income of the business, which, in return, will help you avoid paying too much on taxes, and if you know how to play it well, you will not even have to pay a single centavo on income taxes.
    Here’s how you do things:
    1. Register as a business, since you are a self-employed individual
    2. If you earn in foreign currency, such as when your clients are coming from outside the Philippines, opt for VAT registration, otherwise you will be required to pay 3% out of all your earnings. VAT registered businesses are exempt to pay VAT on earnings in foreign currency
    3. When preparing income tax, fill up both forms 2316 and 1701. The 2316 is what you will use to declare your earnings as an employee of the business, this is where you will put the minimum salary and other benefits you receive from your business. The 1701 is what you will use to declare income/loss for the business. There is a section on the 1701 where you will need to put the salary you received from the business, as indicated in the form 2316. This should be the income that is exempt from tax. If you are married, you can claim for an additional exemption of 50 K and 25K for each child you have. it is probably a good reason to get married and have children :). If you are lucky, you can actually even add some cost of sales to the income statement and that will help reduce the bottom line. Also, if you are a freelancer like me, you would most of the time opt for the optional 40% deduction for the business expenses, rather than an itemized deduction. If you are in Metro Manila, you can declare a monthly revenue of close to 40K without even having to pay anything in business and personal tax. Those in other areas with lower daily minimum rate can declare a monthly revenue close to 30K a month and be not required to pay anything in taxes.
    I hope this lengthy comment helped you.

  20. HH says

    Hi Ms. Stef, thanks for this! I just want to ask, as a freelancer using the non-itemized deduction, do you still get non-taxable exemptions such as the de minimis and COLA? Thank you!

  21. Marc says

    Hi Stef, you are doing a good job with these blogs! A little off topic, do you have any information on who pays a higher tax in general, an employed individual or self-employed one?

  22. Geir says

    Hi Stef, interesting reading:)
    I will start as a freelance, I already have TIN, work permit and VISA, yes I am alien, married in Phils.
    As a freelance I will invoice companies in Norway, not local, do you or anyone else in here know if I have to add VAT on invoives going abroad for selling consultancy services?

    Kr

    Geir

    • Francis says

      As per BIR policy, if you’re selling purely services, official receipts are issued to clients, not invoices. But you may bill your client. If you are non-VAT registered, you don’t add VAT. Otherwise, you have to add VAT.

      If your VAT-registered services go a foreign or non-local client and you are paid in foreign or non-Philippine currency, you may claim zero-rated VAT. But such transactions must be accounted for in accordance with central bank regulations which I think means such transactions must be supported by bank certificates of inward remittance.

  23. name* says

    Hi Stef,
    Its nice to finally see something on the internet about this.. To navigate the gov pages is super hard for some reason…
    If i understood what you wrote above.. If I have a website and all sales are outside the philippines.. And every once in awhile ill send money from my paypal to my philippine bank account, I MUST pay 5% tax minimum?
    would it be a problem if a just hired someone to handle my orders for me locally, would I have to register as a business?

  24. Reish says

    Hi Stef,

    I’m almost finish with my registration. I have my COR already so I guess I’m done. I’m done with stamping my booklets as well, my problem is for the printing of receipts and invoices. The BIR officer offered to do it for me. He asked me to pay 100 pesos per booklet. He also told me that they can’t issue booklets less than 10. He asked me to pay 1000pesos for 10 booklets. Did you have the same case? They told me to come back after two weeks, I did not pay yet. They told me to pay after claiming the booklets.

    I’m working as a freelance online tutor so I really don’t need the receipts but the BIR officer told me it’s for compliance.

    Can you tell me how much did you pay and how many booklets did you get? How long did it take them to issue the receipts? Do you have any idea how much will it cost if I’ll have my booklets printed outsde instead?

    Thank you.

    • Stef Gonzaga says

      Hi Reish,

      If I’m not mistaken, I paid P2000 for 2 bundles of receipts, 10 booklets each. So P1000 is about right. You can opt to hire a third party printer if you want to save on costs.

    • watermelon says

      Oh woah, that is expensive!

      Can anyone share their experience with third party printers? Is it a hassle to opt for third party printers instead? Because if it is, it sounds like you have to shell out 2k (and choose the BIR printers) if you want a smoother/easier transaction. :/

      • Stef Gonzaga says

        It is expensive, but it’s an option for those who don’t know any third party printers and who need to have their receipts printed right away to get started. You can always opt to change once you’ve used up all of your receipts. Just follow the right procedures when doing so.

  25. Reish says

    Hi Stef,

    Thank you very much. Another question, do you use your books of accounts? How do you fill it out? I hope you can do a separate blog post about it. Thank you very much. More power to your blog and your freelance career. <3

  26. HBK says

    Hi Stef,

    What do you think is the advantage of registering as Professionals instead of Self-Employed?

    And secondly, why have you not registered as BMBE?

    Thanks! I appreciate your blog 🙂

    • Stef Gonzaga says

      Hi HBK,

      I registered as a self-employed professional w/o the need of a license to operate. Not sure about the difference you’re referring to.

      This is the first time I’ve heard of BMBE. Could you explain further what this is about? Thanks!

  28. HBK says

    Hi Stef,

    BMBE is a law that is intended for any business that has an asset of not less than 3M. The advantage is that it the registered one will be exempted from income tax. I just read it on this link http://www.nanaynotebook.com/2013/01/the-bmbe-in-real-life.html.

    I think your RDO is considerate enough for you to not submit requirements such as municipality permit and / or DTI registration. Other RDOs insist that those are required. Well, you know how challenging to get business permit especially for those who are working at home.

    Thanks!

  29. Sunshine says

    Hi Stef,
    What if you have missed paying your taxes for months and are late in filing? Will the BIR not question you for not taking care of it right away?

  30. glady says

    Hi Stef,

    I have a question regarding Percentage tax/Income tax. My father has a business which is also the main/only source of his income making his total taxable income equal to his business income. When we file for the quarterly income tax return, is there a way to deduct the taxes already paid thru the monthly percentage tax?

    Thank you in advance.

    Best regards,
    Glady

    • kyuusei says

      hi, would you know how i will be classified? i work online for a US based company(not registered in the philippines) but i am not a freelancer. should i file as self-employed? parang mas swak ako under ofw description except that i’m staying in the philippines now

        • kyuusei says

          hello. in the US yes, but i’m staying in the philippines for good already so i need to file taxes in the ph

          • tax101 says

            let me check first. since you seem to be classified as purely compensation income earner. pero i need to clarify this. btw, do that company gives you certificate of compensation payment?

          • kyuusei says

            hi, thanks for the quick reply. no. a lil background, i was an immigrant in the US and file taxes there and i just got back to the PH, so parang starting from scratch here 🙂

          • tax101 says

            i see. well you seem to fit here: d) A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable year in which he arrives in the Philippines, with respect to his income derived from sources abroad until the date of his arrival in the Philippine s.so far.. you are exempted from filing income tax. make it sure lang that your current company will give you that form. (form 2316 in the philippines) para next year you’ll be able to use that as tax credit to avoid double taxation 🙂

          • kyuusei says

            thank you for replying again, because i’m really confused. please correct me if i’m wrong but form 2316 is for withheld taxes by a PH company/employer right? i still work for the same US company(pinatuloy lang nila work ko kahit balik pinas) and have no plan of resigning from them(yet:) ), and i now have to file taxes on my own here sa PH kaya naguguluhan ako ngayon paano ako magfile since hindi na jurisdiction ng BIR yung US employer :/

          • tax101 says

            basically you’ll fall under this category kasi

            Resident citizens receiving income from sources within or outside the Philippines. ao you just need to file you itr (income tax return).thats true form 2316 is issued by ph employer. wala naman akong nakikitang problem except that if you are going to file your itr for the year 2014 (which is sa 2015 pa, your 2014 will fall under the exempt category) you need to show proof na you have been taxed by your employer already. let me check if kung anong form and iniissue ng emoyer mo abroad based on irs standards 🙂

          • tax101 says

            yes ma’am. to avoid double taxation. remember what happened to manny paquiao? his accountant was unable to secure this forms. anyway, unless you have a business here in the country thats another story. 🙂 glad to be of help