Freelancers get the chance to enjoy the long-term benefits of working comfortably at home without going through the constant ordeals of the stressful work environment and commuting. However, what they often neglect is about paying the right taxes, or some of them might don’t know where to start.
Freelancing delivers zero transport costs and flexible hours, but not zero tax obligations
Freelance job has become a major source of income for many Filipinos from various regions in the Philippines. And the huge presence of digital technology has made it possible.
Freelancers deliver independent services which are not bounded to any company structure or policy guidelines. The potential income for freelancers may vary according to self-established terms with their respective clients, which may also affect the amount of taxes to be settled. If you are working as a regular employee, filing your personal income taxes won’t become your concern since the HR department will do it for you. Unfortunately, for freelancers and self-employed professional, they will be the ones to prepare the tax documents themselves.
The Primary Function of the Bureau of Internal Revenue (BIR)
The Bureau of Internal Revenue is the central tax collection and enforcement agency in the Philippines, running under the supervision of the Department of Finance (DOF) with the following responsibilities:
- Collection of internal revenue taxes and charges that include documentary stamps, capital gains, donors, personal income and percentage tax among others
- Reduction of internal revenue taxes (tax rebates, exemptions, and privileges)
- Enforcement of legal penalties and fines including the execution of judgment decided by the Court of Tax Appeals and lower courts
- Supervision of law enforcement authority as provided under the National Internal Revenue Code and other applicable federal laws
Lawmakers created the first part of the Comprehensive Tax Reform Program (CTRP) known as the Tax Reform for Acceleration and Inclusion (TRAIN) with an objective to implement fair and effective tax collection system in the country. This recent tax reform significantly affects all freelancers and self-employed professionals in positive ways. Freelancers, whether part-time or full-time, still need to pay income taxes, but the amount may vary under certain conditions. The recent amendments are as follows:
- Filing of percentage tax has been modified from a monthly to quarterly basis using BIR Form No. 2551Q.
- Freelancers or self-employed individuals with an annual income of less than Php250,000 are now exempted from paying personal income tax.
- Freelancers with more than Php250,000 annual income are obliged to pay taxes plus 3% percentage tax based on BIR’s graduated tax table.
- Self-employed individuals with an annual income exceeding Php3 million should pay 12% value-added tax.
- Non-VAT taxpayers may have an option to pay 8% of their gross tax receipts if qualified.
A taxpayer should meet the following criterion to become eligible to register for the 8% tax rate privilege:
- If you are a registered professional, a mixed-income earner or single proprietor who earns decently from self-employment whether practicing a licensed profession or not
- If gross receipts and non-operating income do not exceed Php3,000,000 value-added tax limit within the taxable year
- If you are a registered taxpayer who is subject to percentage tax under Section 116 of the NIRC
Are you Classified as a Freelancer?
Freelancers are not specifically included among the list of individuals who should file an Income Tax Return (ITR) based on the National Internal Revenue Code (NIRC). You can be classified as self-employed professional, mixed-income individual or sole proprietor, depending on your nature of the profession. You may fall under these categories for as long as you are not receiving any fixed compensation from any registered corporation in the Philippines regardless of the amount. It’s critically important to declare the appropriate job category to avoid filing the wrong BIR form when paying your income tax.
Freelancers may work as independent contractors with a huge potential to grow exponentially. And they can act as an agency that may also represent a network of freelancers to work together over a specific project. Here are different freelance jobs in the Philippines which may be required by the BIR to file an ITR:
- Journalism (online or field work)
- News and magazine publications
- Filmmaking, screenwriting, video editing
- Film or stage acting
- All forms of music entertainment (broadcast or stage performances)
- Professional services and consultancy
- Insurance and investment products
- Writing (copywriting, content writing, proofreading, and research)
- Event planning and management
- Computer programming
- Web development,
- Video production (marketing, information sharing or educational purposes)
- Academic tutorials
Once you have registered as a taxpayer, you are obliged to fulfill your tax duties and responsibilities, including the declaration of your actual income derived from all possible sources both here and out of the Philippines. You are only exempted from paying an income tax if declared under these certain conditions:
- If you are earning less than Php250,000 every year regardless of work (referring to minimum wage earners and low-income individuals)
- If the exemption is in pursuant to NIRC law and other special laws such as Basic Personal Exemption (Php50,000) and Additional Personal Exemption of Php25,000 for every child dependent
- If you are a Filipino citizen who leaves the country within the taxable year to work or live abroad on a permanent basis
- If you are working in the Philippines, but your employment requires you to be “physically” present outside of the country
- If you are considered as a non-resident citizen (referring to Filipinos who have acquired a new citizenship status abroad)
Importance and Benefits of Filing an Income Tax Return
1. Contributing to nation-building
Collected taxes are utilized as nation-building measures to support various government programs including but not limited to social services, healthcare, education, foreign debt payment, and infrastructure projects, among others. Though people have different sentiments and outlooks regarding the effectiveness of tax collection in the country, tax policies are deemed necessary to deliver sustainable growth and economic progress. Paying your personal income taxes is one way to show your love and support for the country.
2. Documentary compliance for loan applications
An Income Tax Return is often used as a critical document when applying for a loan or a credit card. You may need to get a personal loan or salary loan for your medical expenses, travel expenses, and various unforeseen expenses in the future. You might also need to submit documents like bank statements, tax proofs, and employment certificates when borrowing money from banks and investment companies. Financial institutions would require applicants to submit a recent annual ITR of the previous taxable year particularly if you are a self-employed individual.
3. Overseas employment and international tour requirements
Someday, you might need to secure an ITR when you plan to travel abroad or pursue a professional career overseas. Foreign embassies in the Philippines may also require you to submit an updated ITR when applying for a tourist visa.
4. Ease of government loans and social benefits application
An annual Income Tax Return is a mandatory document often required when applying for a housing loan from PAG-IBIG or Home Development Mutual Fund (HDNF). As a self-employed or freelance professional, you will be asked to present a recent ITR, a local business permit, and audited financial statements to have your housing loan approved. Otherwise, it would be difficult to secure a housing loan if you wish to apply one in the near future. Government-run agencies like Social Security System (SSS) and Government Service Insurance System (GSIS) would also require supporting documents when you apply maternity loans, calamity loans, and retirement benefits.
5. Avoiding stiff tax penalties
As a freelancer, you can always build your own startup business, which may exempt you from paying taxes if you are only earning below Php250,000 per year. However, you should not ever ignore paying your tax responsibilities once your business has grown into a large-scale enterprise to avoid getting penalized for tax evasion.
The NIRC mandates all working individuals, including professionals, part-timers, and low-income individuals, to file an Income Tax Return every year whether they have earned any income or not. Everyone is required to secure a valid Tax Identification Number (TIN) assigned by the BIR upon registration. Taxpayers are also entitled to deduct a number of legitimate expenses from their declared earnings, though allowable deductions are subject to the provisions of the law. Each person should only possess one TIN because having two or more TINs is a serious criminal offense which is punishable by hefty fines.
The BIR has yet to establish a clear definition of a freelance professional, referring to those who are working on different jobs. But the BIR perceives freelancers as a combination of self-employed professionals, business owners, employment agents, and ordinary workers. These freelancers can be as follows:
- Individuals who have the privilege to practice a profession or registered under the Philippine Regulation Commission such as medical doctors, engineers, nurses, accountants, lawyers, and teachers
- Individuals who possess the expertise or technical skills to practice such profession without any license needed
- Individuals who are pursuing visual arts, sports and music as a possible means of personal income
Taxpayer Identification Number (TIN) Application
All freelancers are mandated to acquire a Taxpayers Identification Number (TIN), which is required for all tax-related transactions when visiting the BIR. The BIR also offers an e-registration system that allow you to get your assigned TIN before receiving your actual card. The official TIN indicated in the card will be used to register your profession as a freelancer whether you are earning through various online platforms or local clients. The requirements for registration include:
- NSO-issued birth certificate (original copy)
- BIR Form 1905 (completely filled up)
- Recent Community Tax Certificate (Cedula)
- BIR Form 1901 (Pages 1 and 2 are designated for self-employed registrants)
- Mayor’s Business Permit if applicable
- Certificate of the business name (once your startup business has grown bigger)
- Occupational Tax Receipt (recently paid)
- Professional Tax Receipt (recently paid)
- An affidavit showing rates, billings, and service fees based on BIR Revenue Regulation 4-2014
- Marriage contract (as a supporting document)
- Company certificate from local and online employers
- PRC card (if applicable)
Check out the video of Marilen Manipula to get an idea of how to get your TIN ID. Subscribe to her YouTube channel The All Around VA
Aside from visiting the BIR, you may also get a TIN online through these following steps:
- Visit the BIR official website. But before you register a new TIN, be sure that you have not previously registered for a TIN. If you have two or more registered TINs, you may have violated the provisions under the Internal Revenue Code of 1997.
- Register an account with a valid email address since you will need it to get further instructions.
- Fill up the online form with your personal details. Make sure that all details are accurate.
- Click the submit button and wait for the email instructions on how to proceed with the BIR registration.
Steps for BIR registration as a Freelancer
- Register for a new TIN using BIR’s e-registration system on its official website. Wait for a few days, and you will receive an email indicating your assigned TIN, payment instructions for the registration fee and a completed BIR Form 1901 that you need to print and present to the RDO. Remember to produce two copies of this BIR document.
- Submit the filled-up BIR Form 1901 along with other supporting documents to any Revenue District Offices (RDO near you. The best time to visit your RDO is 9:00 AM in order to avoid the long queue.
- Settle the Php500 registration fee at any BIR office. This amount can be paid in any Authorized Agent Bank (AAB) nearest to your location. You may also pay the registration fee through Development Bank of the Philippines, Land Bank, GCash or Electronic Filing and Payment Systems (Efps) before visiting the BIR. Also, remember to produce two copies of BIR 605 payment form for the tax collection agency.
- Make sure to bring all necessary documents including filled-out forms, recent photo, and photo copies of your documents. Please have them printed in two copies.
- Pay the Php15 documentary stamp tax and another Php15 for the certification fee. The BIR form will then be attached to the taxpayer’s registration certificate, which you will later receive at the end of the process.
- Attend the RDO briefing for new taxpayers to learn more of your duties and responsibilities. The seminar will only take 30 minutes to one hour, depending on the number of new registrants.
- Wait for the RDO to release your BIR Form 2303 or Certificate of Registration (COR), TIN card, Ask for Receipt Notice, Authority to Print (ATP) and Book of Accounts on a scheduled date.
- Submit the ATP along with the formal registration of the Book of Accounts for the RDO to stamp. The Book of Accounts will include expenses book, subsidiary professional income book, journal, and ledger. The BIR officer will request you to write your personal details such as TIN, the purpose of the book, contact details, and permanent address before releasing the book.
Note that if you were able to complete the requirements ahead of time, including printer requirements, invoices, and books, you could get your COR signed and printed as well as your TIN card issued before the day ends. If not, you should ask for a claim stub from any BIR official to know when your documents and book accounts will be released.
Value Added Tax (VAT) for Freelancers
The BIR requires all freelancers to submit an Income Tax Return using BIR Form 2550M (VAT) and BIR Form 2551M (percentage tax). All tax deductions and calculations are based on gross receipts and not on net income per year. Freelance businesses, whether individual or corporation, with gross receipts exceeding Php3,000,000, should pay 12% value-added tax. However, they are only required to settle 3% percentage tax if declared earnings are below the threshold.
Payment Schedules for Freelancers and Self-employed Professionals
Upon receiving your COR, you should be aware of your regular tax dues, especially if your gross income exceeds Php250,000 within the taxable year. Here are the tax payment schedules that you need to settle before the due date.
Monthly Percentage Tax
- Three percent of gross revenue for the whole year
- BIR Form 2551M (Monthly Percentage Tax Return) and BIR Form 0605 to be completed every 20th of the month
- Tax dues payable to any BIR accredited partner banks both private and government
Quarterly Income Tax
- Three percent of taxable gross income
- BIR Form 1701Q (Quarterly Income Tax Return) and BIR Form 0605 to be completed before April 15, August 15 and November 15
- Tax dues payable to any BIR accredited partner banks both private and government
- Formula: Quarterly Income less operational expenses = Taxable Income
Annual Income Tax (known as last quarter payment)
- BIR Form 1701 (Annual Income Tax Return) and BIR Form 0605 to be paid before April 15 the following year
Renewal of Annual Tax Registration
- BIR Form 0605 to be filed on January 30th each year
- Remember to display your COR in your home address or business location
Requirement for Local tax
Freelance businesses are required to secure an official business permit and an annual Community Tax Certificate (Cedula) to legally operate them. You still need to follow the guidelines of local tax requirements, especially if you are running your own home office or managing a group of workers. If you fail to secure the requirements for local tax, your business will be considered illegal, which may prompt the BIR or local business licensing office to penalize you. Freelancers with an annual gross income of less than Php250,000 don’t need to secure a mayor’s permit or barangay clearance either.
Friendly advice prior to BIR registration
1. Attending the BIR-conducted seminar
The seminar may seem beneficial for freelancers to learn the basics of taxation. You’ll be able to understand the taxes that you need to pay while allowing you to ask questions or clarify any unclear information regarding tax obligations. Besides, you are required to attend this to get your Certificate of Registration and TIN card.
2. Completing your Certificate of Registration (COR)
The Certificate of Registration will clearly indicate your business address, registered name, tax classification, and income-generating operations. You can provide the initial information to the BIR assessor regarding your profession or business nature to help him define your tax responsibilities. When you register, please provide the following information:
- The business name is a freelancer
- Official Taxpayer Identification Number is given to you
- Registered date (the time when you start issuing receipts)
- Permanent address where you need to display the CoR and BIR 0605
- Line of business, products or services
3. Updating your COR
Make a registration update by submitting BIR Form 1905 if you already have a registered TIN and COR before. It’s suggested to update your existing tax classification and business name rather than securing a new registration since you will need to submit a lot of supporting documents just to get one. If your trade name is classified as a sole proprietorship, for instance, consider changing it to self-employed professional as well as tax type from quarterly sales tax to quarterly income tax. Secure a Professional Tax Receipt (PTR) from your local government center.
City or municipal hall officials will likely ask you the following requirements before issuing you a PTR as a freelancer:
- Recent PRC ID if you are a licensed professional
- Employment certificate or company certificate
- Valid IDs
Once you have the PTR, produce two copies and submit them to the BIR. You will be asked to get your updated registration on scheduled date along with the BIR signage to be displayed on the public.
4. Securing registration stamps for your columnar (ledger and journals)
Freelancers are required to log their gross income with corresponding receipt numbers and date to an account book. The BIR will stamp the columnar when you register and all accounting records, particularly sales amount and date, should begin from the time you have received the COR. The stamped columnar will be used as a reference for your audited financial statements and computation of your quarterly income tax. After this, you can now proceed to the actual printing of official receipt or Authority to Print together with the following requirements:
- Photocopy (one copy) of Annual Tax Registration 0605 and your Php500 Receipt
- Two photocopies of COR
- Authority to Print from previous registration (if applicable)
- Photocopies of valid IDs such as driver’s license, SSS or voter’s registration
5. Remembering these important notes for freelancers
- Before visiting the BIR, be sure to bring along your updated and accurate cash receipts or disbursements journal. You are required to register a new book for every fiscal year.
- Produce photocopies of COR and form 0605 before proceeding to BIR’s accredited Printers of Receipt. The accredited printing center will give you 12 booklets or equivalent to 1000 receipts, which are valid for five years.
- Download the eBIR forms and fill up the details as early as possible.
- Hire a freelance bookkeeper, preferably licensed, to save time.
Every Filipino has an obligation to pay the appropriate taxes to help the country move forward. Freelancers, just like lawyers, entertainers, and medical practitioners, are no exception to existing tax laws in the Philippines.
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