Updated: September 24, 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:
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.
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:
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.
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.