Freelancing is a lucrative profession. If you do it right, you can earn OFW income in the Philippines. More so, you just need your laptop and your trusty Internet connection and you can earn anywhere in the world. It's pretty much a productive escape to the normal 9-5 cycle we are experiencing.
But then, there is one thing you can't escape even with death. Taxes!
As a citizen of the Philippines, we have to pay our dues to the government for, hopefully, the betterment of our country. As you navigate your way to compliance, you are just flustered with numerous forms and cryptic processes. How can you file and pay when you don't even understand what these forms mean?
Don't worry. As a freelancer, our tax filing is quite easy actually. Here are steps on how to file your taxes.
Disclaimer: This article is not by any means a substitute for an expert opinion. This only serves as a general guideline for the readers. It is best to consult with an accountant for your taxes. Also, subsequent rulings of the BIR might hold the content partially or completely obsolete. Please be guided accordingly.
Before you proceed, make sure that you registered your practice first. Check this article out for the step-by-step guide to register in BIR.
Tax Deadlines To Remember
If you don't know already, we file other types of taxes aside from our income tax return. It will depend if you have chosen to pay the normal "graduated income tax" or the "8% on gross income" scheme.
Remember, regardless if we have to pay any amount or not, failure to file the tax form will net you a penalty of at least 1,000 PHP per form! Yikes!
Here are the tax schedules so that you won't miss filing.
Based on this, income lower than 250,000 PHP will not be taxable anymore. Additionally, people with gross income lower than 3,000,000 PHP can now opt to pick an 8% flat rate.
Take note: If you want to avail of the 8% flat rate, this is not given to you automatically. You have to EXPLICITLY update your Certificate of registration yearly (usually a month before you file the 1st quarterly tax return).
Also, if you go above the 3,000,000 PHP threshold, you can't choose the 8% anymore. Plus, you need AUDITEDFINANCIAL STATEMENTS. And you are required to file VAT returns, not percentage taxes. But it's better than the 600,000 PHP threshold for Financial Statements and roughly 1,900,00 PHP for VAT threshold prior to TRAIN.
For the purpose of this article, we will assume that you are earning a gross income less than 3,000,000 PHP. The taxation for VAT is quite complicated. I suggest hiring an accountant if you reach this point (you can afford it anyway!).
Graduated vs Flat 8% on Gross Income
The first problem: what to choose? Both options have advantages and disadvantages. Inherently, the main advantage of choosing the 8% gross income is for convenience.
First of all, with the 8% (if you see the schedule of the deadlines above) you don't need to file the quarterly percentage tax if you opt for this.
Also, you just need to know your total sales less the 250,000 PHP exemption. Afterward, multiply that figure by 8%. That is your tax due. No questions asked. Some people may just choose this for the mere simplicity and convenience.
But if you don't mind the hassle of filing other taxes and you want to take advantage of your itemized expenses, here is a sample computation for different salary amounts:
As you can see, if you keep your expenses at a minimum, the 8% will surely outshine the graduated income tax. But if you have many RELATED expenses to your profession, you may opt to use the graduated income tax. Take note, this expenses should be NECESSARY AND NORMAL to your business. No gym memberships and probably no massage expenses either (!).
Finally, we are in the most important part: How to file your taxes! For the purpose of this article, we will just discuss how to file the percentage tax and the quarterly income tax return.
For the annual income tax return, there are certain accounting rules that are difficult to explain. It's best to hire an accountant for your annual taxes.
Moving on! The first step is to download the Electronic BIR Forms v7.2. With this, you can file your taxes wherever you are in the world. Just remember that the program only works with Windows OS. The program will look like this:
BIR Form 2551Qv2018 - Quarterly Percentage Tax
If you have chosen to use the graduated income taxes, you need to pay the quarterly percentage tax on top of your income taxes. For us, the percentage tax is pegged at 3% of your gross income per quarter.
If you have opted for the 8% flat rate, you can skip this part. If not, choose this option in the drop-down menu:
After this, choose the quarter and the date you are filing it for. And for item number 13, pick "graduated income tax rate on net taxable income".
Then, go to page 2. On the drop-down menu, choose PT 010. This is the percentage tax for those exempted from VAT.
Afterward, input the amount of the taxable income. The program will compute exactly the amount you will pay. It will be shown on the first page of the form.
The last step is to click "validate" and "submit final copy".
BIR Form 1701Qv2018 - Quarterly Income Tax Return
Now for the main part. For the quarterly income tax return, choose this in the dropdown menu:
You will see this form after clicking.
Quarterly ITR - Graduated Income Tax Return
If you have opted for the graduated income tax return, Choose the Alphanumeric Code "II014 Income from profession - Graduated IT Rates" in number 8.
Afterward, you have two options. Either the itemized standard deduction or optional standard deduction in number 16A.
For the itemized standard deduction, basically, you can use all the related expenses incurred and less it with your total service income. On the other hand, optional standard deduction (OSD) gives you the option to deduct 40% of your sales as your total expenses regardless if it's higher or lower.
Remember, what you choose to use between itemized or OSD will be the scheme applicable for the whole year.
You need again an expense analysis to plan for this. Check your total projected expenses. Will it be more than 40% of your income? Then choose itemized standard deduction. Otherwise, use OSD.
For example, you have a total income of 700,000 PHP. 40% of 700,000 PHP is 280,000 PHP.
If you have 400,000 PHP projected total expenses, use Itemized standard deduction. As you can see, with the itemized standard deduction, you only have 50,000 PHP taxable income (which will be the amount multiplied to the tax rates) compared to 170,000 PHP for optional standard deduction.
If you have 200,000 PHP projected expenses for the year, use OSD. With the comparison below, you will only have 170,000 PHP taxable income for OSD compared to the 250,000 PHP for the itemized standard deduction.
After choosing what scheme you will use, input the amounts in this table. Do not forget to input the 250,000 PHP in the total allowable deductions.
The program will already compute the amount to be paid. It will be reflected on the first page.
The last step is to click "Validate" and "Submit/Final Copy".
Quarterly ITR - 8% Flat Rate
If you have chosen this option, it's actually easier. Just choose the Alphanumeric Code "II017 Income from profession - 8% IT Rates" in option 8.
Next, go to the second page and fill out the form in Schedule II.
Don't forget to input the 250,000 PHP Basic Exemption. Afterward, the program will compute the total amount to be paid on the first page.
The last step is to click "Validate" and "Submit / Final Copy".
Last Reminders if you are Filing for the 2nd and 3rd Quarter
If you are filing for the 2nd or third quarter, don't forget to fill-up Schedule III - Tax Credits/Payment.
Every quarter, you will input the total amount of income and expenses for your business, not just the ones relating to that quarter.
For example, for the 1st quarter you have 300,000 PHP Income and 50,000 PHP Expenses and for the 2nd Quarter, you have 350,000 PHP Income and 75,000 PHP expenses.
You would have to input the total amount of 650,000 PHP for the income and 125,000 for the expenses for your Quarterly ITR - 2nd Quarter. Not just 350,000 PHP and 75,000 PHP.
Also, take a PDF file or screenshot the values on the second page. For some reason, the summary computation for the second page is not reflected in the summary PDF you can save. You might have a hard time computing for the 2nd Quarter and 3rd Quarter ITR-Q if you don't have the figures in the preceding quarters.
Is filing your taxes easy? Not really. But I think it's doable.
Better reread and learn how to file these forms to save some money. After this, you can now focus on furthering your craft! Good luck with your freelance business! And learn more about how to send payment to Filipino staff
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