Written by: Maine Dela Cruz
On or before April 15 each year, the government mandates individuals and entrepreneurs who registered businesses in the Philippines to pay taxes. During tax season, freelancers and entrepreneurs become extremely busy as they prepare for the filing of tax. They file their own annual income tax returns (BIR Form 1701) and pay their own taxes. If you can afford to hire an accountant or tax agent, the job will be easier. However, what if you are unable to?
You need not worry. There are a lot of resources online for your reference. And some steps are now done online as well. Of course, you must have high-speed internet to do online activities like this. And getting a reliable internet service provider in the Philippines will significantly contribute to the smoothness of the whole process.
Indeed, tax preparation and filing in the Philippines may be extremely complex for beginners and even experienced taxpayers. If it’s any consolation, submitting ITRs is much easier today than it was previously. Twelve-page forms have been shortened to four pages. Additionally, the Internal Revenue Service (IRS) has implemented online ways for preparing and filing ITRs.
No prior experience as a self-employed individual submitting an income tax return? This thorough guide should provide you with a good starting point.
What is an Annual Income Tax Return?
An income tax return (ITR) is a document that taxpayers file with the Bureau of Internal Revenue (BIR) every year to record their income, spending, and other critical information such as tax due and any refund for overpayment of taxes. Individuals with a mixed income or who are self-employed must complete BIR Form 1701.
Why Do We Need to Pay Income Taxes?
Many people appear to believe that submitting tax returns is optional and so reject it as unneeded and onerous. This is not a particularly healthy view of tax filing. Here are the main reasons why filing an annual income tax return is important:
1. It is a sign of responsibility.
Filing annual income tax returns demonstrates that you are accountable. Not only that, but it also makes following transactions easier for individuals and enterprises, as their revenue is recorded by the Bureau of Internal Revenue (BIR) with any appropriate tax already paid.
2. It gives you peace of mind.
Being audited by the BIR may be extremely stressful, especially for taxpayers who reduce their tax payments intentionally or unlawfully. At times, it might even influence your personal life, causing restless nights and anxiety.
If you pay the correct amount of tax, you can avoid experiencing these feelings of worry and anxiety. You will have greater peace of mind and will be able to concentrate on expanding your business.
3. It is key to maintaining a good credit rating.
Paying the right amount of tax enables you to maintain a favorable credit rating in financial firms and rating agencies. The more income and taxes you disclose, the better your credit rating will be. You can utilize your favorable credit rating to obtain more money for business development or other objectives.
4. It is a social responsibility and contribution to the country.
Paying the correct amount of tax is a country’s civic duty. Our taxes will be utilized to expand and improve government infrastructures and the lives of Filipinos both inside and outside our nation.
If all income earners pay the correct amount of tax, the government may collect more money to support its objectives, such as road construction, school construction, and improved government wages and services. These variables can contribute to the Philippines attracting more investment and jobs. More people with employment equals more people with money to spend, which benefits your business directly or indirectly.
4 Types of Annual Income Tax Return
In this part, we will explore four common types of annual income tax returns. For a complete list of income tax returns, visit BIR’s official website.
1. Purely compensation income
This category includes salaries, wages, emoluments, and honoraria, as well as commissions, taxable bonuses, and fringe benefits. You will need to file BIR Form No. 1700.
2. Business income and professional
BIR Form No. 1701 shall be filed by individuals who are engaged in business. This includes trade income, fees from the practice of the profession, profits from the sale or exchange of assets, commissions, rental income, and other income not covered by compensation income are all examples of business and/or trade revenue.
3. Passive Income
Those who have passive income must file BIR Form No. 1701A. This also includes income from other sources such as interest on foreign or Philippine currency bank deposits, royalties, prizes and other wins, and dividends. Capital gains on the sale of stock, rental property, and informer’s commissions are also included.
4. Corporation, Partnership and Other Non-Individual Taxpayer Exempt
This type is under the Tax Code, as Amended, {Sec. 30 and those exempted in Sec. 27(C)} and Other Special Laws, with No Other Taxable Income.
To start, this return shall be filed by a corporation, partnership, and other non-individual taxpayers exempt under the Tax Code, as amended [Sec. 30 and those exempted in Sec. 27(C)] and other special laws with no other taxable income such as but not limited to foundations, cooperatives, charitable institutions, non-stock and non-profit educational institutions, general professional partnership (GPP), etc. This return is filed on or before the 15th day of the 4th month following the close of the taxpayer’s taxable year.
How Much is the Regular Income Tax Rate?
This part explains how much are the regular income tax rates individual citizens and resident aliens earning purely compensation income and individuals engaged in business and practice of their profession. For a complete list of the income tax rates, visit BIR’s official website.
Graduated Income Tax Rates
This is under Section 24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963. Under the Tax Code of 1997, as amended by Republic Act No. 10963, individuals earning PHP 250,000 or less annually do not have to pay their taxes. Meanwhile, if you are earning more than PHP 250,000, you will have to be subjected to a tax bracket set by BIR.
Self-employed with Gross Sales Not Exceeding P 3,000,000
This is for purely self-employed individuals and/or professionals whose gross sales/receipts and other non-operating income do not exceed the VAT threshold of p3,000,000.
Under this category, the tax shall be, at the taxpayer’s option: either 8% income tax on gross sales or gross receipts more than p250,000 in lieu of the graduated income tax rates and the percentage tax; or income tax based on the graduated income tax rates.
Income from Practice of Profession
These are individuals earning both compensation income and income from a business and/or practice of the profession. Under this category, the income taxes shall be for income from compensation based on graduated income tax rates; and for income from business and/or practice of the profession.
If the total gross sales/receipts do not exceed the VAT threshold of PHP 3,000,000, the individual taxpayer may opt to avail either 8% income tax on gross sales/receipts and other non-operating income in lieu of the graduated income tax rates and the percentage tax; or income tax based on graduated income tax rates
However, if the total gross sales/receipts exceed VAT threshold of PHP 3,000,000, the income tax will be based on graduated income tax rates.
Certain Passive Income of Individual Citizens and Resident Aliens
If you earn an income from other sources such as interest on Philippine or foreign currency bank royalties, deposits, dividends, and prizes, and other wins, your equivalent tax will be at least 6%, depending on the nature of your passive income.
Two Ways to File an Income Tax Return in the Philippines Online
Aside from the manual filing, which involves filing your ITR personally in the RDO where your current registration is, there are two more methods to file an income tax return in the Philippines: through the Electronic Filing and Payment System (eFPS), Electronic BIR Forms (eBIRForms), and manual filing.
Electronic Filing and Payment System (eFPS)
Paperless ITR filing and online tax payment have been made possible thanks to the BIR’s eFPS technology. Tax filing and payment have never been easier or more simple.
Large taxpayers were a primary focus of the BIR while developing this computerized tax filing and payment system. The eFPS is available to all taxpayers in the country required to file and pay their taxes as of today.
How to Use the eFPS
Here’s how you can file your annual income tax return using the eFPS:
Step 1: Register for an account. To enroll in eFPS, visit the eFPS website and click the “Enroll in eFPS” link. Complete the enrollment form and click the Submit button when finished. After three to ten days, you will get an email from the BIR informing you of the approval or rejection of your enrolment.
Step 2: After the system receives your information, it will assign you a file reference number (FRN). Each successful filing transaction will generate an FRN, which may be located in the upper right corner of your ITR.
Step 3: To make a payment, click the Proceed to Payment button located beneath the FRN. Enter the necessary information and payment method. After that, click “Submit.” When the payment is properly processed, you will receive a confirmation notification on the screen.
Step 4: To pay your tax, click the Proceed to Payment button under the FRN. Enter the required details and payment mode. Then, click “Submit.” You’ll see a confirmation notice on the screen upon successful completion of the payment.
Step 5: Print your ITR by utilizing the Tax Return Inquiry feature. Your RDO may certify your e-filed ITR.
Electronic BIR Forms
The eBIRForms is an alternate approach that makes ITR preparation and filing easier, more convenient, and more accurate. It consists of two packages that enable taxpayers to complete their ITRs offline and submit them to the BIR online: the offline and online packages.
1. Offline eBIRForms Package
This refers to the offline tax preparation software that taxpayers and Accredited Tax Agents use to fill up tax forms offline. Download the latest version of eBIRForms and start filling them out.
2. Online eBIRForms System
This refers to the infrastructure that accepts, processes, and stores tax returns submitted online. In other words, this system makes BIR’s online tax submission services possible.
Now, there’s no reason for confusion between the two. One is for tax preparation and tax return submission and the other is the system that makes online tax filing possible. It’s simple as that!
How to File Annual Income Tax Return through eBIRForms
To begin filing, taxpayers will need to download the offline software package. Additionally, keep in mind that eBIRForms is not presently compatible with Mac. Therefore, if you’re using an Apple computer, you’ll need to locate and install the offline software package on a Windows computer. Here’s how you can file your ITR through eBIRForms:
- Visit the BIR website in step one. Select “eServices.”
- Download the most recent eBIRForms Offline Package.
- Open the package and choose the appropriate tax return. Complete critical information.
- Once the needed form is completed, save a copy of the completed tax return.
- Submit the completed form to the Online eBIRForms system via the Online eBIRForms system.
- The BIR will acknowledge receipt of your ITR through email.
- Pay your tax dues at the nearest AAB of your RDO.
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