Freelancers and small business owners are not exempt from paying taxes. You also have to file and settle your tax forms, especially the BIR form 1701 (note that this is not the ONLY form that you need to file and pay for). The only difference from employees is that you need to file it on your own.
But first, what is BIR Form 1701?
The BIR form 1701 or the Annual Income Tax Return for Self-employed Individuals, Estates and Trusts shows all the transactions covering the calendar year of the taxpayer.
According to BIR, this must be filed by the following individuals:
1. A resident citizen engaged in trade, business, or practice of profession within and without the Philippines.
2. A resident alien, non-resident citizen or non-resident alien individual engaged in trade, business or practice of profession within the Philippines.
3. A trustee of a trust, guardian of a minor, executor/administrator of an estate, or any person acting in any fiduciary capacity for any person, where such trust, estate, minor, or person is engaged in trade or business.
4. An individual engaged in trade or business or in the exercise of their profession and receiving compensation income as well.
Simply put, freelancers and sole proprietors are required to pay their income tax returns. If your annual income is less than P250,000, you are exempt from paying percentage tax and income tax. Still, you need to file your accomplished BIR form 1701 to the RDO.
What’s the difference between 1701 and 1701A?
The only time you’ll need to file using BIR Form 1701A is if you’ve chosen either of the following for your income tax schedule AND if you’re earning PURELY from business or practice of profession.
- Graduated Income Tax Rate with Optional Standard Deduction (OSD), or
- 8% flat income tax rate
If you do not belong to the tax schedules mentioned above, then you will need to file BIR Form 1701.
In addition, if you’re a mixed-income earner (this means that you’re both an employee and earning from a side hustle or business), you will need to file BIR Form 1701.
So, even if you’re mixed-income, you will still need to file Form 1701 even if your side hustle or business is on the 8% flat income tax rate or the Graduated income tax rate with OSD.
I’m earning less than ₱250,000 annually
Under the new TRAIN law, those who earn less than ₱250,000 annually are exempt from paying income tax returns. So if you fall under this bracket, you don’t have to pay your annual ITR — BUT you still have to file.
My annual income is more than ₱250,000
The TRAIN law gives you two options for filing and computing your taxes. You can either follow the 3% percentage + income tax (use the graduated income tax table) or use the new 8% Gross Receipt Tax.
Now, the 8% Gross Receipt Tax might sound easier for you, but keep in mind that it’s not for everyone. To know if you’re making the right choice, check out this tax calculator that we made for you.
But as mentioned in the previous section, if you’re going to use the BIR Form 1701 you are most likely to be on the Graduated Income Tax Rate with Itemized Deduction.
Wondering which option fits your business better? Check out our calculator.
How to compute your Annual Income Tax dues
Before you begin, you’ll need to check whether you’re on the 8% Income Tax Rate or the Graduated Income Tax Rate. The easiest way to do this is to check your Certificate of Registration from the BIR. This will indicate which tax schedule you’re on.
I’m on the 8% Income Tax Rate
The first thing you’ll need to know is whether your earnings come solely from your business or profession, or if your earnings come from both compensation (basically, if you have an employer) and business/profession. After which, you can apply the formula below applicable to you:
Income Solely from Business / Profession
Total Income Tax Due = 0.08 * (Gross Sales - ₱250,000)
Mixed Income Earner
Total Income Tax Due = (0.08 * Gross Sales) + Tax Due on Compensation
As you can see, the ₱250,000 deduction is NOT applied for Mixed-Income Earners. The reason for this is because the ₱250,000 has already been deducted from the tax due based on compensation so it no longer applies to the tax from your business
I’m on the Graduated Income Tax Rate
If you’re on the Graduated Income Tax Rate, you’ll need to check first whether you’re on Itemized Deduction or Optional Standard Deduction (OSD).
Here’s the difference between the two if you’re confused:
- OSD – This allows you to claim a deduction of 40% from your gross sales or receipts for the quarter.
- Itemized Deduction – You have to identify and deduct all the ordinary and necessary expenses from your gross income. These expenses must attribute to the development, management, and operation of your business like travel and salaries.
Take note that neither of these options is available for you if you opt for the 8% IT rate
Now, both of the deductions have different formulas for computing your taxable income so check your Certificate of Registration to confirm which one applies to you.
With that being said, calculating your tax payable for Graduated Income Tax Rate takes two steps:
- Compute your taxable income
- And, based on the taxable income, refer to the tax table for how much tax you’ll need to pay
Formulas for Taxable Income
Taxable Income = Gross Sales - Gross Purchases
Optional Standard Deduction
Taxable Income = Gross Sales * 60%
Computing for Tax Payable
After calculating your taxable income, you will need to refer to the tax table below for your tax dues.
How and where do I file my BIR form 1701?
As self-employed professionals and as MSMEs, we now have two forms to choose from.
You can check out this article that we have written to guide you as you file your Annual Income Tax Return: https://www.taxumo.com/blog/how-do-i-file-an-annual-income-tax-return/
Check out our Taxumo subscription plans! https://www.taxumo.com/taxumo-pricing/
All plans include Annual ITR forms!
What are the required attachments?
You will need to prepare the following attachments for filing your annual income tax returns.
- Certificate of Income Tax Withheld at Source (BIR Form 2307), if claiming tax credit.
- Summary Alphalist of Withholding Tax (if claiming tax credit)
- Certificate of Income Payments not Subjected to Withholding Tax (BIR Form 2304) if applicable.
- Duly approved Tax Debit Memo, if applicable.
- Previously filed return, if an amended return is filed for the same quarter.
- Financial Statements
- CPA Certificate, if annual gross sales or gross receipts exceed 3 million pesos.
- Schedule and Notes to Financial Statement
Deadline for filing BIR Form 1701
The income tax return must be filed and paid on or before April 15 of each year at any BIR-Authorized Agent Bank of the RDO where you registered. However, since April 15 falls on a holiday for 2022, the BIR has extended the deadline to April 18.
You may also use eBIRForms or eFPS to file and don’t forget to also file/submit your attachments via the Alphalist system of the BIR. If you forget to submit (assuming you have attachments to submit), this will incur penalties too.
Submit your accomplished BIR forms with the required documents and your payment. The AAB will stamp mark “Received” on the return and will machine validate it as well. The machine validation will show the date of payment, the amount paid, transaction code, the name of the bank, and other important details.
If there are no AABs in your area, you can settle your taxes with the concerned Revenue Collection Officer (RCO) under the jurisdiction of the RDO.
What will happen if I miss the filing deadline?
Well, there would be penalties. Apart from your tax due, you have to pay 25% of the amount + 20% interest per annum.
This is applicable to amended returns as well. By failing to include some computations, thereby causing you to file an amended return, you’d have to pay for a penalty.
In addition, neglecting to file the return will likewise require you to pay for a penalty, which is 50 percent of the tax due. So you definitely have to file and pay your taxes on time.
Is there an easier way to file the BIR form 1701 and pay my income tax return?
Yes! You can rely on Taxumo when it comes to preparing and filing your tax forms. Whether that be tax computation or filing, Taxumo has products tailor-made to meet your tax filing needs as a self-employed, professional, or a small-business owner.
Just follow the steps here:
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