How to Compute Annual Income Tax for Self-employed Taxpayers in the Philippines
The 15th day of April is an annual great event for both the taxpayers and the Bureau of Internal Revenue (BIR) in the Philippines. This is the day that we, taxpayers should remit a portion of our income to the bureau. This portion or burden is what we called the “income tax”. This is our penalty for doing-well in business. I mean, this is our obligation to share to the government a portion of the earnings we’ve got in doing great in business.
As the deadline is near approaching, I’m also trying to compute my income tax due for the year 2008 as a self employed professional. And as an accountant and a blogger, I make this post to aid readers how to compute tax for individual taxpayers. So let us start now before the deadline comes! First let us secure an Annual Income Tax Return (BIR Form 1701) for self-employed taxpayers (including those with both business and compensation income. Click here to download a pdf file of BIR form 1701. If your have one now, then let’s start to fill in our taxpayer’s data (i.e., taxpayer’s complete name, address, Tax Identification Number (TIN), zipcode, tax period, telephone, date of birth, line of business, method of deduction, exemption status, number of qualified children, et cetera).
If you are receiving compensation income, then you must include it in computing your total taxable income. This income shall be deducted by Premium Paid on Health and or Hospitalization Insurance not to exceed P2,400 per year – if available. Then it’s time now to claim and deduct our personal and additional exemptions. For taxable year 2008, the “transitory” personal and additional exemptions are as follows:
For taxable year 2009 and onwards, each individual taxpayer, whether single or married, shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000.00).
Now, after deducting your personal and additional deductions and Premium Paid on Health and or Hospitalization Insurance from your gross taxable compensation income, you will arrive at your total taxable compensation income (when positive) or excess of deduction over compensation income (when negative).
After deriving your total taxable compensation income or excess of deduction over compensation income, it’s now time to go to your business income. Your taxable gross income is equal to your gross sales/receipts/fees minus your cost of sales/services. Your cost of sales or services shall include all expenses that are directly attributable to the product you sell or services you provide to your customers. After getting the gross income, your other income (income other than those earned from your ordinary business activities) shall also be added into it.
Next is to compute your taxable net income. You have two choices in computing it. Your can either claim for itemized standard deduction or the optional standard deduction. The following are the excerpts from BIR to guide you from choosing between the two.
A taxpayer engaged in business or in the practice of profession shall choose either the optional or itemized deduction (described below). He shall indicate his choice by marking with “X” the appropriate box, otherwise, he shall be deemed to have chosen itemized deduction. The choice made in the return is irrevocable for the taxable year covered.
Optional Standard Deduction(OSD) – A maximum of 40% of their gross sales or gross receipts shall be allowed as deduction in lieu of the itemized deduction. This type of deduction shall not be allowed for non-resident aliens engaged in trade or business. An individual who opts to avail of this deduction need not submit the Account Information Return (AIF)/Financial Statements.
For taxable year 2008 which is the initial year of the implementation of the 40% OSD under RA 9504 which modified the OSD for individuals from 10% of gross income to 40% of gross sales/receipts, the deduction shall cover only the period beginning the effectivity of RA 9504 which is on July 6, 2008. However to simplify and for ease of administration July 1, 2008 shall be considered as the start of the period when the 40% OSD may be allowed. Hence, the following rates and bases shall apply for the taxable year 2008:
Period Covered Rates and Bases
January 1 to June 30, 2008 10% of Gross Income
July 1 to December 31, 2008 40% of Gross Sales/Receipts
Itemized Deductions - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession including a reasonable allowance for salaries, travel, rental and entertainment expenses.
Itemized deductions include also interest, taxes, losses, bad debts, depreciation, depletion, charitable and other contributions, research and development, pension trust, premium payments on health and/or hospitalization insurance.
Premium payment on health and/or hospitalization insurance of an individual taxpayer, including his family, in the amount of P= 2,400 per year, per family, may be deducted from his gross income: Provided, that said taxpayer, including his family, has a yearly gross income of not more than P= 250,000. In case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.
Choosing whether which of the two kinds of deduction will give you more tax benefits depends on the size of your income and expenses. One benefit of choosing OSD is the privilege of “no preparation and submission of AIF or financial statements.
Now that you have computed your net taxable income, add it by your total compensation income or reduce it by your excess of deduction over compensation income. This is to arrive at your total taxable income for the year. Once you are done, it’s now time to compute your income tax due. Your income tax due for the year is computed as follows:
So have you computed your tax due? How much is it? In computing your income tax payable, the following tax credits shall be claimed if available.
-Prior Years’ Excess Credits
-Tax Payments for the First Three Quarters
-Creditable Tax Withheld for the First Three Quarters
-Creditable Tax Withheld Per BIR Form No. 2307 for the 4th Qtr.
-Tax Withheld Per BIR Form No. 2316
-Foreign Tax Credits
-Tax Paid in Return Previously Filed, if you have already file and this is your Amended Return
-Other Payments made
After claiming your tax credits, you have now your total income tax payable – unless you will not make it on or before the due date, the following penalties will add to your total income tax payable.
1. A surcharge of twenty five percent (25%) for each of the following violations:
a) Failure to file any return and pay the amount of tax or installment due on or before the due dates;
b) Filing a return with a person or office other than those with whom it is required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return, or the full amount of tax due for which no return is required to be filed, on or before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of Assessment (Delinquency Surcharge).
2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the Code or by rules and regulations; or
b) In case a false or fraudulent return is willfully made.
3. Interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, on any unpaid amount of tax, from the date prescribed for the payment.
For more information about computation and filing of income tax return for self-employed taxpayers, please visit www.bir.gov.ph