If you belong to this category, then that means that you have additional tax requirements to abide by. Do you know what your tax obligations are? Here are a few things you need to be aware of if you aren’t yet.
1. Freelancers and small business owners must file an Income Tax Return (ITR) declaring mixed income.
Let’s start with the basics. When filing your ITR, you must declare that you are a Mixed Income Earner (MIE), which is how you tell the Bureau of Internal Revenue (BIR) that you have several income sources aside from the compensation income you receive from your employer as a salaried worker.
2. Freelancers are considered as sole proprietors, and as such, need to pay business tax.
This means that aside from registering the official receipts you issue to customers, you need to keep a book of accounts and pay businesses taxes, whether you’re earning or not. Take note that business tax is based on the gross receipts or sales, and not on your net income.
Other things to remember if you’re a freelancer paying income tax:
- You are subject to 12% VAT if your business gross receipts and sales exceed Php1,919,500, but gross receipts below that amount are liable to a 3% percentage tax.
- You need to file BIR Form 2550M (VAT) and BIR Form 2551M (percentage tax) on the 20th and 25th month following the applicable month respectively. VAT-registered businesses must also provide a summary list of sales and purchases.
- Expanded withholding tax is applied for certain expenses incurred such as rent, hiring an outsource person, commission, or those listed in Revenue Regulations No. 2 to 98. This must be remitted to BIR monthly.
3. Request for BIR Form 2307 from your employer when filing taxes as an MIE.
Form 2307, also called the Certificate of Creditable Tax Withheld At Source, should be submitted together with the Quarterly/Annual Income Tax Return. Through this, the amount of withholding tax shall be allowed as a tax credit against the income tax liability of the income recipient in the taxable quarter or year, in which the income was earned or received.
Ask for this form from every company that has withheld tax on their payments to you, including one from your day job, and then consolidate the income you made from your business or businesses into one form 1701.
4. You need to file one Income Tax Return Form (BIR Form 1701) for all your businesses or freelancing jobs.
BIR Form 1701 is the income tax filing form used for self-employed individuals, estates and trusts, including MIEs. As previously mentioned, this is where you consolidate all your income sources and fill out the form completely.
5. Itemize all income sources when filing taxes.
Business owners must itemize all companies and include all the income received from different sources. Just follow all the instructions on Form 1701 to the letter and be as specific as possible. Every single detail must be included and accounted for as much as possible.
6. Your total taxable income can be reduced if you’re qualified for exemptions.
When filling out Form 1701, you need to include all of the gross income you received from various sources. This means that you must note down the income you received from your business/freelancing work, as well as income from compensation as an employee.
The total income can be qualified for exemptions, which are composed of Personal Exemptions and Business Expenses, and your taxable income will be the basis of your income tax.
This is to avoid double taxation in your case when your employer has already paid and filed taxes on your behalf as a salaried employee.
7. Entrepreneurs cannot offset their taxable income with their business loss.
This is because business tax must be differentiated from income taxes. Business taxes are composed of a percentage tax on sales/receipts and value added tax (VAT) while income tax is derived from your annual income as an employee or your personal income.
8. See to it that business permits are up-to-date and current.
Make sure that you keep track of the administrative, behind the scenes duties related to paying taxes and staying in business. Never forget to be on track when it’s time for the renewal of business permit.
Another basic but often neglected requirement is ensuring that receipts are issued properly. Without receipts, you can’t support the claims on your income, and this can lead to issues during filing.
9. Be mindful of the deadlines for submission to avoid penalties.
Remember that you’ll need to file your ITR on or before April 15. The rate of taxes is 5-32% for individuals. If the tax due exceeds PHP2,000, taxpayers may elect to pay in two installments, the first when the return is filed, and the second on or before July 15 of the same year.
Penalties include failure to file returns, late payments, wrong documents, and anything else that might delay the process and cause you to miss deadlines. Surcharges can range from 25% to 50%. Avoid these by filling out your papers ahead of time and filing within the prescribed period.
10. See to it that you attach all requirements to the ITR, as needed.
Make sure that the required attachments such as a summary of taxes, duties, and licenses are included when filing your taxes to avoid delay and penalties.
For example, the BIR Form 2316 (Certificate of Compensation Payment or Income Tax Withheld) must be attached to the Annual Income Tax Return or BIR Form 1701, which is used for individuals with mixed income.
Form 2316 is accomplished and issued yearly by the employer and given to employees whose income is subjected to final tax declaration. The form must indicate the total amount that was paid to the employee, as well as the corresponding taxes withheld during the calendar year.
Keeping track and filing your taxes correctly can be a tedious, time-consuming process. But, it is your basic obligation as a citizen.
To save time and effort, consider hiring an accountant to help you properly fill out your paperwork. You can also opt to outsource these administrative tasks and have experts handle business related concerns like the renewal of business permits. This way, you can focus on being an excellent employee in your day job while making a great business for your sideline rackets as well.
About the Author:
Danella Yaptinchay is the managing director of Full Suite, a service company providing back end support to small businesses. She is also a cofounder of Co.lab, a coworking space, and of the media company Homegrown. In constant pursuit of balance and self-development, she tries to apply the practices of yoga to her daily life.
