Updated: July 1, 2019
One of the most common questions people ask me is if it’s necessary for a starting freelancer or a newbie entrepreneur to file and pay taxes. The answer of course is yes, it is necessary and they should.
It may seem common sense, but I understand where the question is coming from because I have been both.
When I started on freelancing, I wasn’t earning much and income was irregular. There are periods when I had to survive a couple of months without any cash coming in because I had no projects.
And then when I started my first business, my situation was similar. Profits were minimal and nearly not enough to cover my personal expenses. Every so often, I would contemplate on not paying anything for my Monthly Percentage Tax so I could have some extra cash.
Fortunately, the fear of going to jail for tax evasion was stronger than my desire to save a few pesos. So I diligently paid my taxes – complete and on time.
The Philippine Situation
To date, there are over a million registered small to medium enterprises (SMEs), freelancers, and self-employed professionals in the Philippines, making up 99% of the total business establishments operating in the Philippines.
According to the 2016 BIR Report, there are 2.5 million sole proprietors, 1.4 million freelancers, and 429,000 licensed professionals based in the Philippines.
Furthermore, the Philippine Statistics Authority (PSA) estimates that for 2017, there are approximately 11.2 million freelancers in the country. On the other hand, there are more than 915,000 business enterprises operating in the Philippines, with MSMEs accounting for 99.57% of the total establishments.
These numbers explain why I often get questions such as, “Is it okay not to pay taxes at the start?” and “When should we start paying taxes?”
If you’re among them, then let me give you four reasons why you should file and pay taxes as soon as you start operations.
Why do we need to pay taxes
1. Peace of Mind
If you’re running a small business, you should focus on growing your sales and not constantly looking over your shoulder, hoping that the BIR won’t visit your store.
As a freelancer or a professional, taking care of clients and meeting deadlines is stressful enough. You shouldn’t add to that the anxiety of receiving a letter of notice from the BIR to undergo an audit investigation.
2. Proof of Income
Getting a home or car loan? Applying for a VISA? Hoping to get approved for a credit card or personal loan? It’s easy if you are an employee because you have a payslip.
But if you’re a freelancer, professional, or an entrepreneur – there’s no other way to show proof of your income other than your income tax returns.
If you underdeclare your income, then you’re not just lowering your chances of getting your application approved, which you deserve. You’re also endangering yourself for a tax evasion case.
3. Business Growth
Tax documents are often a requirement to apply for accreditation as a supplier or individual contractor. Businesses use these to evaluate if you have the capacity to deliver. If you don’t properly file taxes, it will be hard to seize these opportunities for growth.
Furthermore, among the documents that investors will ask from you are your financial records. If you’re hoping to get investors or business partners, then truthful tax returns will definitely help in soliciting their support .
4. Social Responsibility
Lastly, the taxes you pay help in nation building. It is a social responsibility of a productive individual to contribute to the development of this country.
In the end, it will be you who would benefit through infrastructures that will allow you to do business faster and easier. As well as enjoy better and more efficient government services.