It’s been more than 6 years since the Urban Roamer wrote the taxation guide for (part-time) freelancers, a two-part series that I wrote originally to help freelancers get things in order in fulfilling their tax obligations, especially information that applies specifically for part-time freelancers like myself at that time.
Since then so many things have changed both for myself and the taxation system in general. For one, I found myself becoming a full-time freelancer just 3 months after the series was published. A few months later in October, I got to contribute a chapter on a book for online Filipino entrepreneurs especially because of this series.
Then in 2017, the Tax Reform for Acceleration and Inclusion (TRAIN) Law was enacted, which made significant changes to the taxation system for individuals in an effort to raise tax collection and lower the tax rates for the benefit of Filipino taxpayers. Admittedly, it took me a while to fully understand how this new tax system introduced in the TRAIN law would work. And yeah, it involved some “costly” mistakes along the way.
Now that I’ve finally gotten the hang of this new tax system and learning that some are struggling to understand it, the Urban Roamer feels it’s time to revisit and update this taxation guide, which I hope would be helpful especially to all freelancers out there.
A simpler way to compute taxes
Suffice to say, the TRAIN Law has made the computation of taxes both simple and complicated for professionals and freelancers. But if you find yourself belonging to a certain class, you might find yourself benefitting a lot from the law.
Basically, the law has set up two types of professionals/freelancers as far as taxation is concerned, which I have categorized into classes:
- Class 1: Those earning more than P3 million each year
- Class 2: Those earning P3 million and below each year
If you belong to Class 1, then your tax payments will be based on the new tax table being implemented as a result of the TRAIN Law. Figures aside, how it is computed is similar to the old table. Moreso, you have the option to declare deductions to your gross income either by itemized deductions or the 40% optimized standard deduction or OSD. (which is 40% of your gross revenue to be deducted from that gross revenue) Aside from this, you have to pay the 12% value-added tax which is to be filed in a separate form.
If you’re asking as to which deduction to choose, it will depend on the amount of business expenses you have made for the given year. The rule of thumb is, if the expenses are equal to or below the amount of the computed 40% of your gross revenue, go for OSD. Otherwise, itemized deduction is the way to go.
This can be tricky to explain so I will break this down into sections for easier comprehension and less confusion
Income tax (annual and quarterly)
If you belong to Number 2 though, you can choose to pay your taxes based on what has been described for those belonging to number 1 (let’s call this Graduated Tax Option) or make use of a different formula specifically for those belonging to this category. (let’s call this 8% Option)
The formula for the 8% Option goes like this:
(Annual revenue – P250,000) x 8% = tax due
As you can see, the 8% Option formula is pretty much straightforward and easier to compute with no need for the tax table. However, this option is not for everyone, particularly if your business expense for the year cost more than P250,000. Otherwise, you would have to go with the Graduated Tax Option in computing your taxes.
Whatever option you choose for the tax payment, it is important to declare it starting from the time you file the 1st quarter income tax and stick to it all the way to the annual income tax filing at the minimum.
What about the percentage tax?
In the old taxation system, taxpayers whose gross revenue are at P1.9 million and below would have to pay for a percentage tax and those whose revenues are above the figure would have to pay for the value-added tax, both of which are to be filed system.
With the TRAIN Law, the value-added tax threshold has been raised to P3 million now, corresponding to those belonging to Class 1. That means those in Class 2 would still need to pay for the separate percentage tax right? Not necessarily.
You see if you have to use the 8% Option in calculating your taxes for the year, then you no longer have to compute for the percentage tax as it’s already part of the formula. That being said, you still need to file for the percentage tax, which is now to be filed quarterly via Form 2551Q but you just need to indicate that you’re paying your taxes using the 8% Option and the percentage tax will be filed as 0.
Not part of the 8% Option? Sorry, you need to calculate and file for the percentage tax separately as before.
What about part-time freelancers?
As I have written this series originally for part-time freelancers and having been a part-time freelancer before, it is important that they are addressed in this guide. So the question is, how does this new taxation system affect them.
As before, you will need to declare the taxes declared by your employer on Form 2316 and attached that on your Form 1701. At the same time, you will also include the computation you made for the taxes on your professional/freelance income. However, if you chose the 8% Option, you are not allowed to include the P250,000 deduction in the formula because it is understood that deductions were already made on your employment income. So there’s that.
Also note that if you’re a full-time freelancer or professional, for your annual tax return you need to file Form 1701A, not the plain 1701.
Filing and paying your taxes
As freelancers/professionals, you are expected to file your taxes for the 1st, 2nd, 3rd quarter, and for the tax year. Taxpayers are required to use either eBIRForms or the eFPS system (which is mostly for institutions and prescribed individuals identified by the Bureau of Internal Revenue) for the filing. Fortunately, both eBIRForms and eFPS are intuitive to help calculate the taxes for you.
For payments, you can pay through the BIR’s network of authorized banks or online through channels like GCash. Now some may find it disadvantageous to file and pay taxes online as they do not have the stamp that would certify taxes were filed and paid. In this case, just print out the confirmation email from BIR to attest the filed tax form and from the authorized agent where you paid your taxes.
A disadvantage of the 8% Option and how to get around it
Lastly, I wanted to dedicate this section in light of the concerns some have about doing the 8% Option for tax payments. The thing about the 8% Option is that you end up paying little to no taxes for the 1st to 3rd quarters in most cases only to get the surprise of your life when the annual tax payments come and you are hit with such a large tax due that you expected.
To avoid being surprised come the annual tax payments, my suggestion for those in the 8% Option to compute for their taxes for the rest of the tax year and do so right at the beginning of the year. Then divide the tax due amount into 12 months and set that amount aside each as your tax, as if you are paying your taxes monthly as an employee. That way, you will avoid the surprise of filing taxes for the coming year and end up being more financially prepared in the process.
Here’s hoping you learned a lot from this updated guide. Until the next time the taxation system is updated, be responsible citizens in spite of the odds!
Acknowledgements as well to P&A Grant Thornton