Updated: May 24, 2017
Paying taxes is mandatory. It’s what all law-abiding citizens do. Employees don’t really have to think about it as it’s done automatically by their company for them. But it’s a different story for freelancers and business owners.
Today, we focus on how freelancers can register and pay taxes to the BIR. Particularly, what are the steps to do so.
Freelancers need to be registered with the Bureau of Internal Revenue (BIR). Section 74 in the Philippine Tax Code states that if an individual is receiving income from sources within or outside the Philippines, then they are required to pay taxes.
The BIR defines self-employed as persons engaged in business and who derive their personal income from such business; and professionals, such as (1) “persons who derive their income practicing their profession” like lawyers, and those registered with the Professional Regulation Commission (PRC) such as doctors, dentists, certified public accountants, and others; and (2) those “who pursue an art and make their living therefrom,” including writers, athletes, and others.
Freelancers are Professionals
In short, freelancers and home-based service providers fall under professionals. And they will have to do the filing work themselves, under the Professional category.
Professionals, by definition then, is not just who took a licensure or board exam. It includes content writers/bloggers, graphic designers, insurance/real estate agents, virtual assistants, and online coach/trainer, among others.
Furthermore, a freelancer is categorized as a single or sole proprietor. But it differs from those who apply for a business because professionals do not need to get a Mayor’s Permit and Barangay Clearance.
To apply for tax payment, one needs to identify and secure the following requirements where applicable: NSO Birth Certificate, Certificate of Business Name from the Department of Trade and Industry, Payment of Professional Tax Receipt (PTR), and an affidavit indicating the rates, manner of billings, and the factors considered in determining service fees (as specified in BIR Revenue Regulation 4-2014).
There could be other requirements as well, depending on the city and the local Revenue District Office of the BIR. It’s best to ask them to know the full list of documents that you need to prepare and submit.
How can freelancers pay taxes to the BIR?
Have Tax Identification Number (TIN). Application for registration will be faster if you already have this. One can obtain a TIN online via the BIR website or the BIR portal, which will take a few minutes to accomplish.
Read: How apply for BIR TIN
Accomplish the Application for Registration (BIR Form 1901), and submit it together with all the applicable required documents to the Revenue District Office (RDO) that has jurisdiction over the place of business, or in this case — your home address.
Pay the annual registration fee using the payment form (BIR Form 0605). This will cost you P500, which can be settled at any authorized bank located within the same district as the RDO.
Applicant will now pay the P15 Certification Fee and the P15 Documentary Stamp Tax. A form will be given, which the taxpayer will attach to their registration forms.
The applicant is required to attend the taxpayer’s briefing at the RDO, before the release of the BIR Certificate of Registration (COR, or BIR Form No. 2303) and the “Ask for a Receipt” Notice (ARN). The COR will reflect the returns that must be filed and the taxes to be paid.
Where applicable, applicants are required to apply for Invoices/Receipts using the Authority to Print form (BIR Form 1906). This is needed for the printing of official receipts.
Printing of receipts would cost around P2,000 to P3,000. Around P200 to P300 more will be needed for “books of accounts”.
Applicants should secure and Register their books of accounts (Journal, Ledger, Subsidiary Professional Income Book, and Subsidiary Purchases/Expenses Book), and have them stamped by the same RDO. Take note that one needs 4 books for service business, while 6 is needed for manufacturing or buy & sell.
Now that self-employed individuals who has registered for tax payment will be required to do the following, wherever applicable:
- Display the BIR Certificate of Registration (COR) and the “Ask for a Receipt” Notice in the professional’s place of business. If you work at home, then hang it in your home office.
- They must maintain their books of accounts. For those whose quarterly revenues exceed P150,000, they need to have their books of accounts audited and examined by an independent certified public accountant, and have their books accompanied by relevant documents (such as certified balance sheets, profit and loss statements, and others)
After following the steps, you can now issue receipts and/or invoices for every payment you receive.
Freelancers can also be subjected to a 12% VAT when gross receipts and sales exceed Php1,919,500. If it doesn’t exceed that amount, only 3% percentage tax (BIR Form No. 2551M) is required from gross receipts, which is paid every month.
And do remember that you need to file taxes regardless even if you did not earn anything for the month. You will not pay anything, but you have to state “no income” in BIR Form 2551M and give it to the BIR.
Freelance services are subject to final withholding tax. However, this normally applies to foreigners. For local freelancers, this is called “creditable withholding tax.”
Freelancers do suffer a fluctuating income. They do not have to pay taxes if so, they just need to declare it on a monthly basis (percentage tax). On the other hand, “income” tax is revenue (or what you take in) LESS your business expenses.
From here, we need to know that taxpayers are allowed the following deductions:
- Income Tax Deduction: P50,000
- Dependents: P25,000 deduction per dependent up to 4 children
To illustrate this, suppose that one makes P200,000 total revenue and has 4 children. Deducting P50,000 plus P100,000 from that leaves only the remaining P50,000 as taxable.
One important thing to remember: one must file BIR Form 2550M (VAT) and BIR Form 2551M (percentage tax) on the 20th and 25th month following the applicable month, respectively, for settle these taxes.
Freelancers are considered professionals. They can visit their local Revenue District Office (RDO) to ask for the requirements to register.
You may be first required to get an Occupational Permit from the city, which is usually applied for in the Business Processing and Licensing Office (BPLO) of your municipality.
Once registered, attend the taxpayer’s briefing as this will answer all your questions about your duties and monthly tax filing responsibilities.
Normally, freelancers go under the Percentage Tax category, to which you must pay 3% of your monthly gross income. And lastly, remember to renew your BIR registration every January.
Questions? Clarifications? Corrections? Share them in the comments section below, and I’ll have my accountant friend who wrote most of this article answer them. Thanks.