Under the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, taxation in the Philippines is a mandatory contribution for individuals earning income within the territory.
This legal guide outlines the procedural and substantive requirements for two primary categories of taxpayers: Employees (Purely Compensation Income Earners) and Freelancers (Self-Employed Individuals/Professional Practitioners).
I. Understanding Taxpayer Classifications
The Bureau of Internal Revenue (BIR) distinguishes taxpayers based on the source of their income:
- Purely Compensation Income Earner: Individuals whose income is derived solely from an employer-employee relationship.
- Self-Employed / Freelancer: Individuals who practice a profession or operate a business as a sole proprietor.
- Mixed-Income Earner: Individuals who earn both compensation income (from employment) and income from business or the practice of a profession.
II. For Employees (Purely Compensation Income)
Most employees fall under the Substituted Filing System. This means the employer files the tax return on behalf of the employee, provided the following conditions are met:
- The employee receives purely compensation income from only one employer within the calendar year.
- The tax has been correctly withheld by the employer (equal to the tax due).
Key Forms and Process:
- BIR Form 2316: The Certificate of Compensation Payment/Tax Withheld. Your employer must provide this to you on or before January 31 of the succeeding year.
- Requirement: If you qualify for substituted filing, you do not need to file an Annual Income Tax Return (ITR) yourself. The signed BIR Form 2316 serves as your ITR.
When an Employee MUST file an ITR (BIR Form 1700):
You must manually file if:
- You had multiple employers within the calendar year (consecutively or simultaneously).
- Your tax was not correctly withheld.
- You are a mixed-income earner.
III. For Freelancers and Self-Employed Individuals
Freelancers are treated as individual business owners and are responsible for their own registrations, filings, and payments.
1. Registration Requirements
Before filing, a freelancer must be registered with the BIR under BIR Form 1901. This results in the issuance of a Certificate of Registration (COR), which lists the specific tax types the individual is required to pay.
2. Choosing a Tax Regime
Freelancers generally have two options for income tax:
- Graduated Income Tax Rates: Based on the tax table (0% to 35%). Under this, you can deduct either Itemized Deductions (proven business expenses) or an Optional Standard Deduction (OSD) (40% of gross sales/receipts).
- 8% Flat Income Tax Rate: A simplified rate applied to gross sales/receipts in excess of ₱250,000, provided gross annual sales do not exceed the VAT threshold (currently ₱3,000,000). This replaces both the graduated income tax and the 3% percentage tax.
3. Filing Frequency
Freelancers must file both quarterly and annually:
- Quarterly ITR (BIR Form 1701Q): Filed for the first three quarters of the year.
- Annual ITR (BIR Form 1701 or 1701A): The final consolidation of the year's income.
IV. Mandatory Deadlines and Forms
| Taxpayer Type | Form | Deadline |
|---|---|---|
| Quarterly (Freelance) | 1701Q | May 15 (Q1), Aug 15 (Q2), Nov 15 (Q3) |
| Annual (Self-Employed) | 1701 / 1701A | April 15 of the succeeding year |
| Annual (Employee - Multi-employer) | 1700 | April 15 of the succeeding year |
| Annual (Employee - Substituted) | 2316 | Issued by employer by Jan 31 |
V. The Filing and Payment Process
Step 1: Preparation of Records
Maintain Books of Accounts (Journal/Ledger) as registered with the BIR. For freelancers, ensure all Official Receipts (ORs) or Service Invoices are recorded.
Step 2: Electronic or Manual Filing
- eBIRForms: An offline software provided by the BIR to encode and validate tax returns. Once filled out, the form is submitted online.
- eFPS (Electronic Filing and Payment System): Usually reserved for large taxpayers or those specifically mandated.
Step 3: Payment of Taxes
If there is a "Tax Payable" after deductions and credits (like creditable withholding taxes per Form 2307):
- Authorized Agent Banks (AABs): Payment via over-the-counter at banks within the jurisdiction of your Revenue District Office (RDO).
- Electronic Payment (ePay): Through mobile apps (GCash, Maya), Landbank Link.BizPortal, or Development Bank of the Philippines (DBP) PayTax Online.
VI. Penalties for Non-Compliance
Failure to file and pay on time results in significant legal and financial repercussions under Section 248 and 249 of the NIRC:
- Surcharge: 25% of the tax due (50% in cases of willful neglect or fraud).
- Interest: 12% per annum (under the TRAIN Law).
- Compromise Penalty: A graduated fine based on the amount of tax unpaid, ranging from ₱1,000 to ₱50,000.
VII. Important Tax Credits
Taxpayers should ensure they collect BIR Form 2307 (Certificate of Creditable Tax Withheld at Source) from their clients or employers. These represent taxes already paid on your behalf throughout the year and are deductible from your final tax due.