Last Updated on May 12, 2017 by Marie Bautista
In a few months time, on April 15, we good citizens pay our share of the cost to maintain our sovereign land. Below are a few tax questions you may not have thought of asking , but should.
I’m not rich! Why should I care about taxes?
Because 20% to 32% of your salary goes to income tax.
Because part of your earnings from investments goes to tax.
Because, if you own property, you have to pay tax yearly to keep it.
Feigning ignorance won’t save you if you’re caught shirking your obligations. Here are the following consequences if you forgot your tax obligation:”
- If you fail to file an income tax return, there is a surcharge of 25% to 50% of the tax due and interest of 20% per year computed from the date the tax was due until it is paid.
- If you are convicted of tax evasion, you will have to pay a fine of P30,000 to P100,000 and go to prison for two to four years.
Can’t I just leave it up to H.R. in my office?
The BIR’s “substituted filing” scheme exempts most individuals earning purely compensation income from the requirements to file income tax returns. Your company should issue you a BIR Form 2316 detailing all taxable and non-taxable compensation income paid to you by the company, as well as the computation of your tax due, which should be equal to the amount of tax withheld from you.
Please take note that the substituted filing only works if you are earning purely compensation income. If you have other sources of income other than your salary, you have to file an income tax return.
I am a freelancer. Do I have to Pay taxes?
Freelance workers such as photographers, makeup artists, virtual assistants, online workers, and consultants are considered professionals who also have to pay their dues to the government. This is why companies deduct a withholding tax from their fees. If the client company does not do this, the company cannot claim the expense as a deduction. Make sure that you are declaring your income payments from your client companies. Why? Your client company is periodically declaring a list of income payments they made and the tax they withheld to the BIR. The BIR matches information provided by the client companies with the income tax declarations you have made.
Talent fees and professional fees are subject to 10% to 15% tax. You can use this withholding tax to offset your income tax due.
Your client should give you a Certificate of Creditable Tax Withheld (BIR Form 2307), so you can claim the tax credit.
What deductions can I legally claim to reduce my taxes?
An individual earning purely compensation income is not entitled to any deduction except personal and additional exemptions.
Individuals engaged in business or the practice of a profession are generally allowed to deduct itemized expenses incurred in pursuit of their business or profession.
Itemized expenses require tedious record-keeping so you can choose the Optional Standard Deduction instead. The Optional Standard Deduction (OSD) is equal to 40% of gross revenues. In effect, your taxable income will be equal to 60% of gross revenues.
With OSD, you don’t have to worry about documenting expenses all throughout the year.
If you will be using OSD in computing your income tax, here is an example of how to use OSD in computing your income tax.