This guide teaches you the steps and requirements needed to file a closure of business (a.k.a. cessation of registration) with the BIR.

At some point in your career as a self-employed freelancing professional, things have taken a turn that you have decided to close your freelance business.

For example, you’ve decided to transfer locations, or have other plans that demand your attention. You see that you won’t be able to personally visit the RDO for your monthly and quarterly filings, and you’re worried this might leave a bad mark on your records with the BIR.

If you find yourself in a similar situation, you may want to consider filing for a cessation of registration. Let’s take a look at what this means and the requirements to do so.

What is Closure of Business?

Closure of business or a cessation of registration means you want to close your business and stop filing taxes of any kind to the BIR. This means you are not going to operate any longer as a self-employed professional or a freelance business, and so are not obligated to pay taxes further.

Ideally, you would simply file your monthly VAT or quarterly ITR as “No Operation,” which is a lot simpler and easier to do. If you are transferring to a different city or district, you can always file for a transfer of business location and update your BIR 1905.

But, if you feel that you won’t be doing business again in the future, or there are other bigger plans that you will eventually be engaged in, the best move may be to file for a closure.

It is also important to note that you can close your business without removing your status as a BIR-registered tax payer. If you foresee opening or re-registering a new freelance business in the future, do not cancel your TIN number. There are no monthly or yearly fees to have and keep one, plus you may want to update it once you decide to reopen or register a new business.

NOTE: This post is ideally for freelancers who have registered as self-employed professionals and who are operating under their own names. If you have opened under a business name, you may need to visit other agencies other than the BIR for your clearance requirements. This forum thread lists the government agencies you may need to visit. Finally, if you have an accountant filing your taxes, consult his or her advice before doing so.

BIR Requirements

While searching for information about this topic, I came across the BIR 1905 form available at the BIR website, wherein the requirements for specific updates to your registration are listed.

For cessation of business, make sure to have the following:

• Latest annual ITR filed before the deadline – make sure to file the latest annual ITR before closing your business. This is to ensure that you have paid all of your dues for the past year. File for closure 10 days after deciding to close your business.
• Letter of closure addressed to the BIR – indicate that you are closing your business and the effective date.
• Inventory of unused receipts – a list of the unused invoice stubs, can be printed on ordinary bond paper.
• Unused receipts – surrendered to the BIR for destruction
• Books of accounts – your ledger, columnar books, etc.
• Certificate of registration – to be surrendered to the BIR

• BIR form 1905 – the form used to update your status as a tax payer.
• Accomplished routing sheet – a form wherein several BIR signatories check your records and sign to indicate that you are cleared of any cases, suspensions, or bad marks with the bureau.
• Filed income tax returns, monthly VAT (if you’re VAT-registered), etc. – basically all of the papers you have submitted and that the BIR stamped during filing.

Once you have all of the requirements, you can now begin the procedure of filing for closure.

Take note that what follows may not exactly be as how it will turn out at your respective Revenue District Office. Always ask the BIR officer-of-the-day for information on how to file for a closure if you are not sure. 

1. With your requirements on hand, secure a routing sheet, which will be used for your clearance as a tax payer. 
2. Ask the BIR officer to which department to acquire the first signature. Once you have the signature, always ask to who you will proceed to next. You would be going through collections, the head officer of the RDO, documentations, etc. Follow in sequence to avoid any problems.
3. Once your routing sheet is complete, proceed to the BIR officer-of-the-day to have them evaluate your annual ITR, books of accounts, and receipts.
4. The unused receipts must be destroyed with the BIR officer-of-the-day present. Make sure that you are a witness to this to avoid any suspicion.
5. If you are cleared, s/he will sign the evaluation form and ask you to submit the rest of the requirements.

And you’re done. It’s a very stressful process (in my opinion), but as long as you have paid for all of your taxes and have submitted all of the requirements, you shouldn’t have anything to worry about further.

Important Take-aways

Here are some things to remember to lessen the problems and hassles when filing for a closure at the BIR:

• Make sure your ITR computations are “readable” and understandable to the BIR. Even if you have paid for your annual ITR at the bank, any number that isn’t written or printed properly will be questioned. 
• Avoid filing for a closure during rush hours to avoid waiting too long in line.
• Bring both copies and originals of all of your files, including the very first forms you have submitted to the BIR.
• Always ask for help if you find yourself lost in the middle of the procedure. While they are strict, the BIR officers are willing to help.
• If you’d like information on how to file a closure for a traditional brick and mortar business, Business Tips offers information and advice in “How to Close a Business in the Philippines.”
• And finally, if you have specific questions about this procedure that the post doesn’t cover, you can always call your respective RDO or seek advice from the BIR officer-of-the-day, as they are the best people to turn to for clarification.

>> GUIDE #6: TAXES FOR FREELANCERS: FREQUENTLY ASKED QUESTIONS <<

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 <<