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.
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.
Hi Stef. Thanks for this very informative post. I have a question though. If a freelancer for example have been freelancing fulltime for five years already, but haven’t been filing the due taxes, and then now have decided ‘Okay I want to start paying my taxes’…. In that case, wouldn’t the BIR investigate him for the past years he’s already working as freelancer and have not payed the due taxes? Woudn’t the BIR file criminal charges against him?
Hi John, thanks for asking. Lots of freelancers have similar concerns, but in my case I simply approached the BIR as someone interested in starting her business. I didn’t have to tell them that I’ve freelanced before. So long as I complied with the requirements and attended the seminar, I was good to go.
Ahh, okay. If a freelancer who is getting paid by clients outside the Philippines, and so all of the transactions to receive payments is via online transactions via remittances directly deposited to the bank. Will the BIR require him/her to submit bank statements? The BIR is not allowed by (Bank Secrecy) law to look into deposit accounts, right?
Freelancers are still required to issue receipts as these are proof that you are making sales. What you can do is just “issue” a receipt for every time a client pays you, keep the white copy, and leave the BIR’s copy (usually yellow) in the receipt stub you used.
Stef, when you “issue” receipts for foreign currency payments like say US Dollars… What do you write on the invoice, USD or equivalent PhP? I’m just thinking, it can be complicated because of the forex rate at the time you got paid and the time you filed your tax payments.
I write the USD amount in the description portion, and the PHP equivalent in the breakdown. If I’m not mistaken you would use the forex rates at the time of issuance when writing the PHP equivalent, but I’ll ask again for confirmation.
Thanks Stef. I have another question: What about if you get paid like say today in USD in a certain Forex rate for your service but you didn’t withdraw it yet. Then you withdraw that fund from Paypal to your local bank the following week in a different Forex rate than the date you received the payment. What should be written on the invoice in that case?
Stef I’m sorry for asking questions on technicalities on taxes. I know it’s best to consult an accountant on my questions but I just thought that you are doing it already and so I would like to know how you do it in your case. Thanks!
It’s not a problem. That’s actually a good question. Unfortunately I haven’t been able to get a response yet, so if you need the information immediately, it may be best to consult an accountant, especially one that specialises in tax filing. I’ll get back to you as soon as I have the right answer.
On the flip side, if you are able to get an answer to your question, I’d appreciate it if you could share it in the comments for other freelancers to reference to. Thanks!
Just got a response!
1. Use the forex rates at the time of issuance.
2. Use only the BSP rates. According to my accountant, “Bank rates are net of income by the bank and other charges.”
Hi Stef and John,
You shouldn’t use BSP rates. It should be PDEx rate, that is from the Philippine Dealing Exchange.
On the invoice part, you should denominate it using the transaction currency. But since you are required to maintain your “book of accounts” by the BIR, you have to record everything using your functional currency, which is peso.
Now, invoicing in dollar and recording it in peso in your books have complications. The question is, when will the dollar be actually realized? In your books, at every reporting period, you have to measure the peso equivalent of your $ and record the difference as foreign exchange gain or loss, that will form part of your taxable income or deductible loss when realize.
Maybe I can help you more on these matter, just feel free to contact me. http://ocalundan.info
A freelancer may hide using the bank secrecy law. But when he/she buys items requiring his/her TIN like insurance, real property or a car, there’s a document trail left behind which the BIR may track down. If there’s no filed income tax returns to back up those purchases, then tax evasion is probable.
Although the BIR is more focused on large-scale tax evasion, it’s always better to be on the safe side by filling/paying business/income taxes.
Hi Stef,
If you’re a freelance (professional w/o PTR) and will not use a trade name/ business name and not have a storefront or office, you only have to register to BIR right? and no need to register at DTI and local government right?
Yes, that’s correct.
Thanks Stef, you’re really helping a lot of freelancers in the Philippines
Thanks as well, Raul. 🙂
Raul, I think there are local governments that require PTRs even for non-PRC licensed professionals like freelancers.
*bookmarks article*
Thank you for this informative and useful piece, Stef. 🙂 Keep them coming!
You’re very welcome! 🙂
Hi Stef, Thank you for this. I just have a question about the 1701Q. In the form itself, on line 35, it says to add the taxable income for the previous quarter, so I assume that the taxable income to date is the sum of 34 and 35, which means the taxable income per quarter varies. Is that correct? I’m really trying to figure out how to compute my quarterly and annual taxes that’s why I’m asking for a clarification. 🙂
HH, try this site to get answers for tax return questions:
http://www.businessforum.ph/forums/44-Taxation
Hi there!
Many thanks to you, for providing such clear, concise and complete information on how to compute taxes!
But can you elaborate on the Standard Allowable Deductions on Gross Income? for example from where did you based the 40% figure you used on the sample computations.
Thank you in advance! Have a nice day!
Oops! I think I know the answer to my question already, I saw it on the last page of BIR Form 1701Q.
I was confused because on this resource, ftp://ftp.bir.gov.ph/webadmin1/pdf/taxguide.pdf , on page 4, only a maximum of 10% of gross income is allowed as standard deduction. So I believe this is an old reference?
🙂
Hi Jeca, actually the link you just posted is the old reference. I confirmed with my accountant and other sources that it’s 40% of gross income for those opting for the optional standard tax deduction. 🙂
Thank you very much Stef! Wish you more blessings in return to your kind and sharing heart! 🙂
No problem, Jeca!
Hi Stef — Nice discussion you have here. Very useful.
If I may, I am in a situation that am a full time employee where my employer provides me with a BIR 2316 form at the end of the year.
Also, I have a part-time/freelance job that pays me via remittances through my bank account although I am not registered as a freelancer and do not have and issue receipts.
Now I wanted to pay the additional tax for my freelancing income to my 2316 but am confused on how to compute for it.
Should I just add up my all my income and compute for the payable tax from it? I’m I qualified for the 40% standard deduction for my freelancing work?
Thanks in advance.
I suggest you register first your freelance business with the BIR and issue receipts before declaring freelance earnings in your tax returns. You’ll be putting yourself in potential legal tax problems if you do otherwise.
Hi Stef, your article is so helpful for a freelancer like me. Very concise.
Thanks Luvina!
Hi Ms. Stef!
Is it possible na mag negative ang income tax? As I follow your computation po, Nag negative po ang anwer ko.. my gross income for 2013 is only 122,019.00. i’m using OSD, so less 40% which is 48,807.60 = 73,211.40 na lang, less pa po ang exemption na 50,000 so 23, 211.40 na lang. since it is over 10,000.00 but not over 30,000., magiging 500 + 10% of excess over 10,000.
now i got the answer 1,821.14… with 1,821.14 hindi ko pa po na leless yung binayadan ko nun 1st, 2nd and 3rd quarterly na P 395.16, P874.76 and P957.45, if ileless ko po yun sa 1,821.14 mag nenegative po. Pwede po ba yun or may mali lang po sa computaion ko…
Thanks Po.
Hi Stef! Thank you very much for this article. Especially the slideshow. I learned more from your blog compared to the hours I spent at the BIR seminar I attended.
I was wondering if you can post something about how to compute for the quarterly percentage tax as well? Especially for those of us who are non-vat registered. Kung kaya lang naman. 🙂 I’ve been scouring the web on how to compute for this when I stumbled upon your article. It occurred to me that you have more access to resources that answer questions like these. And you explain these topics so clearly, dapat i-hire ka nang BIR to write the articles sa kanilang website. Para naman maintindihan naming lahat at hindi masakit sa ulo basahin. Hahaha!
Many thanks and God bless!
Hi Ms. Stef. Thanks for this article but how about filing of Creditable Tax Withheld? Thanks a lot.
Thank you very, very much for these posts! God bless you! 🙂