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Tax 101: What Every First Timer Should Know

Doing your taxes is probably one of the most frustrating things every working person does. Even the more veteran people, when it comes to taxes, would find it hard to do when they don’t prepare for it well. In the Philippines, tax computations are one of the things that a lot of people fear, just because of how stressful it can get.

That being said sooner or later, everyone will have to do their taxes as part of their lives. And for those first timers that have no idea how to do them yet, don’t fret, because if you start out early, you might find it easier to do in the future! Plus keep in mind that there are a lot of helpful websites and applications that make it easier for you to do your taxes! That being said, here are some of the most important things that every first-time taxpayer should know.

BIR Forms

There are many kinds of BIR forms that are dedicated solely to paying business taxes. For example, there are specifics forms applicable for self-employed individuals, employees of companies, and business owners. And there are forms that are to be used by Partnerships and Corporations.

It’s important that you know which one you should use so that you can fill out the right form and avoid penalties. Freelancers fall under self-employed individuals. We, freelancers, are considered non-licensed professionals. They, along with business owners who are sole proprietors usually do their own taxes. While people that are employed would usually have their companies do their taxes for them.

Documents Needed

There are as many steps to the processes as there are BIR forms. Haha! I may be exaggerating, but the what’s for sure is that the steps to be taken take a whole lot of time from a business owner’s day. On the average, a business owner in the Philippines takes 2 days in a month (according to a PWC and World Bank report on taxes) spent just complying with taxes. When starting a business, I highly recommend that one should at least be familiar with the 101s of preparing and submitting your own taxes.

A good example would be to know more about income tax returns. These are forms that need to be submitted as long as you are making some kind of income or receiving compensation. Income is basically your gross revenue less expenses and when you do this, you get your taxable income. This is the basis for your taxes (income tax return). A self employed individual submits and pays for income taxes every quarter (Form 1701Q), the fourth quarter being the “famous” annual income tax (Form 1701 or 1701A).

If you are employed (have a day job) and running a business at the same time, you are considered to be a mixed income earner. How do you report taxes? You will secure BIR Form 2316 from your employer at the end of the year and use the values there and combine it with the income / expenses from your business. You do this only for form 1701 or Annual income tax form.

If you need help in preparing tax form 1701 and 1701A, feel free to check out https://www.taxumo.com and check out their blog. They have useful information for everyone!

Payments

The final step is to print out all of these documents and pay for it at the Authorized Agent Bank (basically a bank that accepts BIR payments in the city of your business).

Please prepare 3 copies for all of your accomplished BIR Forms along with the required deposit / bills payment slip and your payment.

In some cases, you won’t be needing to pay anything, and that would entail a “No Payment” Situation. These include refundable/ creditable tax returns, returns with excess tax credit carry over, and returns that are qualified for a second instalment. These “no payment” transactions just need to be filed and stored together with the BIR confirmation via the eBIR Forms system.

Key Takeaway

This article detailed the very basics of what you need to know about taxes. In the Philippines. Tax computations are frustrating, however, as long as you prepare everything and do it as early as you can, you won’t have a problem with doing your taxes any time soon.

If you need help with understanding all of these still, just ask Taxumo.

P.S. I’m a co-founder of Taxumo, whose mission is to help people start and sustain a business! 🙂 Feel free to contact us!

Understanding TRAIN or Tax Reform for Acceleration and Inclusion

A lot of people have been discussing the TRAIN law and how will it affect us. I’ve been reading about it and I’ll be sharing some of the things that I read about with you. Also, I’ll be sharing a Philippines BIR Tax Software that I have been using.

What is TRAIN?

President Rodrigo Duterte signed the Tax Reform for Acceleration and Inclusion (TRAIN) into law last December 19, 2017. It’s the first package among the other tax reform measures to be issued by his administration. It expected to make a considerable impact on the prices of goods and services, take-home pay of Filipinos and their purchasing power.

About 70% of collected revenues will go to infrastructure projects that the Duterte’s administration plan to build. His administration has planned to allocate P8.44 trillion for its “Build, Build, Build” program for 2017-2022. They plan to build more road networks and better mass transportation rides for the public.  These will enhance the economy and create more investment opportunities, thereby creating more jobs or income sources for the Filipinos.

The other projects under the 70% collected revenues are the following: infrastructure for the military, drinking water facilities in all public places and sports facilities for public schools. The remaining 30% will be spent on social mitigating measures and investments for health, nutrition, hunger and education.

What is it to Employees?

Under this law, there is a zero percent tax for low-income earners with an annual income of P250,000 and below. Those with an annual income of P8 million and above are taxed with 35 percent. The 13th month pay and other bonuses at P90,000 and below will remain not to be taxed. This new law lightens the financial burden among low-income earners. With the previous income tax law, about 5 percent is deducted from earners with P10,000 and below income. Those with an annual income of P500,000 and above get to have 32 percent of off their income.

What is it to us Business Owners, Freelancers and Professionals?

For business owners, sole proprietorships and licensed and non-licensed individuals, those earning below Php 250,000 per year will be tax exempt. Those who earn Php 3 Million and below per year now have the option to file and pay for a 3% percentage tax + income tax (paid quarterly) or an 8% percentage tax of gross receipts (paid annually).

Although the 8% percentage tax paid annually may seem attractive, you may want to check what is better for your business. There is still a level where 3% percentage tax + income tax (paid quarterly) is a better option.

Here’s how to check:

One – Download this calculator by a my friend Mark Ong, who is a CPA.

Train bill – compare: Train bill – compare

Second Option – This is a blog from Taxumo, Philippines’ BIR tax software.

TRAIN’s New 8% Tax – Does it really save you money?

What else did change?

The BIR placed a higher tax rate on coal, mining, tobacco, sweetened beverage petroleum, and automobiles. Some may not find it as good news. They fear that companies will increase the prices of their goods for consumers to shoulder the higher tax rates.

What’s next? 

Everyone’s awaiting the other packages and the Implementing Rules and Regulations of the BIR. If you want to know more about the Philippines Tax Reform law, join the workshop of Manila Workshops on January 27. Check it out in this link: http://manilaworkshops.com/events/understanding-tax-reform-for-msmes-self-employed-professionals-freelancers

Personally, our team in Taxumo studied the law and thought about how to easily cascade it to our users. If you haven’t checked out this Philippines BIR Tax Software, you should. It really makes your life as an entrepreneur, freelancer and professional easier. How? Taxumo is the first in the industry to have automated calculations of your tax dues. And guess what? The Taxumo Income Tax calculations now uses the formula from the TRAIN law (RA No. 10963).

Once the Implementing Rules & Regulations are released by the BIR, Taxumo will be updating the forms & formula speedily and accurately to make sure that you’re using the latest forms when you’re filing your taxes.

If you want to try out Taxumo, sign up now for a FREE trial.