You’ve probably heard a friend or two brag about how much income they earn while working in their PJs at home or as side income to their regular office job. It’s true: Freelancers enjoy a lot of perks such as decent pay, flexible hours, and zero commute. Yet what freelancers don’t talk about is taxes. While some do pay their correct taxes, there are too many who don’t by simply not declaring any income in the first place. So, what happens when freelancers don’t pay their taxes?
We interviewed Atty. Ferdinand Cordova of the law firm Cordova, Perez, & Associates to get to the bottom of this issue.
According to the National Internal Revenue Code (NIRC), which is the major tax law of the Philippines, freelancers are not explicitly mentioned. As long as you are not an employee who earns a salary (“pure compensation earner”), then you are categorized either as a professional or business owner (“sole proprietor”) depending on the nature of your work. It’s important to register under the appropriate category with the BIR and get a Tax Identification Number (TIN) for when you file and pay your taxes.
Once you’re registered as a taxpayer, you simply have to declare your income and pay taxes on it. You have to pay taxes on all income derived from all sources, within or outside the Philippines. The only exception is if this is work done abroad and paid abroad—provided that the tax was paid in the foreign country.
Usually, there are tax treaties with other countries against double taxation, which is tax on income that has been previously taxed. Therefore, it doesn’t matter if your work submitted is online or the method of payment—as long as you haven’t paid taxes on your income, you are still liable.
Note that taxes are paid on your income, which means you are entitled to deduct legitimate expenses (subject to limits required by the law) from your earnings.
With the passage of the Tax Reform for Acceleration and Inclusion (TRAIN), all taxpayers with annual income less than P250,000 are exempt from paying taxes. For professional freelancers who earn more than the threshold, you have to pay income tax based on the graduated tax table as well as three percent percentage tax. In addition, you must pay 12 percent VAT if your annual revenues are greater than P3,000,000. If you qualify as a non-VAT taxpayer, you can opt to pay eight percent on gross receipts. However, this flat tax is not for everyone: It’s actually disadvantageous for taxpayers who have a lot of deductible expenses and so are better off paying income tax and percentage tax.
Tax evasion and non-filing of appropriate forms come with hefty penalties imposed by the law. These range from imprisonment for two to four years and payment of fines, interest, compromise fee, and penalties which could sum up to at least five times bigger than the original tax due!
In practice, the Bureau of Internal Revenue (BIR) usually goes after bigger fish for tax evasion cases such as high-profile doctors, lawyers, and entertainment personalities. Given limited resources, the BIR has no better alternative. Therefore, the reality is so as long as you’re not caught, there’s little impact on your credit standing with banks and chances for future employment.
The solution? To quote Atty. Cordova,
“The BIR must be given sufficient teeth to run after tax evaders.”
Not in terms of legislature which is amply covered by the NIRC and its amendments. Instead, he recommends additional budget, personnel complemented by an updated computerization program, and an aggressive campaign to combat this issue.
More public trust in the government will go a long way towards higher rates of tax compliance. Most people who refuse to pay tax rationalize that their hard-earned money will just be used to line the pockets of corrupt politicians. However, these are just excuses. Every Filipino citizen has the duty to pay taxes and contribute to nation-building—freelancers are no exception.
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