In life, there are two things you can’t escape from: Death and Taxes. And as the deadline, April 15, comes close again, are you ready to pay what is due? Heck, do you even know how to pay your taxes? If you don’t, here is how to file your Income Tax Return (ITR) as a freelancer or remote worker.
Disclaimer: This article is aimed to inform the readers to have a basic understanding of taxes. Some of the rules below might be partially or wholly obsolete when specific rulings are enacted. It’s in no way intended to be a substitute for professional advice.
Why Should You Pay Your Taxes?
A lot of Filipinos are quite hesitant in paying their taxes. I mean, why do you need to lower your take-home pay for the government? But as a responsible citizen, it’s your duty to help in nation-building.
And you can also use your ITR for specific purposes like housing loans or visa applications. You can get an accountant to fix it for you. You can even use services like Taxumo. But for those who want to fix it themselves, here’s a guide you can use.
What Taxes Do You Have to Pay
After you register as a freelancer, you need to pay percentage taxes and your income tax returns. Percentage taxes and income taxes are paid quarterly. So for the schedule of deadlines:
Quarterly Percentage Tax
Quarterly percentage taxes are levied on your gross receipts for 3%. For example, you declared 60,000 as your quarterly income. You will need to pay P1,800 (P60,000 x 3%) for that quarter.
Quarterly Income Tax
Our income taxes are collected on a quarterly basis for the first three quarters. Depending on your payment scheme (which we will discuss below), you might need to pay partially during those quarters.
Annual Income Tax
The annual income tax is levied on all your earnings for the year. Of course, partial payments during the quarter will be deducted from your total payments. The deadline for this is on April 15 of the following year.
How Do You Compute your Tax Due?
Computing the income tax due is quite complicated. But this article aims to make it simple for you. For freelancers and remote workers, you can opt for the graduated income tax or 8% income taxes in lieu of graduated rates. What is the difference?
Graduated Income Tax
You must understand that freelancers and remote workers are taxed with their net income. That means income (all your earnings) minus expenses (all related normal and necessary expenses). Afterwards, you will be taxed using these graduated tax rates.
For example, you earned 300,000 PHP for the year, and you have total expenses of 40,000 PHP (like internet bills, electricity, rent, supplies, etc.). Your net income is equal to 260,000 PHP (300,000 PHP minus 40,000 PHP).
But take note, these expenses should have supporting documents. And if you have them, you can opt for Itemized Deduction.
Itemized Deduction just means you can categorize or “itemize” the expenses. For example, you have supporting receipts for your rent, electricity bill, and such.
The advantage of this is that you can maximize all your expenses per category. The disadvantage is, you might not have all the supporting documents in place.
And if your practice doesn’t have a lot of expenses, you might not have a lot to deduct.
Optional Standard Deduction
The next option is the optional standard deduction. For this, you can have a 40% deduction of the gross earnings as a representative of your expenses. No questions asked.
So, for example, you have a total gross income of 300,000 PHP. You can deduct 120,000 PHP (40% of 300,000 PHP) from the gross income. And your net income for tax purposes is equal to 180,000 PHP.
The advantage of this is you don’t need to look for supporting documents for expenses. It’s an automatic deduction. Again, no questions asked. The disadvantage is, if your expenses are more than 40% of the gross income, you will be taxed more than you should’ve had.
8% Flat Rate in Lieu of Graduated Income Tax
The above rules can be quite complicated for most people. That’s why during the launch of the TRAIN law, another option can be used for freelancers, remote workers, and professionals.
It’s simple! For gross income above 250,000 PHP, you just need to multiply 8% from that. And you don’t have to pay for percentage tax anymore.
For example, your gross income is 500,000 PHP. You just need to pay 20,000 PHP Income tax (500,000 PHP minus 250000 PHP multiplied by 8%). It’s cheaper also because you would’ve paid 55,000 PHP if you opt for the graduated rates.
You also don’t need supporting documents for the expenses since it’s an outright percentage. The 8% option is quite convenient for most remote workers.
So Which is Better?
As a remote worker or freelancer, you have the option to choose. And it would depend on your income and expenses.
If your expected income in a year is 250k or 20,833.33 per month, it wouldn’t matter because your first 250k is non-taxable. Now, if it’s above 250k, you need to check your expenses. Let’s do a comparison.
For these scenarios, we included the 3% percentage tax to be paid by freelancers and remote workers to fully see the tax impact per scenario. What if you have a higher than 250k income? Let’s check this Scenario.
Let’s say you earn 360k PHP per year or 30k a month. And your business expenses are:
- 2000 Internet Fees
- 3000 Electricity
It would be best to choose the 8% flat rate because your tax due is lower compared to the graduated income tax. This is because your remote working or freelancing career doesn’t have too many attributable expenses unlike other businesses (For example, Grocery store versus freelancing).
And even if you use the optional standard deduction that yielded a 0 income tax, you still need to pay 10,800 percentage taxes. In essence, you are still saving by using the 8% because you don’t have to pay percentage taxes anymore.
Scenario B, what if your expenses are minimal compared to your income.
Let’s say you earn 600k PHP per year or 50k a month. And your business expenses are:
- 2000 Internet Fees
- 5000 Electricity
In this scenario, the 8% flat rate is still better than the graduated income options. Because the government wants to encourage freelancers and remote workers to pay their taxes. And with the uncertainty of projects they handle, the lower income tax rates compensate for that.
Filing Your Taxes
After choosing between the two, you can input the figures in the eBIR Forms to electronically pass your ITR. Take note; you don’t have to go to your home Revenue District Office (RDO) unless you have a “no payment” return. If your ITR due is zero, you need your ITR stamped.
Other than that, it’s all online.
If you don’t want to handle the hassles of filing your own ITR, you can opt to work with Remote Staff. Remote Staff handles all the ITR and mandatory benefits when you’re a full-time subcontractor. And this is all for free! It’s like working remotely with most of the benefits of an employee.
With that, If you’re looking for remote work, you can check out the following high-paying jobs that you can take advantage of. Cheers!