The Philippines is ranked in the bottom 32% among countries when it comes to the ease of paying taxes. According to the Paying Taxes 2015 study by PricewaterhouseCoopers (PwC), the Philippines ranked 127th out of 189 countries when it comes to conveniently paying taxes. It takes companies 193 hours to pay 36 kinds of taxes. In comparison, it only takes 12 and 41 hours to pay 4 types of taxes in United Arab Emirates (UAE) and Qatar respectively, which are both tied for 1st place.
Luckily for employees, employers are responsible for filing and withholding taxes from their income. For self-employed professionals, freelancers, and business owners however, filing and paying taxes can be a daunting task. The process is both tiresome and complicated despite the presence of an e-filing system (which experienced lags and glitches last tax season). Because of the process, multiple questions are raised when it comes to filing taxes and the whole process can seem confusing.
Here are 5 common tax misconceptions for freelancers and business owners:
1. Freelancers and hobbyists do not need to register with the BIR
Some people start out blogs to simply share their thoughts without the purpose of monetizing them. Others start taking up photography as a hobby during the weekends. You may find yourself relating to the situation, and as months or years pass by, income-generating opportunities are presented to you that are hard to pass up. Soon enough, you’re earning a steady income with your hobby. You still have a full-time job. There’s no need to register and pay taxes, right?
If you fall under the following situations, then you don’t have to pay taxes. Otherwise, your income is taxable, and you need to register with the BIR. You cannot pay your taxes if you are not registered.
You’re exempted from paying taxes if:
- You are a minimum wage earner.
The daily minimum wage rate in NCR is Php 444–481 for people in non-agriculture sectors and Php 444 for those in the sector. For those living in a different region, click here for the minimum wage rates per region.
- Your gross income does not exceed your total personal and additional exemptions.
Your basic personal exemption (BPE) is Php 50,000, regardless if you are married or single and your additional personal exemptions (APE) is Php 25,000 per child dependent, with a maximum of 4 children or up to Php 100,000.
- Your annual salary from one employer does not exceed Php 60,000.
If you are required to pay taxes, then prepare the following documents for BIR registration:
- BIR Form 1901 – click here
- BIR form 0605 Payment Form – click here
- Certification from barangay captain
- Community tax certificate (cedula)
- NSO certified birth certificate
- TIN number
Once you successfully register, you will be given your Certificate of Registration (CoR), which comes with a Php 500 fee.
2. Income derived online is not taxable
As a citizen of the Philippines, you are required to pay your taxes. This includes freelancers and business owners whose income comes from online sources (e.g. blogging, virtual assistantship, online tutoring, etc). The only exception is if your income falls below the situations mentioned above.
Even freelancers need to register with the BIR and provide an official receipt (OR) for merchandise or services valued above Php 25. You may be penalized with Php 1,000 by failing to issue an OR. Aside from issuing ORs, bookkeeping will also provide you an easier time when filing season comes.
One thing to note is that since your business is mostly online, you are not subjected to paying the value added tax (VAT). Instead, you will pay the percentage tax which is 3% of your total earnings.
3. There is only one type of tax
Income tax, business tax, VAT, and percentage tax – that’s a lot of taxes to take note of, especially if you’ve never filed your own taxes before. You may be asking yourself if you’re required to pay all. Read on to find out the differences between them and which you’re obligated to pay.
This is the tax derived from your earnings. Amount varies depending on your income bracket. See below for the different tax rates according to your net taxable income:
This is the tax applied to every transaction between you and your clients. Under the business tax are the VAT and non-VAT or percentage tax.
a. Value Added Tax (VAT) – 12% of every transaction
You are subject to paying VAT if you engage in the selling and importation of goods and services and if your gross annual sales exceed Php 1,919,500.
b. Percentage (non-VAT) tax – 3% of gross earnings
You are subject to paying the percentage tax if your business falls under the industries mentioned in the Percentage Tax page of the BIR and if your gross annual sales DO NOT exceed Php 1,919,500.
Since you are operating a business and earning above the minimum wage, you are obligated to pay the abovementioned taxes.
4. Income derived from overseas is not taxable
Even if your income is derived outside of the Philippines, you are still required to pay the income tax. However, you are exempted from paying the 12% VAT for dollar-paying customers and clients. You are required to pay the VAT only for transactions done within the Philippines.
5. There’s no need to file taxes during a period wherein you don’t earn an income
If you’re a freelancer, then you’ve experienced highs and lows when it comes to your income. Your revenues from your business are never the same. There are some months wherein you earn enough to get you through the next months, while other months may force you to dip into your savings or emergency funds. Now the question is, are you still required to file taxes during a period when you don’t earn any income? Or what you earn is below the requirements specified above?
The answer is ‘yes’. This is to properly keep your record updated. If you don’t earn enough or none at all during a specific period, the BIR may assume that you’re still earning an income and your business is operating.
Now that you know the answers to commonly asked questions and misconceptions when it comes to taxes, you’re more prepared this tax season. Whether it’s registering your business or determining which taxes you’ll pay, you’re a little more knowledgeable now. Do take note that for the previous year, April 15 is the deadline for filing taxes.
2 thoughts on “5 tax misconceptions for freelancers and business owners”
Hello po. Paano po mag-file ng zero percentage tax (Form 2551M) for a month with no income via eBIRForms? If I click the “Submit / Final Copy” button after filling out the form and get a confirmation email from BIR, is it deemed filed already? Or is there a need to print-out something and submit personally to the RDO?
Also, for months with payments (which will be paid to the bank), is there still a need to fill out the Form 0605 (Payment Form) and click “Submit / Final Copy” every time I file/submit Forms 2551, 1701Q and 1701?
Thanks po in advance. 🙂
“you are exempted from paying the 12% VAT for dollar-paying customers and clients. You are required to pay the VAT only for transactions done within the Philippines.”
Any references you can point me to from where you got this information?