How to Compute Annual Income Tax for Self-employed Taxpayers in the Philippines

April 8, 2009 by  
Filed under Taxation

computetaxThe 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:

deduction1

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.

Allowable Deductions

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:

tax-rate

tax-rate2

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

Comments

38 Responses to “How to Compute Annual Income Tax for Self-employed Taxpayers in the Philippines”
  1. Hi Vic,

    The time to pay my taxes are in this month (April), It seems now I have some money to pay them, I mean after my layoff, I will have no problems to pay them, lol.

    Luis

    Marketing Business Review’s last blog post..The First Day of My Freedom

  2. Victorino Q. Abrugar says:

    Hi Luis, It’s great to hear that your in a stable financial condition right now. I know you can be more successful in your goal to earn more – be it offline or online undertakings.

  3. Hi Luis, other than the sales tax of 5% slapped over the sale of shares(stock trading), should I still bother paying other taxes, assuming I profited from the sale? or would may broker takes good care of that? What are those taxes?

  4. Victorino Q. Abrugar says:

    Hi Peter,

    I assume you are the corporate owner of the shares you are trading and selling. I mean you are not the broker.

    What kind of tax is the 5% you are paying over the sale?

    If you are not engaged in the trading of shares of stock and your shares are not considered as capital assets, then you are not entitled to pay capital gains tax.

    BTW, are you selling stocks that are listed in the Local Stock Exchange?

  5. Cathrine says:

    Hi… thanks for posting this blog. I am trying to figure out my 1701 form at the moment. I have small tiangge store and i pay my monthly 2551m tax.
    Where do i get my gross taxable compensation income (item 26A)? I don’t give myself salary. I have only computed my sales less OSD so far.

  6. Victorino Q. Abrugar says:

    Hi Cathrine,

    26A of 1701 (Gross compensation income) is only applicable for those taxpayers who are earning mixed income (compensation income and business income. If you are not receiving any compensation income, you shall leave 26A as zero or not applicable. In this case you will have an excess of deduction over taxable compensation income.

    Thanks for visiting.

  7. Ed del Rosario says:

    Hi,

    Thanks for posting this informative blog. I got some questions that I hope you could help.

    1. Should I chose Itemized Deductions, will I be allowed to file 1701 without the 1701-AIF?
    2. Do you have any blog in the past or knew other blogs that can guide us in 1701-AIF?

    Thanks for your help in advance.

  8. Victorino Q. Abrugar says:

    Hi Ed,
    Thanks for dropping by. I just got online right now. So busy for the Income tax deadlines of our corporate clients.

    Answer no1. Should you choose for itemized deduction, you are required to file the AIF. And if your gross quarterly sales, earnings, receipts or output exceed P 150,000, the CPA Certificate is required.

    Answer No.2. THis is my only business blog at this time. You can download the 1701form in this article, and in this form there are guidelines on how to prepare and file the 1701 form (you can read at at the bottom of the return).

  9. deric says:

    THANK YOU VERY MUCH TO YOUR KINDNESS…GOD BLESS!!!

  10. Rian says:

    hi there!

    i how you will be able to help me. Im a stay at home mom, and unemployed for almost three years, but the i started painting 2 months ago and now i got clients from abroad who purchase my work.

    i want to pay/file tax for this but i dont know how to start. Im considered self employed right?
    the thing is i dont want to register as a ” small business” here in the Phils anymore because I will be moving to the UK in 1.5 months. But, once i get there , I will register my business and start an online store showcasing my work.

    The reason why i want to pay the tax due for these transactions of mine is so that i will have proof that i have already started to gain followers of my work,and also profiting from it.

    i hope you can shed some light to this, i will really appreciate it. :D

  11. viclogic says:

    Hi Rian,

    What is your current citizenship right now?

    The BIR has stated the following Individuals who are required to pay income tax:

    Who Are Required To File Income Tax Returns

    Individuals

    1. Resident citizens receiving income from sources within or outside the Philippines
    2. Non-resident citizens receiving income from sources within the Philippines
    3. Citizens working abroad receiving income from sources within the Philippines
    4. Aliens, whether resident or not, receiving income from sources within the Philippines
    Source: http://www.bir.gov.ph/taxinfo/tax_income.htm

  12. Kim says:

    Hi Vic,

    Thanks so much for posting this useful information. I am a relatively new insurance agent and have been filing my monthly percentage tax return of 3%. I understand that I also have to file a quarterly tax return which is due November. 1) Does this mean that I don't have to file my monthly return for November? 2) Also, it seems that I am taxed thrice? Monthly, quarterly, then annually? Thanks in advance!

  13. viclogic says:

    Hi Kim,

    Thank you for visiting. I presumed that you are a self-employed professional or a mixed income earner (compensation or business professional income) considering that you are paying monthly percentage tax. As a self-employed taxpayer, you are required to pay the following taxes with the BIR:

    1. Monthly Percentage tax (since you are a non-vat taxpayer)
    2. Quarterly income tax (1st, 2nd and 3rd quarters only, since you will pay annual income on the 4th quarter)
    3. Annual income tax (which you can credit the income tax you have paid for the previous three quarters)
    4. Annual registration fee of 500

    If you are a BIR registered self-employed taxpayer and you have your BIR certificate of registration, you can see in that certificate your taxability.

    Please remember that percentage tax is a “business tax (you pay whether you earn or you incur a loss since it is based on gross revenue or sales)” while income tax is an income tax (you pay when you earn income”.

    For more information please click the following link and download the BIR tax guide on professional. ftp://ftp.bir.gov.ph/webadmin1/pdf/taxguide.pdf

  14. pachydared says:

    can you please give me example of ITR computation? tnx hope to hear frm yu soon

  15. viclogic says:

    Hi pachydared,

    So that we can give you the specific information that you need, can you tell me what kind of income are you earning? Your status? Your dependents? We can make your case as an example – with sample figures.

    Thank you.

  16. pachydared says:

    thank you very much, I am a doctor with private clinic, married and have 3 dependents. di pa madami ag icome kaya ako muna ang nagcocompute ng BIR o, than you very much hope to hear from to soon. tnx

    ________________________________

  17. viclogic says:

    Hi pachydared,

    I understand….are you paying your quarterly income tax? I assume you are asking for a sample annual ITR computation and not for quarterly a ITR computation. What particular period do you want me to give you? An ITR for 2008 calendar year or 2009 calendar year? You may also download the link to the BIR form 1701 so that you can have a clear picture of a computation. I will try to make a sample ITR form filled-up with sample computation which can be downloaded here soonest. Thank you.

  18. pachydared says:

    tnx, an ITR for 2009, yup im paying my my Quarterly and monthly. maraming salamat

    ________________________________

  19. viclogic says:

    Hi, I made you my friend now. Great couple you got there. Congratulations! I will work on the sample ITR to be downloaded here, immediately after I am done with my deadline on audit. :) Thanks for introducing the site.

  20. evan99 says:

    Does self employed need to pay and file personal withholding tax? If yes, what from to use? In residential rental property, does tenant need to pay withholding tax in their rent?

  21. evan99 says:

    I mean what form to use?

  22. viclogic says:

    Hi evan,

    Welcome to our site.

    A self-employed taxpayer is required to file and remit to BIR witholding tax as follows:

    1. BIR form 1601C (monthly)/ 1604F (annual) -Income tax withheld on compensation – if he/she has employees which under the Tax Code are required to be withheld by their employer on their compensation.

    2. BIR form 1601E monthly/ 1604F (annual) -Creditable income taxes withheld expanded – This return shall be filed in triplicate by every withholding agent (WA)/payor who is either an individual or non-individual, required to deduct and withhold taxes on income payments subject to Expanded/Creditable Withholding Taxes.

    In residential rental property, does tenant need to pay withholding tax in their rent?
    Answer: Please refer to No.2. In this case, the tenant is required to deduct and withhold taxes on rental income payments to his lessor. Example, if the tenant pays monthly rental amounting P10,000 to the lessor, he is required to deduct and withhold P500 (5% of P10,000). Thus, he/should remit the said amount by filing BIR form 1601E every month. This return shall be filed and the tax paid on or before the tenth (10th) day of the month following the month in which withholding was made except for taxes withheld for December which shall be filed/paid on or before January 15 of the succeeding year. He is also required to file annual Information Return of Creditable Income taxes Withheld (Expanded) on or before March 1 of the year following the calendar year in which the income payments subjected to expanded withholding taxes are paid or accrued.

    Thank you for asking. We will publish an article on withholding taxes in the future to guide our users in this matter.

    Lastly, if you register with the BIR as a self-employed taxpayer (by business or profession), you will be interviewed by an examiner. Thus, you should be honest enough to tell everything about your business or profession (e.g., your business nature, employees, office rental, et cetera). This is to give you your BIR COR (certificate of registration) with all the correct taxability on it. If you have a BIR COR now, you can check out your taxability in there.

    You can download the said forms by visiting the BIR link below:

    http://www.bir.gov.ph/birforms/birforms.htm

  23. evan99 says:

    Dear Vic,

    Thank you for sharing your knowledge and your openness for helping people understand the Philippines tax laws and regulations.  

    Regards,

    Evan

    ________________________________

  24. evan99 says:

    Thank you very much for sharing your knowledge to people who needs help to understand things.

  25. evan99 says:

    Hi Vic,

    I'm back again. Just a follow-up about withholding tax for residential property. Im just new in the rental business and I have a lot to learn. As you explained, the tenant will deduct & remit the withholding taxes on rental payments. This withholding tax is lessor's tax. which the lessors can claim when the lessor file his income tax. Is this right?

    If the tenant do not want to do deduction and remittance of the withholding taxes because of troubles of dealing with paperworks and BIR redtapes, does the lessor be liable to deduct & remit the withholding taxes?

    I will appreciate your help. Thank you very much.

  26. viclogic says:

    Welcome back Evan,

    With regard to your first question, Yes, the tax is a lessor's tax (actually lessor's income tax) which is only withheld by the lessee/tenant to be remitted to the BIR. The lessee only serve as a remitting agency but it's actually an income tax which the lessor is charged.

    Then the lessor can ask the lessee/tenant a certificate of creditable withholding tax (BIR form 2307). This form/return shows the amounts of income tax withheld by the lessee/tenant. This is also what the lessor will use and attached to the income tax return to claim the creditable income tax against his income tax due for a period (quarterly and annual).

    The lessee/tenant is required by the Tax Code to remit withholding tax. Failure by them to file and pay withholding tax, will cause them penalties. The obligation for filing withholdng tax is imposed on the lessee/tenant and not on the lessor in this case. Hence, the lessor has no liability or obligation with the BIR with regard to withholding tax. His obligation lies on paying income tax.

    Provided the lessor pay faithfully all his income tax, the effect on the lessor's income tax payable is the same whether the lessee/tenant remits or not remits withholding tax to the BIR. The only difference is that when the lessee/tenant remit withholding tax to the BIR, the BIR receives the some of the lessor's income tax in advance. BIR 's purpose of withholding tax is to lessen underdeclaration of income tax return, involve income tax payees (e.g. lessee and employers) to strenghten income tax remittance, and provide a strong audit trail for BIR audit purposes.

  27. Lyra says:

    Hi! Thank you for the informative blog. I'm into rental business (apartment), just want to know what are the taxes deductible from gross income for self-employed ITR? Is the real property tax for the building and lot deductible? How about 2551M (monthly percentage)? Also, how do you compute depreciation, can I just give a certain number of years as to the life of the bldg as a basis to my computation? Thank you.

  28. dannepbation says:

    Hi ….just want to ask sample computation of 1701 with figures…since first time ko lang po mg file ng ITR…im into trading , non vat of po ang regsitration ko…purely self employed..ngfile ako monthy ng 1601 E at 2551 M sa bank…hope you can help me since i have no idea at pra mkatipid muna sa pambayad accountant….Thanks

  29. dannepbation says:

    hi…need help on my 1701 since its my first time to do this…i dont really have an idea on how to compute this..hope you can provide a sample computation with figures so i can use it as guide in preparation..im fillimg 1601E and 2552M monthly…

  30. michellevillarino says:

    what are the deductible in computing taxable income?can i ask for the whole list.
    and all item that included in computation of taxable,either the simplest item.thanks

  31. michellevillarino says:

    can i ask for whole list for the items included and excluded in computing the taxable income. in studying now. and many things have been a question to me.

  32. The program includes one-time transaction taxes such as estate, donor, capital gains, final withholding tax, expanded withholding and documentary stamp on the transfer, sale, exchange, or disposition of assets.

  33. christianloveenriquez says:

    Hi, I'm preparing for the first time the ITR of my boss. He's married and he wanted to consolidate his income w/ his wife's. He has a mixed income and preferred to use itemized deduction while her wife preferred to use OSD. Is it ok to consolidate their income in one form using itemized deduction for my boss and OSD for his wife. Hope you can help me. Thanks.

  34. is Income tax is necessary to paid out? If somebody is not paying the Income Tax then which steps can be take by the government??

  35. Let me know that if i want to pay online my income tax then how can it possible?

  36. rscmtc says:

    I was wondering. I have combined income whereby I get salary from an employer and withholding tax is withtheld by my employer. Likwise I have rental business and I pay income tax for the rent I earned. At the end of the year, my auditor file my itr under 1701 combine income but she informed me since I already paid my income tax quarterly and my employer remitted my withholding tax. My CPA told me not to combine the income of the rental and my salary and pay income tax on higher bracket. My CPA told me since I already paid my taxes on salary withheld and income tax on my business (sole employed), I no longer need to pay taxes because witholding tax and income tax are two different type of taxes and payment of it are treated separately. I asked two differenct CPA and they gave me the same answer. IS there a clear BIR ruling about it? Can you shed light into it? thanks

  37. Hajile Senob says:

    Hi I am a blogger and at the same time I have a day job. I am earning quite on my blogging activities and my day job employer is paying my income tax. Now how should I start with paying tax for my blog earnings? I am married with 2 children and I really don't have any idea with regards to getting taxes from my earning on blogging. Can you help me pls?

  38. Hi Hajile,

    You are considered an individual who earns mixed income – earning from compensation and earning from business or practice of profession. In that case, you may registered as a self-employed individual and obtain a certificate of registration from the BIR (BIR form 2303). Thus, you may be subjected to monthly percentage tax or VAT (if your gross receipts exceeds 1.5M a year).