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 <<

Guide #2: BIR Requirements and Registration

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First off, let’s tackle the terms that best defines us freelancers:

  1. Whatever may be your field of expertise, you are identified as a professional or self-employed, since you are an individual practicing your profession. The BIR may ask if you have a license, so just inform them that your line of work doesn’t require one to operate.
  2. Registering as a professional means labeling yourself as an individual with a business of your own. This involves unique requirements that differ from registering as a tax-paying employee of a company.

BIR Requirements for Professionals/Freelancers

Before visiting the BIR, you must have these requirements on hand:

  1. A registered TIN number — link
  2. P500 TIN registration fee
  3. (1) xerox copy of your birth certificate
  4. (1) xerox copy of your marriage certificate (if married) and the birth certificate/s of your dependents, if you have any.
  5. (2) copies of completed BIR 1901 form — part 1 | part 2
  6. (1) original and (2) xerox copies of BIR 605 payment form used to pay the P500 registration fee
  7. (1) xerox copy of proof of address
  8. (1) xerox copy of ID with name, birthdate, and signature

Once you’ve managed to submit all these, the BIR will require you to buy and/or register the following:

  1. Books: (1) ledger, (2) columnar books, and (1) linear journal at P140
  2. (1) Documentary stamp at P15
  3. Invoices, depending on how much your printer charges
  4. Your printer’s registration fee, TIN number, and the job order for printing of invoices.
  5. Application for a TIN card (free)

I bought and registered all of these at the BIR office. Very convenient, I must say.

At this point, you should start looking for a printer who can assist you with the printing of your invoices. You also need to acquire a job order, the printer’s TIN number, and registration fee as these are part of the requirements.

In my case, since I didn’t know any, the BIR officer offered to contact and order a set of invoices from their own printers for me.

The Briefing for New Registrants

After submitting all my requirements, I attended a short seminar/briefing where a BIR representative walked me through the basics of taxes. This was a very good opportunity for me to understand the taxes I’ll be paying, to ask specific questions that are important for freelancers, and to clarify vague information about taxation.

If your revenue district office requires your attendance to this briefing, ask when the next schedule will be and attend it. This is a very good opportunity for you to ask questions, to clarify what isn’t clear about your taxes, and the like. Luckily for me, the representative who was available was very nice to me and explained the basics in a very simple and understandable manner.

These requirements are necessary to acquire two very important documents: your COR (Certificate of Registration) and your TIN card. Without these, your application will not be processed.

The Steps to Registering as a Tax Payer

I must admit that registering at the BIR was no easy trip, so if you want to avoid paying a big amount for transportation fares and waiting in line for hours, follow these steps:

  1. Register for a TIN number via the eReg page of the BIR website. Use the link above. You will then receive an email containing your TIN number, instructions on how to pay the registration fee, and a completed 1901 form that you can print and submit to the BIR. Print two copies of this form.

An accomplished BIR 605.

  1. Check which RDO (revenue district office) covers the location of your office. In my case, it’s RDO 33, which covers Ermita-Intramuros-Malate.
  2. Pay your P500 registration fee using BIR form 605 and through the following options:
    • At an accredited agent bank of your RDO,
    • G-cash, or
    • The BIR’s eFPS or Electronic Filing and Payment System

    I didn’t understand the instructions on how to use G-cash or eFPS to pay though, so I suggest paying your P500 at an accredited agent bank. Don’t forget to xerox 2 copies of the 605 payment form for the BIR.

  3. Visit your RDO. The best time I’d suggest is getting there on or before 09:00 AM to avoid the long lines. I got there at around 08:30 AM and so far the BIR personnel were energetic and attentive.
  4. Submit all of your documents. Make sure they’re complete and that you have the right number of xerox copies.
  5. The BIR officer will then instruct you to buy and register the documentary stamp and books. Make sure you have enough money (and spare change) to purchase these. If you don’t have a printer to hire for your invoices, ask the person assisting you if they could refer you to a printer that they know of.
  6. The BIR officer will stamp your books with labels and ask you to write your name, TIN number, address, and the purpose of the book. The two columnar books are cash receipts and cash disbursement, while the other two are the ledger and the journal.
  7. Attend the briefing or short seminar. Take down notes, listen carefully to the discussion, and ask all of your questions before leaving the seminar. Oh, and don’t forget to sign the attendance sheet/record book.
  8. Don’t forget to apply for your TIN card. Just ask the officer in charge of issuing the TIN cards and he/she will ask you to fill out a slip of paper with necessary details, such as your name, TIN number, address, contact number, etc.
  9. Get your COR and your TIN card.

If you were able to submit all of your requirements (including your printer’s requirements and the job order), you’ll be able to have your COR printed, signed, and your TIN card issued on the same day.

In my case, I have to wait for the printer’s requirements before I could get the COR and TIN, so all these including my invoices and books will be released together the next time I come back. If you’re going through a similar situation, ask when you can come back and confirm with the BIR officer that your documents and books will be released by then.

Important Last-minute Tips

A very busy BIR office.

And that’s how the registration process works. Before I end this post though, here are a couple of important tips that will hopefully make your trip to the BIR less stressful and frustrating.

  • Be early when visiting the BIR. They don’t have a convenient and effective system of managing the people who visit for BIR concerns, so go there at around 08:00 AM or before 09:30 AM to avoid congestion.
  • Gather all of your documents ASAP. It’s really a hassle to travel all the way to the BIR only to find out that you’re missing one or two requirements.
  • If you do arrive late, bring entertainment with you. I brought a book to keep my occupied while waiting for my turn at the tax assistance unit. If you find entertainment in people watching though, that’s fine too.
  • Find a printer you trust and that’s affordable. I was charged a big amount for printing, since the BIR officer was the one who facilitated that particular requirement for me. If you want to save on costs for printing, search for your own printer already.
  • Don’t leave your house without spare change. This is especially for those who take public transportation and for the requirements that should be bought at the BIR. Keep a breakdown of P500 in your wallet, just to be sure.
  • Bring a bottle of water. You’ll never know when you’ll get thirsty from all the waiting and the accumulated body heat!

You can also download this tax guide written and designed for self-employed professionals. Just right-click the link and save the link as PDF.

>> GUIDE #3: 3 KINDS OF TAXES FOR PINOY FREELANCERS <<

Guide #1: 5 Good Reasons Why Pinoy Freelancers Should Pay Taxes

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Taxation has always been a mystery among Filipino freelancers, yet it’s a necessary step if you want to be considered as a legitimate freelancing business.

While there is a significant lack of clear tax laws applicable to freelancers and online workers, it is still a freelancer’s responsibility to learn about tax laws applicable to his or her situation and to abide by these laws at all times when operating one’s freelancing business.

When I made the decision to register myself as a tax payer, I did receive a handful of negative reactions from members of my family. With the BIR running after the family business and monitoring its income reports, the fact that I can earn without needing to register myself as a tax payer is a dream come true for them.

But I knew that there is still some good in paying taxes, so I did a bit of research to see what resources were out there regarding taxes and freelancing in the Philippines.

You can have a look at these articles:

As you can see, it’s an issue that’s already been discussed, debated, and argued upon. The fact of the matter is that according to Philippine tax laws, we must pay our taxes if we are located physically within the Philippines and regardless whether the sources of income are coming from within or outside of the Philippines.

Quoting again from PinoyMoneyTalk.com’s article:

A Filipino citizen is taxed based on his taxable income derived within and without the Philippines, which includes part-time works as an offshore, outsourced writer for a US-based website (see page 157 Annex A1 of Philippine Taxation Handbook: A Simplified Course September 2006 Edition).

Again, no matter where the source of income is coming from, it is still taxable by law. If you received your funds from an online MLM scheme, an outsourced project, work from a fellow professional, etc., it is still taxable income.

5 Reasons Why Freelancers Should Pay Taxes

Convinced, I sought the help of a certified public accountant to talk about the process further and to help me with my own taxes. We discussed many things regarding taxation, especially the benefits and consequences of paying and evading taxes.

Here are 5 good reasons why Pinoy freelancers should pay taxes:

  • You need to think long-term. Buying a house or a car is a lifetime investment that securing a loan to buy one will mean presenting actual proof that you have the earning capacity to pay for it. Unless you plan on buying your next Honda Civic or Toyota Lexus in cold cash, you need to show your income tax returns to the company or organization.
  • You are required by Philippine law to pay taxes. Not paying means breaking the law, and if you get caught breaking the law, you will be penalized heavily by the BIR without question. That’s 25% to 50% of your income per year plus up to 20% interest. Read Section 232 of the National Internal Revenue Code.
  • You’re in control of your taxes. Registering as a tax-paying self-employed professional gives you the opportunity to declare your taxable income without the BIR dictating how much you have to declare every year. According to an article by About.me Tax Guide William Perez, “Being self-employed is quite possibly one of the best tax strategies available today…you are in full control of your tax situation, and you can reduce current income by any losses you have from freelancing, renting out property, or investing.“
  • You save yourself from a lot of inconvenience. You may think that you can live without a credit card or a particular service, but as your business grows and your ideas encourage you to go forth and be risky, you will need other payment methods besides cash. Applying for a credit card, a phone line, an internet connection, etc. will definitely be easy if you have ITRs, SSS, and other income-related documents on hand.
  • You’re doing your part as a citizen of the Philippines. It’s certainly difficult knowing that your taxes are pocketed by greedy people in the government, but at least you did your part as a citizen of this country. Even though you have the opportunity to evade and live life tax-free, it’s always good to know that you lived up to your responsibility by diligently calculating and paying your taxes.

>> GUIDE #2: BIR REQUIREMENTS AND REGISTRATION <<