Tax Compliance of Freelancers in the Philippines

By: Garry Pagaspas, CPA

As Wikipedia.Org defines the term “Freelancer”, and hereunder we quote:

“A freelancer, freelance worker, or freelance is somebody who is self-employed and is not committed to a particular employer long term. These workers are often represented by a company or an agency that resells their labor and that of others to its clients with or without project management and labor contributed by its regular employees. Others are completely independent. ‘Independent contractor” would be the term used in a higher register of English.

Fields where freelancing is common include;  music, journalism, publishing, screenwriting, film making, acting, photojournalism, cosmetics, fragrances, editing, event planning, event management, copy editing, proofreading, indexing, copy writing, computer programming, web design, graphic design, website development, consulting, tour guiding, video editing, video production and translating.”

It seems that the freelancer is a broad term applied to self-employed individuals or individuals hired as independent contractors and not as an employee of the other contracting party. For tax purposes, they are termed as “sole proprietors” and in this article, let us share you the related tax compliance and what taxes are you required to pay as a self-employed freelance in the service industry.

1. Payment of registration fees – P500.00 annually. 

Registration of your habitual freelance or self-employed is the first step to proper tax compliance. To register, you fill-out BIR Form No. 1901 for filing with the BIR along with the required attachments enumerated at the back of the form. One attachment is the BIR Form No. 0605 duly received by the BIR accredited bank covering your location after payment of P500.oo annual registration fees. In BIR Form No. 1901, you will choose the tax types applicable to you and for regular filing with the BIR. Check only those that are mostly applicable and beneficial to you to avoid the inconvenience of filing unnecessary tax returns. If BIR will do the checking, we suggest you be inquisitive as to the implications that you be aware.

2. Registering official receipts

After release of the BIR Certificate of Registration, you will be required to register Official Receipts (O.R.) that you issue every collection from your freelancing business. The fact that your client or customer did not ask for BIR official receipts will not excuse you from issuing a BIR registered O.R., and this applies even if your client or customer are based abroad. If you will be caught not issuing O.R., BIR may penalize you P1,000.00 for every collection you failed to issue O.R., sanction you under Oplan Kandado program, or worst, charge you tax evasion for imprisonment on fraud and willful attempt to evade taxes. BIR has accredited printing companies and the same will normally assist you for securing an Authority to Print (ATP). Normal requirement is at least ten (10) booklets and costs ranges from P800.00 to P1,500.00 a booklet.

3. Registering and maintaining books of accounts

This is also secured after the release of your BIR Certificate of registration and the cost is minimal – P30 to P60 a booklet. The number would depend on the nature of your registration as follows – four (4) books for non-VAT, and six (6) books for VAT-registered.

• Journal
• Ledger
• Cash receipts book
• Cash disbursements book
• Subsidiary sales journal (additional for VAT registered)
• Subsidiary purchases journal (additional for VAT registered)

4. Payment of business taxes – 12% value added tax, or 3% percentage tax;

For being habitually engaged in trade or business, or practice of profession, you will be liable for business taxes. In short, you pay business tax because you do business as a freelancer and it would not matter if you actually earn or not, after deducting business expenses for as long as you have gross receipts from freelancing business. This is where misconception lies for some – they do not wish to pay because they earn less than their expenses. Business tax in based in the gross receipts or gross sales you make, and not on the net income you make.

In general, if your annual gross receipts (services) or gross sales (goods) exceeds P1,919,500 (effective 2012 and onwards), you will be liable for 12% VAT. In which case, you must be a VAT-registered where you compute VAT due based on the difference between output VAT (12% VAT on your gross receipts/sales) and input tax (12% VAT on your purchases from VAT-registered duly supported by VAT-registered receipts or invoices. On the other hand, if you do not exceed P1,919,500 and non-VAT or other percentage tax registered, then, you will be liable for 3% percentage tax based on your gross receipts. If you registered for non-VAT and later exceeded the VAT threshold of P1,919,500, then, you are mandated to update registration to VAT using BIR Form No. 1905 and avail of the transitional input VAT. (Update from TRAIN Law: Mandated entities to register for VAT are those with gross sales or receipts for the past twelve (12) months, other than those that are exempt under Section 109(A) to (BB), exceeding Three million pesos (₱3,000,000).

You file and pay percentage tax return or BIR Form No. 2551M not later than the 20th day of the month following the applicable month (Update: TRAIN LAW made it quarterly BIR Form No. 2551Q). On the other hand, you file and pay monthly VAT return or BIR Form No. 2550M not later than the 20th day of the month following the applicable month, and the quarterly VAT return BIR Form No. 2550Q not later than the 25th day of the month following the applicable quarter. Likewise, if you are a VAT registered, you will be required to submit a summary list of sales and purchases, and issue VAT O.R. with VAT separately shown. Please note that every failure is subject to penalty so do not miss out.

5. Withholding taxes

In paying some expenses, you are automatically appointed by the BIR as a withholding tax agent. If you have some employees, you are required to withhold tax on compensation every payroll, remit monthly using BIR Form No. 1601C with a summary return at the end of the year using BIR Form No. 1604C and issue withholding tax certificates to employees using BIR Form No. 2316 annually or after separation from employment. If your salary to them is a minimum wage only, then, the same is exempt from withholding tax, including the holiday pay, hazard pay, overtime pay, and night shift differential. Should you provide de minimis benefits, the same is also not exempt from withholding.

For specific expenses, you will be required to withhold expanded withholding  taxes  like rental payment of 5%, professional fees of your bookkeeper and other professionals you hired 10%/15%, commission of 10%, and the likes specified in Revenue Regulations No. 2-98, as amended. Withholding is based on the amount you paid, excluding VAT, if any, and amounts paid should also be issued O.R. by your service providers. You will be required remit monthly expanded withholding taxes using BIR Form No. 1601E with a summary return at the end of the year using BIR Form No. 1604E and issue withholding tax certificates to payees using BIR Form No. 2307 quarterly or every after payment.

6. Filing and payment of income taxes

You are likewise required to file and pay quarterly and annual income taxes based on taxable net income at the rate of  5-32% using the tax table prescribed by the BIR. You pay income tax if your free lancing generated taxable income measured by the difference between your gross receipts and deductible expenses – business expenses and personal exemptions of p50,000 a year and P25,000 for every qualified dependent child up to four (4) (Update under TRAIN Law: no deduction allowed related to personal exemption and qualified dependent).  If you were withheld 10% or 15% or 2% upon your collections, please secure your BIR Form No. 2307 because they are your advance income tax payments deductible from your income tax returns.

Quarterly taxable net income is the difference between your gross receipts and business expenses, and is required to be filed not later than 15th day of the month following the end of applicable quarter using BIR Form No. 1701Q. Annual income tax return is filed not later than April 15 after the end of the applicable calendar year.

7. Audited financial statements (AFS)

If your gross receipts in any one quarter exceeds P150,000.00, your annual income tax return must be accompanied by a financial statements audited by an independent certified public accountant, except if you opted for optional standard deduction (OSD) in your income tax returns, where, in some instances, you may find some tax savings under OSD (Update under TRAIN Law: ..there is a mandatory requirement for corporations, companies, partnerships or persons whose gross annual sales, earnings, receipts or output exceed Three million pesos (₱3,000,000) to have their books of accounts audited and examined yearly by an independent Certified Public Accountants).You bookkeeper cannot make the audit because of the requirement of independence in mental attitude in our profession, so it will normally refer your account to another auditor. AFS is not just for simple compliance. It could serve as your opportunity for check and balance to determine whether your account had been properly handled, and establish the credibility of your financials with the government agencies and third parties, such as when securing financing with banks and financing institutions. This will cost you some amount based on the volume of your transactions.

8. Local tax compliance

You will likewise be required to secure annual community tax certificates, and business permits with the municipality or city of location. Please note that, as a rule, a business permit is a requirement for legality and you business or undertaking without it will be considered illegal. It may cost you some amount and an ounce of effort to secure one. You can either do it yourself, or secure some service providers actively engaged to secure one as they are more familiar with the process and the requirements. This will save you more headaches and irritations in processing.

Summary

The above only enumerates the most material tax types and there could be more depending on the transactions, like documentary stamp tax on lease agreements. For start-up freelancers, tax compliance is the least thing that comes to priority but the most important consideration that you cannot go away with. For me, tax compliance and trade, business, or profession always go hand in hand with. In all you business endeavors, you must take into account tax compliance so you can really enjoy the full benefits of your success. I feel pity those who succeed in the business endeavors after years, but, suddenly pulled to the ground by tax evasion charges. BIR is now aggressive on tax administration and more taxpayers and even CPAs are becoming targets of tax evasion. It will not only destroy your savings invested in your properties, but, also the credibility of your name that you have long developed through he years. It takes time to develop one, but, so easy to destroy.

(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. 

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.