Today, we will answer many of the questions that freelancers in the Philippines often find themselves asking regarding income tax return (ITR) and tax paying in general:
What is ITR and why I need it? Who are required to file an ITR? What taxes do I have to pay to be eligible for an ITR? How can I have my ITR if I’m a freelancer in the Philippines?
But before we get into all that, we have to answer one loaded question first. We pay taxes because there are tax laws that demand us to, but why do we really have to? Why is it such a necessity that tax crimes such as fraud and evasion are so heavily penalized? Why do we have to give a portion of our hard-earned money to the government?
Taxes are the so called lifeblood of the government and paying them is a civic duty. The government uses the money we “give” them to finance services and projects that are meant to improve every Filipino’s life and the country’s growth.
Without any form of taxation, we won’t have roads, public services, police security, and practically any sort of civil order. So as painful as it is to pay your taxes, it is something that you must never fail to do.
Now that we’re a little more informed about the importance and use of taxes, we can delve in further and discuss ITR. Regular office employees need not worry about ITR because their companies handle all the Philippine tax filings for them.
Freelancers, however, have to file everything themselves and this can get quite taxing. The lack of information we have about the subject alone is crippling but add to that the unbelievably grueling process of tax filing and we end up disabled.
Unfortunately, there’s really no way around it – well, there is but all of them lands you in jail. So let’s all take a deep breath and dissect this thing down to the smallest detail. We will be guiding you every step of the way and answer all your questions, so just stay close and keep on reading!
What is ITR?
It’s hard to answer the question “How can I have my ITR if I’m a freelancer in the Philippines?” without any information on ITR, so we’ll tackle that first.
Income tax return or ITR, in simpler terms, is a tax refund or the excess tax paid during the year. To explain it better, we’ll describe it from the point-of-view of an office employee.
As an employee, your employer automatically becomes your withholding agent. What this means is you are giving them the right to deduct and withhold a tax amount from your monthly income. They then remit this amount to the Bureau of Internal Revenue (BIR) and make an end-of-the-year report on all the withholding taxes they have remitted. All of this is required by the National Internal Revenue Code and is their obligation as an employer.
Where does the ITR come in, you ask? Prior to the last payroll of the calendar year, your employer will compute your total income tax due or the total amount of tax you have to pay for the year and subtract this amount from the sum of taxes they have withheld from January to November. The resulting difference is now your income tax return/tax refund which your employer will give back to you. It’s pretty simple when you look at it this way:
Tax amount withheld by the employer from January to November – Employee’s tax due for the entire year = ITR/Tax Refund
Now, what does this all mean for a freelancer? For one, you have no withholding agent since you file and pay your taxes yourself. Second, there are no tax amounts withheld from you so the equation will change. Instead of subtracting your tax due from withheld taxes, it will be subtracted from the tax you paid prior to getting your December paycheck. It will look a little like this:
Sum of monthly tax paid from January to November – Tax due for the entire year = ITR/Tax refund
Finally, any excess won’t automatically be added to your paycheck and you will have to personally get it yourself or you can ask for it to be carried over as tax credit for the following year.
Who Is Required to File an ITR?
It might come as a shock to you, but not everyone is required to file for an income tax return. We have listed below the types of individuals and corporations that are obligated to file an ITR, so you’ll know where you fall into:
1. Filipino citizens residing in the Philippines, regardless of income source, are required to file an ITR if they fall under any one of these categories:
- Individuals employed by two or more employers any time during the taxable year.
- Self-employed individuals either though professional practice or conduct of trade (this is where freelancers fall into).
- Individuals who derive mixed income or those who were both self-employed and employed by employers during one taxable year.
- Individuals who derive other non-business, non-professional-related income on top of their compensation income.
- Individuals who are married, employed, and have withholding tax, but their spouses are not entitled to substituted filing.
- Individuals whose income tax during the past year were not withheld correctly.
- Individuals who are marginal income earners.
2. Non-Filipino citizens who receive their income from sources in the Philippines.
3. Domestic corporations who receive their income from businesses within or outside the Philippines.
4. Foreign corporations who receive their income from within the Philippines.
What taxes do you have to pay to be eligible for an ITR?
In order to answer your question “How can I have my ITR if I’m a Freelancer in the Philippines?” you first have to properly pay your taxes. Time to whip out your calculator and ledgers now because we’ll discuss the different Philippine taxes freelancers have to pay.
- Monthly Percentage Tax
The monthly percentage tax is just 3% of your total monthly income, which makes it the easiest to compute. If you have a fixed income, then you won’t have a problem because it’s the same throughout the entire year. But freelancers don’t normally have a fixed monthly income, so they’ll have to compute this each month.
As an example, let’s say you earned P30,000 for the month of June. Your monthly percentage tax is 3% of that, which is P900. It is also important to note that the deadline for filling your monthly percentage tax is on or before the 20th of each month. So your tax of P900 for the month of June should be paid before July 20th.
Additionally, if the 20th of the month happens to land on a weekend or holiday, then the deadline will automatically be moved to the next working day.
- Quarterly Income Tax
The deadlines—yes, plural, because this needs to be filed thrice a year—for your quarterly income tax are on the 15th of April, August, and November. Your quarterly income tax will be higher than your monthly income tax, but this is where you can declare deductibles.
Deductibles are the amount you remove from your total monthly income in order to get your taxable income. You can declare your deductibles in two ways:
- Optional Standard Deductible (OSD) – Freelancers are recommended to go with the optional standard deductible because it’s easier and more straightforward. When you go for the OSD, you declare 40% of your quarterly income as your deductible. This will then automatically make the remaining 60% your taxable income. Another reason this is the suggested way is that the BIR won’t need to audit your expenses and you won’t have to itemize and calculate your expenses.
- Itemized Deductible – If you choose the itemized deductible, then you should either have enough time and patience or a really good accountant. As the name suggests, you will have to itemize all expenses made for the purpose of your business and subtract it to your quarterly income. Now, you can’t just subtract as you wish. You need to provide proof that these expenses were made in the form of receipts, bank statements, and invoices.
How can freelancers get their ITR?
Finally, we’re going to answer the looming question freelancers love to ask which is “How can I have my ITR if I’m a freelancer in the Philippines?”
If you’ve just started freelancing, then the first thing you have to do is register as a self-employed individual at the BIR. The documents you will need for this are:
- BIR Registration Form (Form 1901)
- BIR Payment Form (Form 0605)
- BIR Authority to Print Form (1906)
- NSO Birth Certificate
- Barangay Certification
- Cedula
- TIN Number/Card
- Books of account (ledger/journal/expenses book)
Once you have gathered these documents, submit all of them to the BIR district office that has jurisdiction over your business. You will be asked to pay an annual registration fee of P500, a P15 certification fee, and another P15 fee for the documentary stamp tax.
You will then have to attend a seminar where the BIR briefs taxpayers, after which you will receive your Certificate of Registration (COR). After you get you COR, you will have to apply for invoices or receipts using the BIR Form 1906. Lastly, register your books of accounts and have them stamped in the same district office.
Once you are registered as a self-employed individual, you can go about and do your business so you can pay the necessary taxes which were listed in the previous section. Before April 15 rolls around, you should have filled for your ITR, and we’ll tell you just exactly how to do that. It’s actually a lot less confusing than other tax filing processes and the registration process. Here’s the step-by-step process of how you can have your ITR if you’re a freelancer in the Philippines:
- Head to BIR’s website and download BIR Form No. 1701, which is titled “Annual Income Tax Return for Self-Employed Individuals, Estates and Trusts.”
- Observe BIR’s guideline and fill it out accordingly. Form No. 1701 is a 12-page document and it’s exhausting to complete, but avoid making any mistakes at all costs. You also shouldn’t dare fabricate any information here lest you want to get penalized.
- After completing the form, head to any authorized agent bank of the district office where you are registered and present to them your form and documents.
- If everything checks out, they will stamp and validate the form as proof of filing your ITR.
That’s it. Now you know how you can have your ITR if you’re a freelancer in the Philippines. It’s actually surprisingly easy once you’ve gone over the registration process and dutifully paid your due taxes.
Why should you learn about ITR and taxes?
The thing with taxes is they’re so important but we’re taught very little about them. During our long stay in the academe, not once were the subject of taxes and their importance ever discussed in detail. Forget about how to file them, basic information wasn’t even taught to us.
As infuriating as it is, there might be a reasonable explanation for this. For one, no one was expected to compute their own taxes. As adults, we were expected to enter corporations and have other people do our taxes for us. Self-employment wasn’t as rampant is it is now, so adding tax discussions in general curriculum wasn’t the government’s priority.
However, due to the self-employment boom, freelancers are suddenly forced to answer several questions like “What is ITR and why I need it? Who are required to file an ITR? What taxes do I have to pay to be eligible for an ITR? How can I have my ITR if I’m a freelancer in the Philippines?”
But maybe we should all be asking the same questions – not just freelancers who absolutely need to. There are new tax laws being implemented now and we can’t gauge their effects without really knowing the ins and outs of tax paying and filing. Even though it’s highly unlikely, we might be being robbed right under our noses. So let this be the start of your search for knowledge regarding taxation!
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