Income Tax Return Guide: How To File And Pay Your Tax Dues
According to the Philippine Statistics Authority (PSA), the second-largest class of workers in the country are self-employed. They made up about 27.8% of the total employment rate in the country in 2017. The self-employment population also has a growing rate of freelancers, due to the rise of remote jobs online. As the self-employed population continues to grow, their contribution to the economy now bears as much gravity as those who are employed.
For self-employed individuals and freelancers, taxes are sometimes easy to forget. Unlike being formally employed where taxes are automatically deducted from their paycheck along with benefits like health insurance and SSS contributions, take-home pay tends to be a bit higher for the self-employed. Thus, it’s tempting to just pocket all of that money every payday and move on. But unless you want the Bureau of Internal Revenue (BIR) to come knocking at your door, it’s wise to set aside a chunk of those funds to pay your taxes.
Who is considered self-employed?
Taxpayers in the Philippines are classified into two types: corporate and individuals. Those who fall into the individual taxpayer category, are those who are either employed (or a compensation income earner, which includes minimum wage earners) or self-employed.
Self-employed workers are those who work on their own account or with one or a few partners or in cooperatives. In these jobs, the remuneration is directly dependent upon the profits derived from the goods and services produced by the person running the livelihood.
Self-employed individuals may register as either single proprietors or entrepreneurs (other than marginal income earners or those earning less than ₱ 100,000 annual gross revenues), or as professionals.
Single proprietor vs professionals
Professionals who are classified as self-employed are individuals who are practicing their profession, with or without a license under a regulatory board or body. They receive payment only for the service that they do, but they don’t receive benefits and compensation because they aren’t employees. Examples of self-employed professionals are private practice physicians, lawyers, and even accountants who are basically on a pay-per-service basis.
Freelancers are considered professionals despite not being governed by a regulatory board or body. As is the case of bloggers, web developers, graphic designers, writers, and other people who provide specialized services.
Meanwhile, sole proprietors are individuals who run their own businesses. It can be the most simple form of business, as long as it’s registered through the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI).
BIR’s definition of self-employed
- Persons engaged in business and who derive their personal income from such business
- 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 and home-based service providers also fall under professionals.
How to register as self-employed at BIR
Just like everyone else, the self-employed are required to register with BIR for tax filing. The process can be a bit more tedious compared to tax registration for employment due to some extra documents.
- NSO Birth Certificate
- Mayor’s Permit, if applicable
- DTI Certificate of Business Name, if applicable
- PRC ID, if applicable
- Payment of Professional Tax Receipt (PTR), if applicable
- Affidavit indicating the rates, manner of billings, and the factors considered in determining service fees (as specified in BIR Revenue Regulation 4-2014)
Forms to fill -out
- BIR Form 1905 – for people who already have a TIN number but want to a change business. The form is also needed in the case of TIN loss
- BIR Form 1901 – the first and second page is the registration form. Basically, this is the form for all self-employed individuals.
- BIR Payment Form 0605 – present this form upon payment in any authorized bank by the Revenue District Office (RDO).
Issuance of TIN is free of charge
Fill up the Application for Registration (BIR Form 1901) and the payment form (BIR Form 0605), and gather the applicable required documents.
Submit to the form and the supplementary documents to the Revenue District Office (RDO) that has jurisdiction over your place of business.
Pay the ₱500 annual registration fee. You can simply go to any authorized bank located within your district and provide them with the payment form with your payment.
Check with your RDO what banks are accredited to accept this payment.
Pay the ₱15 Certification Fee and the P15 Documentary Stamp Tax. A form will be given, which the taxpayer will be attaching to the registration certificate later on.
Attend the required 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.
Apply for Invoices/Receipts using the Authority to Print form (BIR Form 1906).
Register books of accounts (Journal/Ledger/Subsidiary Professional Income Book and Subsidiary Purchases/Expenses Book) and have them stamped by the same RDO.
Bookkeeping and invoicing requirements
Self-employed individuals, especially professionals are required to maintain books of accounts using any acceptable method of accounting (accrual or cash basis) consistently. All of their accounts are required to be preserved within the prescriptive period (three years from the close of the taxable year) for post-audit examination.
There are guidelines that should be followed upon invoicing, such as the:
- Receipts or sales invoices should each have corresponding serial numbers.
- The name of the business, the TIN, and the business address of the Professional should also appear on the invoice.
- Receipts or invoices should be issued to every payment received by the professional.
- The original copy of receipts or invoices should be issued to the client upon the transaction. Meanwhile, a duplicate copy should be preserved in the place of business for a period of three (3) years from the close of the taxable year.
Revenues exceeding ₱150,000 should have there be audited and examined by an independent certified public accountant and shall have their books accompanied by relevant documents (such as certified balance sheets, profit and loss statements, and others)
On February 2018, the BIR released Revenue Regulation RR 8-2018 which details the implementation of income taxes under the TRAIN law. Under the TRAIN law or Republic Act (RA) No. 10963, self-employed individuals and professionals will be subjected to the following tax regulations:
If annual gross sales or income is ₱3 Million or below
Self-employed and professionals with annual gross sales or income receipts not exceeding the VAT threshold of P3 Million have the option to choose between these two tax rates:
- Eight percent (8%) of gross sales or receipts and other income, in excess of ₱250,000 instead of the graduated income tax rates and percentage tax (no option to register for VAT); OR
- Graduated income tax rates of 0% to 35% on net taxable income, plus 3% percentage tax (No change in the computation of Net Taxable Business Income)
The graduated income tax rates are the same as the Personal Income Tax Rates and Tax Tables here and summarized below.
BIR Income Tax Table (for the years 2018-2022)
|Bracket||Taxable income per year||Income tax rate|
|1||₱250,000 and below||0%|
|2||Above ₱250,000 to ₱400,000||20% of the excess over ₱250,000|
|3||Above ₱400,000 to ₱800,000||₱30,000 + 25% of the excess over ₱400,000|
|4||Above ₱800,000 to ₱2,000,000||₱130,000 + 30% of the excess over P800,000|
|5||Above ₱2,000,000 to ₱8,000,000||₱490,000 + 32% of the excess over ₱2,000,000|
|6||Above ₱8,000,000||₱2,410,000 + 35% of the excess over ₱8,000,000|
BIR Income Tax Table (from year 2023 onwards)
|Bracket||Taxable income per year||Income tax rate|
|1||₱250,000 and below||0%|
|2||Above ₱250,000 to ₱400,000||15% of the excess over ₱250,000|
|3||Above ₱400,000 to ₱800,000||₱22,500 + 20% of the excess over ₱400,000|
|4||Above ₱800,000 to ₱2,000,000||₱102,500 + 25% of the excess over ₱800,000|
|5||Above ₱2,000,000 to ₱8,000,000||₱402,500 + 30% of the excess over ₱2,000,000|
|6||Above ₱8,000,000||₱2,202,500 + 35% of the excess over ₱5,000,000|
8% withholding tax for self-employed and professionals
The 8% withholding tax rate replaces the two-tier rate of 10% (for self-employed and professionals earning less than ₱720,000 income every year) or 15% (for those earning more than ₱720,000 per year).
The 8% withholding rate is applied to the income, regardless of the amount, and is reiterated in BIR’s Revenue Memorandum Circular No. 1-2018 issued on January 4, 2018, which states that:
“Change in the Creditable Withholding Tax Rate on income Payments to Self-employed individuals or Professionals.”
The following income Payments to Self-employed individuals or Professionals shall be subject to 8%:
- professional fees, talent fees, commissions, etc. for services rendered by individuals;
- income distribution to beneficiaries of Estates and Trusts;
- income Payment to certain brokers and agents;
- income Payments to partners of general professional partnership;
- Professional fees paid to medical practitioners; and
- Commission of independent and/or exclusive sales representatives, and marketing agents of companies.”
If annual gross sales or income is above ₱3 Million
However, the tax rule is simpler and more straightforward for self-employed and professionals receiving annual gross sales or receipts exceeding the ₱3 Million VAT threshold. If their gross income or sales receipts total more than ₱3 million, they do not have a choice and they must follow the graduated income tax rates (as shown above) on the net taxable income, plus VAT.
Filing your Income Tax Return (ITR)
Filing a tax return for the year is a straightforward process. If the documents and bookkeeping have consistently complied, filing should be as easy as these three steps:
- Download and accomplish the ITR form from BIR’s website.
- Proceed to the Authorized Agent Bank of RDO where you are currently registered and present your filled-out BIR form and required documents.
- Receive duly stamped and validated form as proof of ITR filing.
Having to deal with taxes is no fun at all, however, it is a responsibility every law-abiding citizen must comply with. As the BIR would put it:
“If you love your country, then pay your taxes. “
The BIR now allows submission of your ITR to RDOs outside your own district.
Paying your tax dues via ePay
Taxpayers can now pay their tax dues easier as the BIR has finally enabled online payments through their ePayment channels. These e-payment channels can be accessed through the following payment platforms:
This article was originally published in April 2020 and is updated regularly for more relevant and accurate information