Employees vs Professionals: Which One Pays More Taxes?

Posted by Fitz Villafuerte under Freelancing, Personal Finance on March 4, 2014

I met with an accountant friend yesterday and one of the topics of our conversation was how much taxes employees and professionals pay in the Philippines.

I listened intently to his explanation, and below is my best effort to share with you the surprising things I learned.

Meet Mr. Employee. He is a graphic artist for an advertising firm, earning P30,000 gross income every month.

He is single and without dependents. Because of this, he will pay P5,199.78 monthly as taxes.

This was computed using the prevailing rates for SSS, Philhealth and Pag-ibig Fund employee contributions with respect to his salary; and using the BIR Tax Table here:

employee Employees vs Professionals: Which One Pays More Taxes?

Now, meet Mr. Professional, also single and without dependents. He is a freelance photographer, earning an average of P34,364 gross income every month.

Because he is self-employed, calculating his taxes are a bit complicated.

First, he must pay an annual registration fee of P500 to the BIR.

Second, because he is non-VAT registered, he will pay 3% of his gross sales every month as percentage tax. This is equal to P1,030.92 every month.

Lastly, he chose to apply the Optional Standard Deduction for his gross income, and thus he will pay P49,355.20 for his annual income tax based on the BIR Tax Rate here.

mr professional Employees vs Professionals: Which One Pays More Taxes?

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Analyzing The Two Tables

At this point, you can already see that even though Mr. Professional has a higher monthly gross income, he actually pays less taxes to the BIR.

However, we cannot simply compare the two based on these tables, and immediately conclude that Mr. Employee is getting the bad end of the deal.

Mr. Employee has the benefits of SSS, Philhealth and Pag-Ibig, plus he will also receive a mandatory, tax-free, 13th month pay as an employee.

So assuming Mr. Professional will voluntarily contribute to SSS, Philhealth and Pag-Ibig Fund at applicable rates for self-employed individuals, then here’s a more balanced look at how the two stack up against each other:

bir tax philippines Employees vs Professionals: Which One Pays More Taxes?

As you can see, both Mr. Employee and Mr. Professional are technically getting the same amount of money every year, and yet… Mr. Employee is paying more taxes.

Which now begs the question…

Would you rather be Mr. Employee or Mr. Professional?

Learn how to transition from being an employee, towards self-employment, freelancing and finally, entrepreneurship by subscribing to Ready To Be Rich here.

Postscript:
I am not an accountant. If you find a mistake in the computations above, then please point it out so that I can correct it. Thank you.

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12 Responses to “Employees vs Professionals: Which One Pays More Taxes?”


  1. elleica says:

    Thank for this Fitz. I am under this transition now. Which begs the question – how do I start paying taxes as a freelancer? And would it be prudent to declare taxes on my freelance income if I am still a full time employee and just a part time freelancer?

  2. Mr. Confused says:

    Wait a minute Brod Fitz… Im quite confused. Mr. Employee pays his taxes automatically through his monthly salary. So he gets his salary minus all of the things that he needs to pay through like SSS, Pag Ibig and Taxes…

    Now for Mr. Professional, how does he pay for that? Does he need to go to BIR and pay for it? The Annual Registration of 500 is payable I know through affiliated banks and/or through Globe Gcash but what about other taxes?

    and since he is self employed, what if there are months wherein he has no money earned? What about the months wherein he earned quite more or less than the average?

  3. Sil says:

    Hi Fitz,

    In the computation, you forgot to account for personal exemption for individuals that amounts to P50,000.00 this is for a whole year already. :)

  4. Chad says:

    The title of your article and your conclusions aren’t the same. You’re not comparing it apples to apples.
    1. Your title asks the question: who pays more taxes? Employees or professionals? So we’re comparing tax rates, not net take home pay.
    2. Your table for tax computation shows that on an annual basis, both the employee and the professional pay almost the same tax amount (about P62k, the difference being about approximately P150). So, to answer your question posed by the title of your article, and basing it on your computation, the answer is “neither.” Both pay roughly the same amount of taxes.
    3. You concluded that both people get the same amount of net money a year but the professional actually pays more taxes. If you look at the table, their taxes are the same. It’s the payments to SSS, Pagibig, etc which make up for the difference. So the reason why the net annual take home pay is the same despite the employee getting the mandated 13th month pay is because the fees of SSS, etc of the professional are significantly higher than the employee. So they pay the same tax but pay different rates in terms of payments to SSS, etc.

    Some other points:
    1. The only reason why the 13th month pay of the employee is tax free is because it falls within the tax free bonus limit. So anyone making more than 30k a month will be taxed on the amount in excess of 30k.
    2. As you mentioned, contributions of the professional to SSS are voluntary. So while professionals have the option to increase their take home pay by NOT contributing (with the effect of losing something of a pension in the future), employees currently do not have that option.

    My conclusion here:
    If you want to increase your take home pay, you have more flexibility as a professional since contributions are voluntary while employees do not have that option. But the tax paid by both (in your example anyway) is almost the same.

    My two cents. :) If I made an error, please do let me know.

    Thanks!

  5. Paul Eugenio says:

    Hi, Fitz. Let me correct that computation regarding non-tax contributions (I worked at SSS before):

    Benefits in SSS (and most probably in the other Government Financial Institutions) are computed using “salary credits” – meaning if you pay more, you will actually get more benefits even if you are compelled to pay more now.

    Assuming that the employee only paid Php 120 per month, most likely he would only get the minimum pension of P 1,200/month in the future (of course this will change, I’m just saying the current amount now). The professional who had paid more will get as much as Php 15,000 pension.

  6. Paul Eugenio says:

    So it means that eventually, the “professional” will actually get more benefits from the government as a reward for him paying more “taxes”. Hence it is invalid to say that it is unfair for them to pay more.

  7. Mr A says:

    I think it is the Professional that get’s the short end. I say that because that person has to pay 4,000 more to earn the same as the employee. You also didn’t consider the Tax deductions you had mentioned on the second table, which make the professional’s earning less than the actual employee.

    So base on the computations you had presented, the Professional has the short end of the stick. But that’s assuming that the person pays his/her taxes properly. Though for the sake of argument, let’s leave it out of the equation.

  8. Mr A says:

    Ok, I have to take back the part where you didn’t not consider the tax part in the second table. But I still see that the Professional still gets the short end of the stick. Maybe you should have given an example where the Professional earns the same gross as the employee.

  9. Fitz says:

    @elleica
    You have to do it yourself. Go to your BIR RDO to inquire on the process. Furthermore, it depends on how much exactly you are earning from your freelance income. If it’s a regular thing, then you should pay. If it’s just an occasional “raket” – then maybe it’s prudent not to for now.

    Also, you can ask your HR department for advise regarding your freelance income if they are willing to process your taxes with mixed income sources.

    @Mr. Confused
    Yes, Mr. Professional pay it himself. He goes to the BIR to register and pays through accredited banks and/or other channels (like GCash).

    If he earns no income, he needs to file a BIR form declaring “no income” and bring it to his RDO, and he need not pay anything for the monthly percentage tax.

    The percentage tax is paid monthly, based on the declared gross income for the month – so the payment varies every month.

    @Sil
    Oh, that’s right! I’ll account for this in the tables and revise them.

    But in any case, since both of them have the same personal exemptions (single without dependents) – the end result would still be the same because the same amount will be deducted and thus Mr. Employee will still pay more taxes, correct?

    @Chad
    1. I designed the example so that they’ll have the same net take home pay to see who pays more taxes. If they have the same monthly gross income (P30,000 per month), then the professional will pay significantly less taxes.

    2. While it seems that they roughly pay the same amount of taxes, Mr. Professional can do other tax minimization strategies such as opting not to do OSD and submitting an itemized account of his expenses.

    3. As an employee, part of your SSS, etc. contributions is shouldered by the employer – that’s why Mr. Professional has higher contributions, because he is paying the contributions in full.

    I opted for Mr. Professional to do voluntary payment so that both of them has the benefits of SSS, Philhealth and Pag-ibig fund. However, it should be noted that he can choose not to pay these and get more take home pay.

    Some other points:
    1. Yes! Above P30k and he’s liable to pay taxes for the 13th month pay. However, the government is planning to raise this to P75k.

    2. That’s right! I personally don’t pay SSS and Pag-ibig, only Philhealth. Instead of paying for SSS, I invest the money in mutual funds and the stock market. Also, I already own a home, so no need for Pag-ibig fund.

    Conclusion:
    You have the right conclusion. Employees have very little options when it comes to their income and tax planning, while professionals have more control on how they will manage everything. And you will be surprised how much better it gets if you have a corporation, who has all the best tax minimization tools.

    @Paul
    Thanks for the input. Indeed, the professional will get more benefits actually from his SSS contributions. But in terms of present value of money, he is shelling out more cash to be a voluntary member.

    @Mr A
    If Mr. Professional earns the same gross income as the employee (P30,000 average per month), then he will still be paying less taxes than Mr. Employee. If I remember it right, he will be paying only around P54,000 in total taxes.

  10. pj says:

    Missing from the equation:
    1. Mr. Employee gets x days of paid leave vs. Mr. Professional no work no pay and no bonuses

    2. Expenses for continuing education/training is at the expense of the employer of Mr. Employee vs. Own pocket of Mr. Professional

  11. Fitz says:

    @pj
    That’s right, those are valid points.

    However, no matter how much Mr. Employee works, his salary has a limit; while Mr. Professional’s income has no ceiling, i.e. the more he works, the higher his likely income.

    Also, Mr. Employee only has one source of income, his company; while Mr. Professional has many sources of income, each of his clients.

    Furthermore, no work, no pay is not always true for Mr. Professional because they can easily shift towards being an entrepreneur and hire staff to do his or her work.

    Accountants, lawyers, financial planners, SEO consultants – there’s a lot of professionals who earn retainer fees even if they do not do actual work for the month.

    Lastly, professionals don’t always pay from their own pocket for continuing education or training. Some freelancers I know have gotten sponsors, scholarships or even ex-deals for that.

  12. Gary says:

    Hi Sir Fitz,

    Do you have an article here about Banking Holidays? My accountant friend said i should be wary of this. I have stocks in BDO. Kindly share.

    Many thanks.

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