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The Freelance Pinoy

Expert Advice for Freelancers

Search Results for: tax

Guide #6: Taxation for Freelancers Frequently Asked Questions

February 12, 2014 by Stef

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These are the most common questions received of the Taxation for Freelancers series. I’ve put the most popular in today’s post to give you the head start you need.

1. How do I approach the BIR to register as a freelancing professional or business?

The BIR uses traditional terms when catering to tax payers’ needs, so it’s important to use these terms so as not to get confused and end up with the wrong procedures and requirements.

For freelancers, you would approach the BIR as two identities depending on how you would like to operate as a tax payer: 1.) As a self-employed professional, or 2.) A business. Each one has it’s own set of requirements, so it’s important to explain to the BIR as clearly as possible what it is that you do for a living.

2. What should a freelancer do if s/he already has a TIN, particularly after working as an employee?

He/She should go the BIR and update his/her registration. Tax liabilities of an employee is not the same with someone engaged in business (self employed) and therefore BIR records should be updated.

3. Should I register under my full name or a business name?

For self-employed professionals, you can register your business under your full name. This eliminates the need to visit the DTI and other government offices to register a business name.

There are however advantages to registering under a business name, such as a professional brand or when operating as an agency or team. You will then need to consult with the BIR for the requirements and procedures necessary to do so.

4. Under what category should a freelancer register under to pay taxes to the BIR?

A freelancer would normally register as a person engaged in business that provides services for a fee. Usually your tax liabilities would be Income Tax, and VAT or Percentage depending on your choice.

5. How much in income is required if a freelancer wishes to pay taxes as a self-employed individual?

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There is no specific level of income wherein a person is required to pay taxes. As long as you are receiving payment, regardless of whether you are gaining or losing, you are required to file your tax returns.

6. What is the difference between a VAT-registered and non-VAT registered tax payer in terms of how much tax s/he has to pay?

Just to put things into context, the BIR states that “any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed One Million Five Hundred Thousand Pesos (P1,500,000.00).”

VAT-registered tax payers are required to pay 12% sales tax on gross sales or receipts. As a VAT-registered tax payer, you can declare your sales tax as zero-exempt if you’re earning foreign currency, such as US dollars.

Also, as per the BIR officer I spoke to when I first registered, if you intend to market to local businesses here in the Philippines, they’d be more receptive to working with you if you are VAT-registered.

Non-VAT registered tax payers are required to pay 3% sales tax. This is called a percentage tax. Refer to this list of businesses required to file the percentage tax.

7. Since the BIR requires the registered tax payer to have printed receipts made, what should the freelancer do with these receipts when s/he issues digital invoices to their clients?

You are required to issue official receipts for every payment that you receive. Hence, regardless of the location of the client you still need to make use of the OR.

You may e-mail the OR to your clients or just write the OR and just keep it. The main reason for issuing an OR is for documentation purposes so that the BIR can keep track of your receipt.

8. Could you explain the different books (e.g. ledger, columnar books), particularly what their purposes are?

The BIR requires every tax payer in a manual system to prepare and manage various books.

These books are the following:

  • Cash receipts book – to keep track of sales receipts every month. You need to break down in a sales receipts the vatable and non-vatable sales and also indicate the Output VAT.
  • Cash disbursement book – to keep track of cash disbursed or issued. Tax payer needs to break down the purchases to vatable and non-vatable purchases and indicate also the input VAT.
  • General journal book – a record of the debits and credits made in the accounts. This is like the diary of the company that tells what are the things that was received or sold and things that were issued or paid.
  • General ledger book – shows the summary of the debits and credits made in each in particular account that the company maintains.

9. How does a freelancer go about computing his or her deductions?

The rule of thumb is that the only types of expenses you would deduct from your gross sales or income are those that contribute to the management and growth of your freelancing business.

To make things clearer, the BIR website has listed the allowable deductions and the kinds of expenses that do not count when calculating a tax payer’s deductions on gross sales or income.

To integrate this to computing for your actual income tax returns, check out the step-by-step instructions and a concrete example in this post: Taxes for Freelancers: How to Compute For Your Income Tax Returns.

10. I decided to stop freelancing for various reasons (e.g. taking on a full-time job as an employee, move out of the country). What should I do with regards to taxes?

You will need to file a cessation or closure of business to avoid any penalties with the BIR. Check this post out: Taxes for Pinoy Freelancers: How to File for a Closure of Business.

11. I was not able to pay my taxes on time. What should I do?

One of the hardest lessons I’ve learned is that you can’t mess with the tax schedules and due dates. I once was late in filing for my VAT returns, and so the BIR required me to pay P1,000-P2000 in penalties.

If you at any time did not file your tax returns on time, address the problem immediately by visiting the BIR and have them compute the penalties you need to pay. This is the only way to ensure that you do not have any liabilities or bad cases on your account.

Of course, the best move is to always pay and file your taxes on time.

12. I have a question about taxes that isn’t related to registering a freelancing business or as a freelancer. I also have questions about a specific situation that none of your posts addressed.

All of my Taxes for Pinoy Freelancers posts are meant for tax payers who are registering as freelancers, freelancing businesses, and self-employed professionals who render services to consumers.

If you have a tax question or concern that isn’t covered in any of these posts, the best people to ask is the Bureau of Internal Revenue itself.

Approach the Officer-of-the-Day with all of your questions so they may be able to answer them fully during your visit.

>> BACK TO HOME <<

Tutorials Tagged: freelancers, taxes

Guide #4: How to Compute For Your Income Tax Returns

September 13, 2013 by Stef

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I’ve written extensively on taxes for freelancers, but most are still unsure about how to actually compute for their taxes, particularly the quarterly and annual income tax return (ITR).

The BIR has actually released a system called eFPS or e-Filing and Payment System that pretty much automates this for you, but in case you aren’t able to enroll or you prefer to do your own taxes, the slideshow below should give you a visual presentation of how to compute for your income tax returns.

[gview file=”http://thefreelancepinoy.com/wp-content/uploads/2013/09/How-to-Compute-for-Freelancer-Taxes.pptx”]

Freelancer Mark Joseph actually emailed the sample scenario to me, after which I traced the original source to a Work & Money thread at FemaleNetwork.com. Many thanks to freelancer_babe for providing a clear example of how to compute for ITR and to Mark for sharing this with me.

I hope you’ll find the slideshow useful and a resource to go back to when computing for your ITR. If you have specific questions about filing for your taxes, it’s always best to ask a BIR officer-of-the-day at your nearest RDO.

>> GUIDE #5: HOW TO FILE FOR A CLOSURE OF BUSINESS <<

Tutorials Tagged: BIR, taxes, tutorial

Guide #3: 3 Kinds of Taxes for Pinoy Freelancers

June 9, 2011 by Stef

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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 <<

Tutorials Tagged: BIR, freelancers, freelancing, taxes

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  • Guide #6: Taxation for Freelancers Frequently Asked Questions
  • Table of Contents
  • Guide #4: How to Compute For Your Income Tax Returns
  • Guide #5: How to File for a Closure of Business
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