How to Compute Income Tax in the Philippines (Single Proprietorship)

Feb 7, 2011 by at Taxation

How to Compute Income Tax in the Philippines (Single Proprietorship)

How to compute annual income tax in the Philippines for self-employed individuals, such as proprietors and professionals? Computing income tax expense and payable is different for individuals and corporations. Taxable corporations may be taxed using a fixed income tax rate. On the other hand, if you are a self-employed professional or an owner of a single proprietorship business, your income tax expense is computed using a graduated tax rate. It is a progressive tax which the tax rate increases as the taxable base amount increases. This means that the higher taxable income you have, the higher your income tax expense is. The following are the requirements, instructions and procedures to compute and file your income tax return.

 

The tax form you will use

For self-employed individuals such as proprietors, professionals and those with both business and compensation income, you will use BIR Form 1701 (please click here to download form). It must be prepared in 3 copies (one for BIR, one for the Authorized Agent Bank and one for your copy).

 

Documentary requirements

Below are the documentary requirements that should be attached with the return, if applicable. For taxpayers earning both business income and compensation income, BIR Form 2316 should be attached.

1.  Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if applicable
2.  Certificate of Income Payments not Subjected to Withholding Tax (BIR Form 2304) if applicable
3.  Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
4.  Waiver of the Husband’s right to claim additional exemption, if applicable
5.  Duly approved Tax Debit Memo, if applicable
6.  Proof of Foreign Tax Credits, if applicable
7.  Income Tax Return previously filed and proof of payment, if filing an amended return for the same year
8.  Account Information Form (AIF) or the Certificate of the independent CPA with Audited Financial Statements if the gross quarterly sales, earnings, receipts or output exceed P 150,000.00
9.  Proof of prior year’s excess tax credits, if applicable

 

Computation of Income Tax Due and Payable

The following are simple steps to calculate your income tax payable.

1. Compute your taxable Compensation Income (positive) or excess of Deductions over Taxable Compensation Income (negative). Here is how you will compute it.

a. Determine your Gross Taxable Compensation Income. This is the income you earn from your employer during the taxable year. If you are earning purely from your business or you are not employed, then you can leave it blank.
b. Determine your premium paid on Health and or Hospitalization, which should not exceed Php 2,400 per year. If none, then leave it blank. *
c. Determine your Personal and Additional Exemptions as follows:

Personal Exemptions:

For single individual or married individual judicially decreed as legally separated with no qualified dependents………………………………………P 50,000.00
For head of family……………………………P 50,000.00
For each married individual *…………P 50,000.00

Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.

Additional Exemptions:

* For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents

The additional exemption can be claimed by the following:
* The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife
* The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code.
* The individuals considered as Head of the Family supporting a qualified dependent

d. Add the amounts in (b) and (c), then deduct the total from the amount in (a) to arrive at your taxable Compensation Income (positive) or excess of Deductions over Taxable Compensation Income (negative).

2. Compute your gross taxable business or professional income. Here is how you will calculate it.

a. Determine your sales, receipts or revenues for the taxable year.
b. Determine your cost of sales or cost of services.
c. (a) minus (b) will simply give you your gross taxable or professional income.

3. Compute your total taxable business or professional income by simply adding result in (2) and your other taxable income.

4. Compute your Net Income. Your Net Income is equal to result in (3) minus your allowable deductions. Your allowable deductions can be either:

a) Optional Standard Deduction – an amount not exceeding 40% of the net sales for individuals and gross income for corporations; or

b) Itemized Deductions which include the following:

  • Expenses
  • Interest
  • Taxes
  • Losses
  • Bad Debts
  • Depreciation
  • Depletion of Oil and Gas Wells and Mines
  • Charitable Contributions and Other Contributions
  • Research and Development
  • Pension Trusts

Note: A taxpayer engaged in business or in the practice of profession shall choose either the optional or itemized deduction (described below). He shall indicate his choice by marking with “X” the appropriate box, otherwise, he shall be deemed to have chosen itemized deduction. The choice made in the return is irrevocable for the taxable year covered.

Reminder: There are expenses that have ceilings or limits as deductibles to your taxable income, such as interest expense, representation and entertainment expense, etc. To learn more, please read our article “Deductible Expenses (Allowable Deductions) in the Philippines”.

5. Compute you total taxable income by adding the result in #4 (Net Income) to the result in #1 (taxable Compensation Income or excess of Deductions over Taxable Compensation Income). If the result is negative or it becomes a loss, then you will not have a tax due for the taxable year, otherwise, continue to the next step.

6. Compute your Income Tax Due. This is also your income tax expense incurred during the taxable year. Calculate your tax due for the taxable year using the following tax rate table.

Income tax rates for self-employed taxpayers

Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal installments, the first installment to be paid at the time the return is filed and the second installment 15 of the same year at on or before July the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered.

7. Compute your Income Tax Payable. This is the tax you are still liable at the end of the year. To calculate your income tax payable, deduct your income tax due with the following tax credit/payments, if available.

-Prior Years’ Excess Credits
-Tax Payments for the First Three Quarters
-Creditable Tax Withheld for the First Three Quarters
-Creditable Tax Withheld Per BIR Form No. 2307 for the 4th Qtr.
-Tax Withheld Per BIR Form No. 2316
-Foreign Tax Credits
-Tax Paid in Return Previously Filed, if you have already file and this is your Amended Return
-Other Payments made

8. Compute your Total Payable. If unfortunately, you fail to pay your income tax on or before the due date, the following penalties will be imposed and will be added to your total amount payable.

1. A surcharge of twenty five percent (25%) for each of the following violations:
a) Failure to file any return and pay the amount of tax or installment due on or before the due dates;
b) Filing a return with a person or office other than those with whom it is required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return, or the full amount of tax due for which no return is required to be filed, on or before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of Assessment (Delinquency Surcharge).

2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the Code or by rules and regulations; or
b) In case a false or fraudulent return is willfully made.

3. Interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, on any unpaid amount of tax, from the date prescribed for the payment.

A simple illustration of computing total income tax payable is shown below:

Gross Income (Gross business income, compensation income and other income)
Less: Allowable Deductions (Itemized or Optional) (refer to # 4)
Equals: Net Income
Less: Personal & Additional Exemptions (see #1)
Equals: Net Taxable Income
Multiply by Tax Rate (5 to 32%) (refer to # 6)
Equals: Income Tax Due
Less: Tax credits & payments (refer to #7)
Equals: Income tax payable
Add: Penalties (Surcharge, interests & compromise) (refer to #8)
Equals: Total amount payable

 

Procedures for paying and filing

1.  Fill-up BIR Form 1701 in triplicate copies.

2.  If there is payment:
a. Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701, together with the required attachments and your payment.
b. In places where there are no AABs, proceed to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701, together with the required attachments and your payment.
c. Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer

3.  For “No Payment” including refundable/ creditable returns, returns with excess tax credit carry over, and returns qualified for second installment:
a. Proceed to the Revenue District Office where you are registered or to any established Tax Filing Centers established by the BIR and present the duly accomplished BIR Form 1701, together with the required attachments.
b. Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center representative.

 

Deadline

Final Adjustment Return or Annual Income Tax Return - On or before the 15th day of April of each year covering income for the preceding year

For more information, such as who are the individuals exempt from income tax and other tax related information, please visit this web page (Tax Info)  from the Bureau of Internal Revenue (BIR). Updates to this article will be provided when necessary.

Update 1 (April 28, 2011)
For professionals and freelancers, such as online entrepreneurs, bloggers, web designers, mixed income earners, etc., who keep on asking how to register with the BIR and pay their income taxes, we have published an article titled “How to Register with the BIR (for Professionals)” for your guide.

Update: The BIR issued Revenue Regulation No. 19-2011 on November 2011 requiring self-employed individual taxpayers to use the revised BIR Form 1701 for the income tax return covering and starting December 31, 2011 for filing on or before April 15, 2012. For more information about the instructions and guidelines on filing the said return, please refer to the last page of the new form provided in the link above (in the tax form you will use section).

Victorino Abrugar is a retired CPA practitioner, a blogger, speaker, and an entrepreneur. He's the CEO of Optixor, Inc., a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.

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107 Comments

  1. I have a question regarding TIN. I’m working as a full time freelancer and I already have TIN. However, I’m confuse on the next step to take. How do I get registered as a self-employed so that I can pay taxes? Hope you can help me with the step-by-step procedures.

    • Vic

      Hi Chris,

      Thanks for visiting. We have already published an article on how to register with the BIR (self-employed and or corporation) in this link: http://businesstips.ph/how-to-register-your-business-with-the-bir-philippines/ After you are done with the BIR registration, the Bureau will issue you a certificate of registration (BIR Form 2303). The taxes you will pay monthly, quarter and or annually will be stated in that certificate. You may visit the BIR in your Revenue District to personally inquire with regard to your registration.

      • roannefajardo

        good day sir vic!!

        I’m interested with your discussions here and you can probably help me answer my questions in mind!

        kindly help me!
        just wanna ask about PRIOR YEAR’S EXCESS TAX CREDIT. . . HOW BOUT IF IT WAS NEGATIVE VALUE?? DO I NEED TO INCLUDE THIS IN THE COMPUTATION OF 1701Q???

        I REALLY NEED YOUR HELP!!
        PLSSS

        THANKS AND GODBLESS

        ROANNE FAJARDO,
        ACCOUNTING STUDENT!!

        • Vic

          Hi Roanne,
          Prior Years’ Excess Credit is included in the computation of 1701Q, it is filled up in 40A/B of the BIR form 1701Q. However, you must assure that it is really a Prior Years’ Excess Credit i.e., an actual overpayment of income taxes from the prior years that are not yet credited. You can download form 1701Q here ftp://ftp.bir.gov.ph/webadmin1/pdf/27141701jul2008.pdf

  2. Beth

    Hi Sir,

    I am a VAT-registered Sole Proprietor.
    I recently sold some goods to a non-profit government agency.
    They told me that they are VAT exempt so the price i quoted them is without 12% VAT.
    The price I quoted is the amount I wrote on the Sales Invoice I issued them, is this correct?
    Somebody told me I should ask for some kind of BIR form (235???) from the customer.
    But I already issued the invoice with the amount I quoted (which I didn’t add VAT).

    I don’t understand what form I need from them and the accounting dept of the agency did not mention anything about it.

    What should I do? I don’t want to get in trouble with BIR because of this.
    Please help me. Thank you very much.

  3. Vic

    Hi Beth,

    Did the agency withhold part of their income payment to you? If yes, then you can ask them BIR Form 2307 – Certificate of Creditable Tax Withheld at Source. This certificate shows the VAT they withheld from you. You can ask that certificate and attached it to you VAT return to claim as creditable against your VAT payable for the taxable period.

  4. Clarisse

    Hi Vic, Thank you so much for taking the time out to do this!! This is extremely helpful!!! :)

    • Vic

      Hi Clarisse. Your welcome, and thank you for visiting.

  5. Cathy

    Hi. I’m a doctor and I started private practice almost a year ago. Practice has been slow to pick up and I’ve had to take numerous leaves from clinic because of health reasons. I’ve been paying my monthly and quarterly percentage taxes (2551M and 1701Q). My gross receipts from 2010 amount to less than Php 50,000 (which is the personal exemption I’m automatically entitled to, right?). Do I go to my BIR RDO to file my form 1701 because I have no payment to make OR can I not file at all since my monthly and quarterly returns reflect my income for last year anyway?

    • Vic

      Hi Cathy,
      Although you don’t have income tax payable for you annual income tax return for 2010, you still need to file your BIR Form 1701 with the BIR, and have it stamped received by the revenue officer in your RDO. Take note that if there is a penalty for non-payment of income tax, there is also a penalty (compromise) for non-filing of income tax return. Also, you should be ready to justify your small income reported. They might ask you where are you getting the money you use for your living expenses. Thanks.

  6. Cathy

    Thanks very much!

  7. Julie

    hello sir,
    i just took over making bir reports but the previous person filing the report filed 1701Q with no basis at all, putting figures that are not true to avoid payments. the problem now is that i cannot consolidate (if needed) 2551M with that of the 1701Q. and my boss wanted me to file closure of this particular company since it was put up for school requirement of her son in school and has graduated and is not interested in running/continuing the business, but i am having problems and hesitations with regards to this bir records…
    what is the best thing to do, since april 15 is fast approaching…
    i really felt relieve that you’re answering questions instantly…i really do hope and pray that u cud really help me…i don’t want to be liable with this kind of activity/practice.

    thanks in advance…will be waiting for your reply…

    • Vic

      Hi Julie,
      You need to reconcile your revenue reported in income tax returns and those reported in 2551M. If necessary, you can amend the 2551M previously filed with the BIR to tally with your income tax returns, or amend the quarterly income tax returns to tally with the 2551M, whichever is correct and needed to be amended. In amending returns, you should attached the original returns filed. You also need to pay interest, depending on what penalties the BIR in your district will imposed. You should pay your annual income tax before the due date, to avoid further penalties.

  8. Michael

    Hi I’m a taxi operator. I paid percentage tax as common carrier by land. 3% of my Gross receipts every month. My Gross Receipts for the year 2010 exceeds 1.5M threshold is this mean i am automatically subject to VAT and start filing VAT return and not Percentage return. And in addition to that because i filed and pay percentage tax, I am Non VAT entity right? Can i compel my suppliers not to charge VAT on my purchases? If yes, what documents I needed? Thanks.

    • Vic

      Hi Michael,
      a.Taxi for hire for the transport of passengers are VAT exempt services subject to percentage tax under Title V of the NIRC, as amended.
      b. VAT is a tax that can be passed on to buyers, whether they are VAT registered or non-VAT registered persons. When we eat in VAT registered restaurants, we cannot compel the company to not charge us VAT. Anyway, you may charge the extra price to your expenses, instead of as an input tax since you’re nonVAT.
      For further clarification, please inquire with your local BIR.
      Thanks.

  9. Dan

    hi! good pm. Am i to understand that using the 40% OSD would not affect the filing and reporting of the other BIR returns such VAT and withholding tax?

    • Vic

      Hi Dan,
      It may not, as long as your revenues and purchases are tallied with the amounts you reported in your VAT returns for output and inputs. The only difference is on the deductions claimed. It will not affect other returns, as long as those returns are correctly declared.

  10. Good morning. I’m really having a hard time. I have been employed by Dep Ed since 2005. Last year, I was able to get a part time job as a contractor in a tutorial company, I am not an employee. According to the company, they need to withhold 2% of my income as a contractor. My income is not consistent every month because it depends on the reservation of students not the number of hours I offer to serve. There were some hours I had no students. The higher the number of students I teach, the higher my income. Sometimes, I could earn more than 10k. When I filed my ITR yesterday, I learned that I have a payment to made. According to BIR, I have now a mixed income. They added my income from the employee and my income as a contractor, after all the deductions, they calculated my tax due under the 5%-32% rule. I referred to my company’s explanation on this. As a contractor, I am not subject to the 5%-32% since I am not an employee. I am really confused. Hope you understand my case. I really need help. Thank you.

    • Vic

      Hi Sundy,
      5%-32% (graduated tax rate) is imposed on individual taxpayers, whether they are pure employee, self-employed or earning mixed income. In your case, you are earning mixed income: from compensation and from the practice of your profession. Thus, you need to file BIR form 1701, as a taxpayer earning mixed income. You can ask from your part-time company the BIR form 2307 ( the certificate of withholding tax made by the company). Then you can use that as an attachment to your income tax return as credit against your tax payable. You also ask for the BIR form 2316 from your employer for withholding tax from your salary. Hence, BIR form 2307 and 2306 will be your attachments in your ITR, and they will serve as the creditable tax payments you can deduct to your income tax payable for the taxable year. Also, you can claim your allowable expenses directly related to your practice of profession as deductions to your total taxable income “related to practice of profession”. This is the difference: taxpayers who earn pure compensation income cannot deduct their expenses relative to employment, while self-employed taxpayers can deduct their expenses directly related to their business or to their practice of profession to their income from business or practice of profession. For more clarifications, please inquire personally with your RDO.

  11. drey

    Good Day Sir Vic!

    Can i get your email address? because i have a lot of question about paying taxes in a Single Proprietorship Business.

    Thank You.

    • Vic

      HI Drey,
      You can post your questions in this page as comments. So that it can also be read by our other readers who may also have the same questions with yours for the benefit of all. But if you have some personal matters, you may reach me at my FB account and message there. You can check my social media profiles in my About page. However, since I’m also at the office working for the audit and tax season, I may not entertain messages in my FB until the end of tax seasons. Thanks.

      • drey

        Scenario:
        My gross income is about P1,000,000.00 then my net is P500,000.00.

        Question:
        1) How much tax i will pay ? (Single Proprietorship)
        2) How you will compute taxes is it in the gross or in the net income and how many %?
        3) is there any exemption?

        Thanks!!

        • Vic

          Hi,

          1. Graduated tax table is provided in the article.
          2. It should be based on your net taxable income less your personal and additional exemption. (please refer to the article).

          … It would be difficult to compute your exact income tax payable if based only on your given data. There are still many things to consider, such as the allowable exemptions and deductions. I cannot give an answer that will not be based on exact and complete data. Thanks.

  12. Thank you Sir Vic for this explanation.It’s my first time to file ITR as an earner of a mixed income so I was so confused. I am glad to have bumped into your site. Keep it up! :)

  13. joy

    hi Sir Vic,

    I am a single proprietor using a trade name. Do single proprietors/self employed need to submit CPA certified FS? If yes, is there a required format? just like pfrs for corporations etc? My gross revenue for the year is 3.7M, net income is 301k.

    Also, my other customers did not gave me the 2307 form when they witheld professional taxes. Once i get the forms,can i still use it for the next year? if not, what is the effect on my books cause i did not receive the full amount of receivable and was not able to deduct it in my tax due? Thanks

    • Vic

      Hi Joy,
      Yes, you need to submit audited FS if your GROSS QUARTERLY REVENUE sales, earnings, receipts or output exceed P 150,000.00. It would be PFRS or PFRS for SMEs, your CPA auditor should know it.

      With regard to the 2307, I’m not sure if you can still deduct it or if there is an expiration stated in the form. With this matter, please inquire personally with the BIR. Thank you. It is the obligation of your customer who withhold you to give you the 2307.

      • hyaeth

        Hi Vic,

        Do we need to submit CPA certified Financial Statements every quarter if quarterly revenue exceeds P 150,000.00 or we only submit it one time during Annual ITR filing? For CPA certified Financial Statements, is it only a balance sheet and income statement? Thanks!

  14. hi sir,

    i started my food cart business last Oct 2009.it was a franchised business. The company arranged the BIR papers from corporation to single proprietorship. i only received my BIR documents like app. for registration, COR, etc. last August 2010. meaning to say that my business was only registered last August. Since then, i was the one filing 1601-E (withholding tax) and 2551M (percentage tax). Should i file 1701Q form also in 4th qtr of 2010? and quarterly of every year? how can i compute my annual income tax? please help… thanks..

    • Vic

      Hi Emy,
      There is no quarterly income tax file for the 4th quarter. There is only 1st, 2nd and 3rd. What you will file in the 4th is the annual income tax return which is due this April 15. Guidelines in computation of Income tax is provided in the article. Thank you.

  15. Jacky

    Hi Sir,

    I would like to inquire how tax amount due will be computed in the case that an individual has 2 successive employers within the year and the tax rate is different for the two employers–first employer withheld tax based on the regular tax rate and the second employer is a Regional Headquarters of a multinational IT company, with a preferential tax rate of 15% (tax amount is computed simply as 15% of the gross income less SSS/Philhealth/Pag-ibig contributions).

  16. Vic

    Hi jacky,
    You may compute your income tax based on the normal graduated tax, then you can get certificates BIR form 2316 or “2306” from your two employers. You can attached those in your income tax return. Your income subject to final tax may not be included in the computation of your income tax due, but should be reflected in the ITR as income subject to final tax.

    (Update)
    BTW, your other income from Regional Headquarters of a multinational IT company is maybe subjected to final tax, hence instead of BIR form 2316, you ask for BIR form 2306 (certificate of final tax withheld at source). I’m not sure if that income will still be included in the computation of your total taxable income using the normal rate. But the resources in the BIR website imply that income subject to final tax is not already subject to normal tax, and should be excluded for purposes of income tax computation in the annual ITR. It would be better if you will ask personally with the BIR in your area. Thanks.

  17. Vic

    For all commenters, please make an effort first to read the article and answers to previous comments, before you make a questions. Today is the deadline of Income tax return. I may not have time to entertain questions today, because I’m on OT work for the tax and audit season. Thank you for joining our discussion. I hope you all have successfully filed your income tax return on time!

  18. Winder

    Hi Sir Vic. Im a mixed income earner, I work at American Power Conversion and I also have my own business, a computer shop business. I filed my ITR last wednesday but im not sure if it is correct. My taxable compensation income, this is after allowed deduction is 537,924.16. My business income: Revenue 32,777 Direct Cost(depreciation and rental) 233,240 making Gross loss of (200,963) itemized deduction 149,527.38 (it said to ITR row 97 Total allowable expense not to exceed Gross Income). What I did is i made my allowable expense same as my Gross loss giving me Net loss of (401,926).Then I consolidated this to my Taxable compensation income arriving at Total taxable income for 135,998.16. And using the table, tax due is 21,699.63 less tax withhheld on my compensation 137,135.73 = Total overpayment for (115,436.10). Is my computation is correct? Do I need to amend my ITR and reflect in my business net income is zero?

    I know you are busy right now sir vic, you can answer my queries if you have free time. Thanks and may God Bless you.

    • Vic

      Hi, have you attached financial statements? BTW, how come you have a big cost of services compare to your service income? Have you properly matched your cost of services to your service income?

    • Vic

      Hi based on your given data, please consider the following computation:

      28 Taxable Compensation Income = 537,924.16
      29 Sales/Receipts/Revenues/Fees = 32,777
      30 Less: Cost of Sales/Services = 233,240
      31 Gross Taxable Business/Profession Income = (200,463)
      32 Add: Other Taxable Income = 0
      33 Total = (200,463)
      34 Less: Allowable Deductions = (200,463)
      35 Net Income = 0
      36 Less: Excess of Deduction over Taxable Compensation Income = 0
      37 Taxable Business Income = 0
      38 Total Taxable Income = 537,924.16
      39 Tax Due = 137,135.73

      If you less that to your tax withheld on compensation, which amounts to 137,135.73, your income tax payable is ZERO.

      “”row 97 Total allowable expense not to exceed Gross Income”” means, you should not have a negative taxable business income, which also means your lowest possible taxable business income would be ZERO. I use (200,463) as allowable deductions instead of ZERO because ZERO is greater than the negative (200,463).

      Please take note that you cannot reduce your taxable compensation income with your business expenses for income tax computation purposes. Since, you have no taxable business income, and your compensation income is correctly withheld, your income tax payable is zero.

      This is only according to my own computation and based on my analysis of the BIR form 1701. For more clarification and assurance on the computation of your income tax, please inquire with a BIR officer in your local area. Thanks.

  19. neng

    hi sir, it is my first time to be a freelancer and my first time to file an itr of a single proprietor. i have’nt finished checking the books of my client so i felt the need to file a tentative fs today. is ok to file tentative? will we be charged of any penalty? was there any given time for tentative filers to make their fs final? thank u so much. glad ur always ready to answer questions. god bless.

    • Vic

      Hi Neng,
      There are taxpayers who file tentative. But the BIR encourages to file final ITR. Yes you may be charged by penalties on the time you amend your previous ITR. I’m sure amended returns will be charged for interest, but I’m not sure if there is surcharge on that: it can be different in other BIR districts. You may inquire with the BIR in your local area.
      BTW, taxpayers have the right to amend their previously filed return, unless the BIR has already send you a LA (Letter of Authority) for audit.

      • neng

        thank u so much sir vic, ur such a big help. one more question po, is filing of first quarter itr of a sole proprietor is the same as that of the filing of the annual itr?

  20. rme

    I’m working as a Data Entry Assistant (Homebased) and and have a TIN number. How can I register as a self employed to pay taxes?

  21. Winder

    Yes sir vic, I attached Balance sheet and Income statement only.

  22. Richmond

    Hi Vic,

    I am a start-up taxi operator. I was requried by BIR to pay common carriers tax of 3% through BIR form 2551m on a monthly basis. I have been filing my 2551m since Feb (commencement of business). However, I am actually confused on how I should treat this entry on my books and in filing my 1701 for 2011.

    Should I treat this entry on the 1701 as ‘taxes and licenses’ under Schedule 7 (Schedule of Itemize Deductions)? or can it be deducted from the total tax due as ‘Tax Payments for First Three Quarters’ under item 40?

    Also, will I be required by BIR to submit a detailed copy of my books of account (including general journal, ledger, trial balance, etc) upon filing 1701? Or will the P&L and Balance Sheet be able to satisfy the ‘attachments’ requirement of BIR form 1701?

    Thanks in advance!

    Cheers,
    Richmond

    • Vic

      Hi Richmond,

      Thanks for your visit. With regard to your questions:

      1. Yes your percentage taxes can be claimed as expenses deductible to your income as “taxes and licenses” in schedule of itemized deductions. It is deducted as expenses and not used as tax credits against your income tax due. Tax Payments for First Three Quarters only include the actual quarterly income taxes you have paid for the 1st to 3rd quarters.

      2. Books of accounts are not submitted to the BIR when filing your 1701. Please read the last page or the back of your Form 1701, it is stated there the attachments required in filing 1701. The BIR may only require to check your books upon audit (with Letter of Authority), tax mapping, or perhaps upon registering your new books of accounts for the new taxable year.

      • Richmond

        Many thanks for your help Sir Vic. Really appreciate it a lot.

        More power to you and your site!

        Cheers,
        Richmond

  23. Winder

    Many thanks sir vic for your explanation. I depreciated my computer equipment in 3 years plus my rental thats why I have big cost of services. I will amend my ITR. Thanks again I really appreciated it. God bless you.

    • Vic

      Thanks and welcome Winder.

      • hyaeth

        Hi Vic,

        How can I estimate the useful life of my medical equipment? Is it okay if I just estimate it on my own and deduct depreciation expense annually? Is there any BIR ruling about depreciation expense? Thanks a lot!

  24. NICOLE

    Hi. I worked as a company employee until 2007. I have a tin number and paid taxes while still an employee. From 2007 until now, I have been jobless. However, this May 2011, I’ll be working as a tutor. I will go to the students’ houses and offer my services. How can I change my status from employed to self-employed? I don’t have any business or office and I only offer service. What should I do? Thank you

  25. Vic

    Hello Nicole,
    You should register as a self-employed taxpayer. Please read our article titled “Tax Guide in the Philippines in this link http://businesstips.ph/tax-guide-philippines/ . I believe this will help you. You will find links and resources there, such as registration with the BIR and Tax guide for professionals.

  26. Khel

    Hi Sir Vic. I learned that deminimis benefit is non taxable. Are this benefits provided by the BIR need to be supported by valid documents(OR, Incoice)? Many thanks.

    • Vic

      Hi Khel,
      The BIR has recently issued Revenue Regulations (RR) 5-2011 giving effect the new and amended list of “de minimis” benefit, which are exempt from income tax and withholding of income tax from compensation. Follow this link to read ftp://ftp.bir.gov.ph/webadmin1/pdf/56846RR%205-2011.pdf . Yes the tax code imposes “substantiation requirements” to taxpayers for accounts reflected in their books and reports filed with the BIR.

      • khel

        If the deminis benefit is included in the employment contract of an employee are this still need to be substantiated? Example Basic Pay 12,000 Deminis benefit: Rice subsidy 1500, Laundry Allow 300 and etc.?

        • Vic

          Hi,
          You just need to preserve the supporting documents showing those transactions (payslip, vouchers, etc.,). It’s a standard not only for tax purposes, but also for accounting and internal control purposes. I think the BIR requires 3 years in the preservation of your books of accounts and records. You just need to preserve those documents (no need to file and submit), unless an audit is conducted (either it’s an audit by the BIR or by your external auditor).

      • hyaeth

        Hi Vic,
        I’m a professional. I have minor expenses that doesn’t have OR or vouchers. Does it mean that I can’t include them in my deductible expenses? Are petty cash vouchers substantial enough for minor expenses? Thanks! I have a lot of questions already here.

        • Vic

          For small expenses where OR or invoices are impossible, such as fare and other small expenses, petty cash vouchers can substantiate, but it must be duly signed by people who received the cash payments. They should also reflect reasonable amounts.

  27. May

    Hi sir Vic!

    In Jan-Jul 2010, I have worked for a company based in Pasay but they did not transfer my RDO Code (It was RDO 050, Makati the whole time I was employed there). Then Aug 2010, I transferred to a Makati company and since my current RDO is 050, there was no need for me to transfer. My question is: What happens to the taxes withheld from me by Pasay company when I am registered then to a different RDO code? I am filing a late ITR (Pasay company did not give me my 2316 until now). Should I still include the income I got from Pasay branch when I’m filing mg ITR to RDO 050?

  28. Vic

    Hello May,
    1. You should include all your compensation income during the taxable year in your ITR.
    2. You ask again the BIR form 2316 (certificate showing the amounts of taxes withheld from your wages) from your employer, and tell them that it “must be issued to you on or before January 31 of the succeeding year in which the compensation was paid, or in cases where there is termination of employment, it is issued on the same day the last payment of wages is made.”
    3. If they can provide you the 2316, then attach that to your ITR.
    4. If they don’t, you tell them that they can be penalized for failure to issue the 2316 to you on due time.

    This is assuming that your employer has actually withheld taxes from your compensation, and they have filed and remitted them to the BIR.

  29. Che

    Sir can you help me make comparative financial statements (preferably with notes ^_^ )of trading and construction business engaged in both private and government projects? I don’t know how to solve for its income tax expense related in making its income statement…Am I going to deduct the taxes payable in the income statement for the tax incurred for those government projects? Is it 7%? Please help… thank you..

    • Vic

      Hi, did the government agencies withhold income taxes from you? If yes, then ask them Certificate of creditable withholding taxes (BIR 2307). These certificates are to be attached in your income tax returns so that you can claim them as creditable (deductible) to your income tax due. Please clarify and specify your other questions. Thanks.

  30. Michael

    Hi Sir Vic, Is a representative office of foreign corporation needs to file audited FS? A representative office is a non resident foreign corporation not engaged in any income generating business in the philippines. Right? And they are exempt from filing the corporate income tax. How are the financial statements of a representative office prepared? Are they the same to an ordinary corp? Can you please give me a sample. Many thanks in advance.

    • Vic

      Hi,
      BIR form 1702 (annual corporate ITR) is filed annually by every corporation, partnership, joint stock companies, joint accounts, associations (EXCEPT foreign corporation not engaged in trade or business in the Philippines. HOWEVER, foreign corporation may be subjected to final withholding tax on their income from Philippine sources (e.g., interest income, rental, etc.,). For more clarifications, please visit and inquire the RDO in your jurisdiction. Your FS may be prepared in accordance to the accounting policies adopted by your mother corporation. Please inquire with your main/parent corporation. Thanks.

  31. Michael

    Sir vic is that mean that a representative office being exempt from filing 1702 does not need an Audited FS? Thanks

    • Vic

      Audited FS is an attachment to ITR, so if ITR is not required, attachment is not required, for ITR purposes. We cannot generally say that your office does not need an audited FS. Of course there are other parties (management, parent company, government audit [BIR, SEC, etc.]) that may need it as the requirement arises. Please inquire at your local RDO for more clarification.

  32. ayette

    hi,
    im working on a company and just started single proprietorship business which is on Events Management. Below are my question?
    1. Are services with VAT?
    2. If i will be utilizing the service of part-timers on a per project basis and per commision, the salary or commission I will give them are they considered Company Expenses? How will I reflect this on my books?
    Thanks in advance.

  33. Joseph

    Dear Sir Vic,

    I am in a new business(telecom Contractor) venture and studying and considering all areas of income tax return payments. My question is, are the salaries of my employees can be deducted from my Gross Income in computing my income tax return. It would be more appreciated if you could state other deductions which I may use in computing my income tax return…God Bless!

    • Vic

      Hi Joseph,
      The salaries and wages expense you’ve incurred relative to the operation of your business is an allowable deduction. But you should also take note that you may be required to withhold tax on the compensation of your employees and file BIR form 1601C/1604C. For your guidance please check this article we have published, it includes links to articles that may help you in understanding your taxes. http://businesstips.ph/tax-guide-philippines/

  34. Michael

    Hi Sir Vic, we have client which is a representative office in the philippines where the parent company is located in Singapore. During month end(closing of books) they restate (revalue) their foreign currency in rate given by the parent company by recording the fluctuation in rate in Realized Forex Gain (Loss). I told them that this is wrong. Restatement of foreign currency should be recorded to unrealized forex gain(loss) and they should only record realized forex gain (loss) if there are actual transaction occured. Can you give some link (international standards) to support my explanation to them because they dont agree with me. Many thanks in advance.

  35. Nina

    Hi. I have been engaged by a company as a project manager/IT consultant for 1 year. They deduct 2% from my monthly compensation and give me form 2307 monthly. Total contract fee for the consultancy service is less than 1MM. What are the BIR forms I need to file? Is it sufficient to just file the annual income tax by next year or are there other forms I need to submit?

  36. Karen

    Hi Vic,

    Sir, if it is possible to post or wrote some guidelines on how to use the Ledger & Journal i’m so confuse on what to write on those two ledgers~ i’m operating in Internet Cafe. please do help…

    • Vic

      @ Karen
      I will write those articles in the future, but I still need to start at the basics. Thanks.

      • hyaeth

        Hi Vic,

        I will also be waiting for this article from you. I haven’t written anything in my Books of Accounts yet since March.

  37. Romel

    Hi Sir Vic!

    I am not sure if i am properly taxed by my employer. My basic monthly salary is 40,000. Tax status: ME. no dependent as of now.
    Please teach me the formula on how to get my tax withheld.

    Hope to hear from you.

    Thank you.

    Romel

  38. triyabhui

    Hi Sir Vic,

    Just wanna ask the difference between BIR forms 1700 and 1701? I am a consultant who work for american couple planning to establish business in the Phils, which BIR forms is more applicable in my kind of work? i know that i’m already delay with the payment and filing of ITR.

    Warm Regards,

    Triya

  39. edwin salonga

    good pm.. were planning to franchise a business , but were still thinking what is the best way to minimize paying tax between a single proprietor and a corporation.

    • Vic

      We can’t really tell which is more beneficial. It depends upon your business, sales, expenses, profit and other factors. Also, some other franchise business requires a corporation franchisee (check the business you are franchising). You also need to consider not only the tax consequences and advantages in forming a corporation. Please read this article… http://businesstips.ph/advantages-and-disadvantages-of-forming-a-corporation/

  40. James

    Good day Sir,

    I am an architect as well as my friends. We are all working as freelancers and planning to rent an office space where we can work on the projects as a team since communication by email alone is very difficult. By the way I can’t say how much our income would be per month since number of projects varies and sometimes there are no projects at all. My 1st question is do we still have to apply for a business permit or DTI permit. Secondly, Can we register as self-employed instead of a company and pay our tax separately? Lastly, How much is the exemption if we’re paying individual tax?

    • Sir James, it appears that you will engage in Architectural profession. As a rule, practice of profession no longer needs a DTI registration because by theory it is not a trade or a business. I suppose this applies also to Mayor’s Permit, or if required, I surmise that the fee should be minimal and the requirements should be simple in line with the said theory.

  41. jo

    Good Day Sir!
    I am a software programmer and moved to another IT company last September 2010. During Filling of Income Tax this year, my current company just provided me the computation and I am the one who personally filed them on BIR but now they are telling me that after they have finalize their 2010 annulization this month, I resulted to tax deficiency. They told me that my 2010 annualization resulted to monthly tax due greater than 32% and that they were not allowed to deduct amount more than the maximum rate.
    Can you please enlighten me on this process? Thank you in advance.

    • Vic

      Hi. What causes your tax deficiency? Did they withhold tax on your income in 2010? Did you claim creditable withholding tax on your 2010 filing of income tax? I can’t figure out your question? :) thanks.

  42. Hi Sir Vic, our group ministry are planning to start a business soon and they suggest that its easier to get a sole proprietorship, since I am the group leader they said it’s okay to put our business in my name but just a representation protocol…they’ve come up with this idea because of some restriction in our ministries regarding partnership and corporation that are not allowed for private reasons…although I agree to their suggestion but i still need an expert of this area for clarification…what are the advantages and dis-advantages? kindly explain please….

    thanks in advance

    Marl

  43. jusie

    Hi Jo,

    Your enlightened already,

    Regards,

    Jusie

  44. Dan

    Sir Vic,

    Good day! Scenario: we were withheld by 5,000 for payment of rental CWT 2307 dated 01-01-2011 to 01-31-2011, We can use as tax credit until when?

    Thank you very much

    • Vic

      @ Dan
      The withheld income tax is an income tax to be matched on its income base. Meaning, it should be claimed on the period, quarter or year where the income base is reported. Please confirm this to your BIR RDO for more clarifications.

      • To add some point, if during the period the tax due is less than the total 2307 claimable on that period based on matching, then, the excess tax credits could still be carried over until such time they are consumed. As a rule, carry-over of excess withholding tax credits does not prescribe.

        • Vic

          Thanks Ghar. That’s right… as a carry over excess withholding tax credit, it does not prescribe until fully consumed. Take note that as a carry over excess, it should mean it is claimed in the previous periods or quarters.

          To make sure that 2307 are attached on the corresponding periods, payees must compel and secure them from their issuers. The following are the deadlines of issuing 2307 (payees can ask 2307 on or before the following dates):

          For EWT – To be issued to payee on or before the 20th day of the month following the close of the taxable quarter. Upon request of the payee, however, the payor must furnish such statement to the payee simultaneously with the income payment.

          For Percentage Tax On Government Money Payments – To be issued to the payee on or before the 10th day of the month following the month in which withholding was made. Upon request of the payee, however, the payor must furnish such statement to the payee simultaneously with the income payment.

          For VAT Withholding – To be issued to the payee on or before the 10th day of the month following the month in which withholding was made. Upon request of the payee, however, the payor must furnish such statement to the payee simultaneously with the income payment.

  45. Joshua

    Hi VIc,

    Please give me advise on how to compute Fringe Benefit Tax?

    Thanks a lot,

    Joshua

    • FBT computations are quite complicated as it may depend on the nature of the benefit provided (say, a car, a house, a grocery, a loan, etc) as they have varying applications. However in general, you may use the formula: value of the benefit provided divided by 68% times 32%. If say you were given cash of P680,000 to buy a car under your name, then, the entire amount is the value of the benefit so the FBT is P680,000 divided by 68% times 32% or P320,000.

  46. hyaeth

    Hi Vic,

    I keep on coming back to your website because your answers are prompt and precise.

    I am a doctor and registered as a professional. I work in a clinic that I share with two other doctors. The clinic is under the name of one of the other doctors but we divide the expenses by 3. I don’t file 1601-E for rent since it’s done by the other doctor but we share the payment of the rent. Can I deduct the rent from my income? Will I be questioned by BIR if I have rent expense in my Books of Accounts but I don’t file 1601-E? It’s the same set up with the salary of our secretary but I don’t file the 1601-C.

    Thanks a lot!

    • Vic

      If you claim rent expense, without filing 1601-E, the BIR will question you. I can’t comment further with this to give professional advice, since the BIR should be the one to rule out on that kind of scenario. Thanks.

      • Can I join her, Vic & Hyaeth. It appears that you have a substantiation issue here and presupposes that you are on itemized deduction. Under the scenario, you will really have that issue. If I may suggest, you may please consider 40% Optional Standard Deduction (OSD) in lieu of the itemized deductions. Under OSD, a flat rate of 40% of your gross receipts as doctor will be deductible even without the substantiation or even without the actual expense. However, you have to opt for OSD on the very first quarter of the taxable year so this may only apply to you starting next year and every year thereafter.

        • hyaeth

          Thanks Ghar and Vic. I am registered as a professional starting March 14, 2011.

          01 I haven’t filed any ITR yet so does it mean that I can still use OSD?
          02 If I choose OSD this taxable year, can I still change it to Itemized next taxable year?
          03 As of now, I have a negative net income, which deduction do you recommend?
          04 If I choose OSD, do I still have to record all of my expenses in my Books of Accounts?

          Thank you so much. I really have a vague idea about all of this.

          • Please see reply beside your clarification.
            01 I haven’t filed any ITR yet so does it mean that I can still use OSD? Yes, you can still opt for OSD.
            02 If I choose OSD this taxable year, can I still change it to Itemized next taxable year? Yes, because it is irrevocable only for the year of option.
            03 As of now, I have a negative net income, which deduction do you recommend? You situation is a trade-off between substantiation and taxability. At OSD you may have a tax liability but at least you are safe on substantiation, because even if you have no taxable income under itemized deduction, you cannot do away with the risk that comes assessment time your claimed itemized expenses will be disallowed and will still create tax liability plus penalties. Please quantify risk under itemized deduction and tax liability under OSD.
            04 If I choose OSD, do I still have to record all of my expenses in my Books of Accounts? Under OSD you are no longer required for audited financial statements as an attachment to the ITR except that you will still have to maintain your books. You will record expenses still for future reference on the operational performance or for future use such as when circumstances arise requiring audited financial statements for purposes other than BIR, say loan application.

            Thank you so much. I really have a vague idea about all of this. – We advocate on educating entrepreneurs through seminars on BIR compliance on schedules or special arrangements and we would be happy to help you.

  47. hyaeth

    Thanks a lot Ghar! This is very informational. Where can we get seminars on BIR compliance? My sister is an accounting graduate but not doing the practice but she is currently a technical support of US QuickBooks and she is very good at it. I will recommend her to get a seminar so she can do bookkeeping services since she has a lot of QuickBooks software of all versions.

  48. You may click at my name to get to our schedules. Yes, it might be a good combination so she may integrate BIR compliance in the system.

  49. Vic

    Thanks to all who have participated in this topic and discussion. Since the comments have already reached more than 100 comments, we are already closing comments on this post to avoid the article to load and be read very slow. For you further questions, please join our Business Forum and post your questions in the right thread. We have especially created this online business forum for Filipino Entrepreneurs and business owners: BusinessForum.ph http://www.businessforum.ph/register.php