A Taxation Guide for Filipino Freelance Workers Finding Projects Online
August 27th, 2015
Working as a freelancer gives you a lot of freedom, a fact that is undeniable. With the freedom, however, come a few responsibilities. Paying taxes is one of those, an obligation that many freelancers dislike intensely or even loathe.
Many Filipino freelancers don’t pay taxes and they effortlessly get away with it. If you’re serious about establishing your online career, however, paying what’s due will be the wise thing to do.
All citizens of the Philippines have an obligation to facilitate national development by paying taxes. Some people consider giving money to the government a big loss because of the implied corruption. The hard-earned dollars will ultimately end in somebody’s deep pockets, right? It’s not this simple and certainly not this negative. Taxes provide funding for various essentials — healthcare, pensions and public facility development to name a few.
Media have already published various stories about people who left their job, became self-employed and earned a lot by finding online freelance projects. The Bureau of Internal Revenue (BIR) in the Philippines has started paying attention to this new model. Chances are that more and more freelancers will scrutinized and eventually asked to provide answers about their reluctance to pay taxes.
Are you making your first steps in the world of being an online freelancer? If so, you probably have tons of questions about taxation policies, documents and paying taxes. The following guide will acquaint you with some of the biggest essentials that all Filipino freelancers should know.
BIR’s Classification of Freelancers
According to BIR, freelancers are classified within a special category — they are legally seen as a combination of employees and business owners. BIR still doesn’t have proper separate classification, which makes all the bureaucratic procedures hard to understand and follow.
Although the system lacks rules for freelancers, as self-employed people, we have to pay bills and taxes. The following guide will reveal some essentials like:
- Documents that freelancers need to fill out
- BIR blanks and their significance
- How to calculate taxes
- How to avoid penalties and fines
What is TIN (Taxpayer Identification Number)?
Taxpayer Identification Number or TIN is the number that you use for tax-related and other accounting purposes. BIR has its e-registration system that you can use to get your number online. The registration fee is 500 peso per year. You can pay the fee at any branch of the Authorized Agent Banks (AABs) in your area. If you prefer online payment, use the Electronic Filing and Payment System (eFPS) or GCash.
Once you’ve made the payment, visit the nearest BIR office in your area and take your TIN card. The TIN card will be needed to register as a self-employed professional that makes money online.
How to Register as an Online Freelancer?
There are several documents that you have to provide to BIR in order to register as a freelancer that works online. These documents include:
A Guide to Filling out the Necessary Documents
Filling out taxation documents is far from the easiest task in the world. Still, being meticulous about it and following a couple of steps will simplify the process.
Once you get your NSO Birth Certificate, Marriage Certificate (if needed) and Sedula, you begin working on the BIR forms. People that don’t have a background in accounting may stumble across a few common challenges.
Application for Registration — BIR Form 1901
Here’s the data that you’ll need to enter in each of the respective document fields:
1: Taxpayer type (put mark on “Single Proprietorship”)
4: TIN number
7: Full name
9: Date of birth
10: Residence address
11: Zip code
12: Telephone number
If you make your money mainly online, you are considered an independent contractor. This means that in your BIR Form 1901, you have to mark:
22: Income tax and Other percentage taxes; specify “Self-employed”
23: If you have transactions that exceed 25 peso, you have to issue a receipt and maintain a Cash Disbursement Journal and Cash Receipt Journal. Specify the two types of books that you use:
If you’re single and don’t have children, you can omit that part of the BIR Form 1901. If you’re married and have children, you have to fill out Part Two about your civil status.
The third part of the form is intended for freelancers that have children. One of the spouses has to make a declaration about the children. Parents in Philippines qualify for additional tax exemptions for up to four children.
Payment Form 0605
In order to pay for your Certificate of Registration, you have to fill out Payment Form 0605. Three copies will be needed.
9: TIN Number
12: Occupation — self-employed
13: Your names
14: Telephone number
16: Zip code
If you use Form 0605 to pay only Certificate of Registration (COR), you have to fill out the following:
Tips for Submitting the Documents
When you fill out the two forms and have the first three documents in the list presented above, you’re ready to visit the local BIR office. The BIR representative will give you a date on which you’ll have to come back and take your COR. Don’t forget to bring the Cash Disbursement and Cash Receipt Journal Books to register it. Keep in mind that you have to register a new book every fiscal year.
When you get your COR, make a photocopy of the certificate and the filled out BIR Form 0605 and take those to the Accredited Printers of Receipts of BIR. You can take a full list of all accredited points at every BIR office. The full list is also available here. The accredited center will give you 12 booklets that have 1000 receipts each. You can use the booklet over the course of the next five years. The price for the 12 booklets you will receive will range between 1,000 and 1,500 peso.
What Taxes a Freelancer Has to Pay?
When you finally take your COR, you’re officially registered as a taxpayer. Congratulations! So, here’s the next big question — what taxes do you have to pay as a Filipino freelancer that works online?
Due to the corporate activities that you’re involved in, you’ll be expected to pay the following:
- Monthly Percentage Tax (three percent of your gross revenue)
- BIR Form 2551M (Monthly Percentage Tax Return) and BIR Form 0605
- Deadline: 20th of every month, you can pay in any BIR partner banks
- Quarterly Income Tax (based on the net income)
- BIR Form 1701Q (Quarterly Income Tax Return) and BIR Form 0605
- Deadline: April 15th, August 15th and November 15th
- Annual and Last Quarter Payment of Income Tax
- BIR Form 1701 (Annual Income Tax Return) and BIR Form 0605
- Deadline: April 15th of the following year
- Renewal of Annual Registration Tax (COR)
- BIR Form 0605
- Deadline: January 30th every year
Calculating Your Freelance Income Taxes
If you earn 10,000 peso per month as a freelancer, for example, you have to pay a percentage tax every month and income tax every quarter.
Monthly Percentage Tax
As an online worker, you’re exempt from VAT and will have to pay a tax that totals only three percent of your income. This means that when you earn 10,000 peso every month, you have to pay a monthly tax of 300 peso. This tax is due by the 20th of each month.
Fill out the calculated monthly tax payment in Part Two of the BIR form:
BIR Form 0605 — when you pay your monthly percentage tax, you have to fill out the following:
Quarterly Income Tax
If you earn 10,000 peso per month, you will accumulate 30,000 peso per quarter that will have to be declared. You’ll also have to pay the quarterly tax on this amount. You can declare deductibles via Optional Standard Deductible (OSD) and Itemized Deductible.
- The OSD way: declare 40 percent of your gross income as deductible. You’ll automatically deduct 12,000 peso from the quarterly income of 30,000 peso. For the next three months, your tax will be deducted from 18,000 peso. The main advantages of the OSD approach are that BIR will not audit your expenses, it’s easier to calculate the amounts and you’re free from having to itemize expenses for that quarter.
- The Itemized Deductibles: you will have to keep all receipts. It would be best to work with a qualified accountant if you’re itemizing deductibles for the first time Five important steps will need to be followed for the completion of the process:
The percentage tax: once you have paid it, you can deduct 1,200 peso.
If you’re paying taxes for the first time as a self-employed worker, you can declare expenses during registration:
Receipts: 1,500 peso Annual Registration: 500 peso NSO Certificates and other documents: 1,000 peso Social Security System (SSS) Payment: 1,500 peso for three months Philhealth (Philippine Health Insurance) and Pag-ibig Find: 600 peso for three months Internet Expenses: 3,000 peso for three months
Electricity and Computer Depreciation: 1,5000 peso for three months
The total amount of itemized deductibles is 10,800 peso.
To make the calculation simpler, we’ll use OSD deductibles that add up to 12,000 peso.
Quarterly Income — (minus) OSD deductibles = Freelancer’s taxable income
30,000–12,000 = 18,000
According to the Amount of Net Taxable Income, the taxable income of 18,000 peso is qualified in the range from 10,000 to 30,000 peso.
P 500 + 10% (P 18,000 — P 10,000) = P1,300 have to be paid every quarter
The BIR Form 1701Q (Quarterly Income Tax Return) is the document that you have to submit every quarter.
All spouse information will be filled out by your spouse’s employer, except for the personal information.
Every quarter you need to fill out the 0605 form.
Annual Income Tax
Every Filipino, regardless of marital status or number of children has the right to claim a 50,000-peso deduction from the gross annual income. An additional 25,000-peso deduction is available for every child (for up to four children).
If you’re married and have one child you’re entitled to the 50,000-peso reduction and an additional reduction of 25,000 peso for a total of 75,000 peso.
So, using the above example — you earn 10,000 peso per month for an annual income of 120,000 peso:
Annual Income — (minus) Personal Exemption = Taxable Income
P 120,000 — (minus) P 75,000 = P 45, 000
The OSD of 45,000 (40%) is 18,000 peso. The taxable income is finally calculated at 27,000 peso.
According to the Tax Table of BIR Form 1701, you’re income is in the category of over 10,000 peso and below 30,000 peso.
P500 + (10% * (P27,000 — P10,000)) = P2,200.
Tax Due for the three quarters is 3 * P1,300 = P3,900.
You can deduct it from your income tax.
P2,200 — P3,900 = — P1,700
The calculation signifies that BIR actually has to give you 1,700 peso for overpaid taxes.
You can have your monthly taxes deducted every quarter, so you will be free from paying an excess amount and waiting for the government to give back that money.
Quarterly BIR Form 1701Q
Every quarter, you will pay 400 peso.
The calculation for your annual income tax is:
Annual Tax Due = P 2,200 — P 1,200 (quarterly income tax = 3 * P 400) — P 900 (monthly percentage tax for the last quarter)
Annual Tax Due = 100 peso
The BIR Electronic Filling and Payment System is the easiest way to fill out your tax information. Once you get your registration application approved, you have to visit your local Revenue District Office (RDO) for activation.
For renewal of your annual self-employment, you need to fill out only BIR Form 0605:
Once you go through the process, you’ll be more confident about all forms, blanks and payments. The E-system will ease the process and will also give you access to records for previous periods.
Anyone who’s successful and who enjoys financial stability is a taxpayer. Being a model citizen is one of the options for changing the mindset of the people that you love, your friends and everyone that you work with.
In addition, paying taxes will give you peace of mind and make it a whole lot easier to focus on your career and be a successful freelancer. Good luck!