With the world becoming increasingly digital, people and businesses daily engage in various virtual activities, including compliance practices. For instance, big and small businesses are legally responsible for filing income tax returns annually. Here, filing taxes online is convenient.
However, many don’t know what to do to stay compliant. In fact, 49 of 102 surveyed companies in the Philippines described the tax system as somewhat complicated.
If you own a business, it’s only fitting that you know the ropes to avoid penalties and issues. This infographic can help you learn about income tax returns and how to file them.
What is an Income Tax Return?
According to the Bureau of Internal Revenue, an income tax is a tax on your salary or income, profits from property, emoluments, professional practice or business, and other gross income sources that correspond to an income tax rate. Meanwhile, a tax return is a cashback of the extra taxes you paid during a specific tax year.
Whether you’re a working individual or a business, you must file an income tax return (ITR) annually for earning revenue during the year.
As a Filipino citizen, you must pay taxes on your income, regardless of its source. As for aliens or foreigners, only income derived from sources inside the Philippines is taxed. The following types of income are tax deductible:
- compensation from any employer-employee relationship, including commissions, fringe benefits, and taxable bonuses;
- revenue from professional practice, trade, sale of assets, rental activities, and business; and
- passive income from these sources: interest from Philippine or foreign currency bank accounts, royalties, prizes (like the lottery), dividends, sales of rental property, shares of stocks and an informer’s reward.
Who Is Required to File an ITR?
Citizens or foreigners residing in the Philippines and receiving income inside or outside the country must file an ITR. Companies usually file their employees’ ITRs, while freelancers and business owners do it themselves. In 2021, there were about 26.8 million individual 26.8 million individual taxpayers.
The list below shows individuals and non-individuals who are required to file their ITRs.
- Resident citizens who receive money from domestic or international sources –this includes those who have single or several employers within the tax period, are self-employed and professionals with mixed-income and are earning from non-business and non-professional income;
- Non-resident citizens who earn money from Philippine-based sources; and
- Resident or non-resident foreign nationals who receive income from the Philippines.
- Corporations and partnerships, regardless of their structure or formation;
- Domestic businesses that receive money from both domestic and international sources;
- Foreign companies that earn income in the Philippines; and
- Estates and trusts that are in business or trade.
Who Is Exempted from Filing an Income Tax Return?
Although most earning individuals must observe income tax filing in the Philippines, exemptions apply to the following:
- a person earning minimum wage;
- a person whose gross income is not greater than the exemptions for personal and other items;
- a person whose annual income from a single employer is below ₱ 60,000 from which the income tax has been correctly withheld;
- a person who had final withholding tax applied to their income;
- a person eligible for substituted filing;
- an overseas Filipino worker (OFW);
- a non-resident Filipino citizen who is not staying in the Philippines but disclosed to the BIR that they would remain abroad;
- a non-resident Filipino citizen who leaves the Philippines during the tax year to live overseas for permanent employment or as an immigrant;
- a non-resident Filipino citizen who works and is paid abroad; and
- a Filipino citizen who was previously a non-resident citizen.
Which BIR Form Do I Use for My Income Tax Preparation?
You can identify the different BIR forms by their number. The correct BIR form number depends on your earning status or business type.
- BIR Form 1700 is for reporting earnings solely from compensation, non-business income or professional income.
- BIR Form 1701A is for reporting income from your business or profession. This form also applies if you avail of the 8% fixed income tax rate.
- BIR Form 1701 is for reporting earnings as self-employed.
- BIR Form 1701Q is for reporting quarterly income.
- BIR Form 1702-EX is for corporations, partnerships, and other non-individuals exempted under the Tax Code and other special laws and have no other taxable income.
- BIR Form 1702Q is for reporting quarterly income.
- BIR Form 1702-MX is for reporting mixed-income, which is subject to varying tax rates. This form also reports earnings that are eligible for a special rate.
- BIR Form 1702-RT is for reporting income subject to a regular or fixed tax rate.
How to File Your Income Tax Return
Once you’ve identified which forms to use for your ITR, you can file them in person, via online filing, or by using online BIR forms. However, the BIR can reject your application if you are identified as a bogus taxpayer, if you’ve provided mismatched information with the BIR’s database or if the Head of Office doesn’t authorize your application.
In-person filing and payments
In-person or manual tax filing requires you to visit the Revenue District Office (RDO) or Tax Filing Center with your accomplished BIR form and other necessary documents for filing your ITR. Then, you must proceed to the right RDO, which has your records.
To pay your taxes, you will need to settle them with an accredited bank of the RDO. After the BIR approves your application, you will receive a copy of the legally validated and stamped BIR form as proof that your income tax return has been filed.
Online filing and payments
If manual tax filing is too tedious or inconvenient, you can do it online. The electronic filing and payment system (eFPS) allows you to transact through the BIR website once you sign up and enroll.
Like manual filing, you will need to submit an accomplished BIR form. Once you get approval, you will also get a copy of the BIR form with the legal validation and stamp.
The eFPS is for BIR duly notified large taxpayers, the top 20,000 private corporations, and the top 5,000 individual taxpayers. The following are also required to use this method of tax filing:
- taxpayers who plan to work with government offices;
- corporations with ₱10 million in paid-up capital stock;
- organizations within special economic zones and listed with the Philippine Economic Zone Authority (PEZA); and
- government offices.
Online BIR Forms
Another way to conveniently accomplish your ITR is through the electronic BIR Forms or eBIRForms. The BIR created these to give non-eFPS taxpayers and accredited tax agents (ATAs) the option to file their taxes online. To digitally process your taxes, you must go to the BIR website and click eServices. It will lead you to the eBIRForms Package.
Although this tax preparation software doesn’t compute your income tax due, you may still install and download it on your computer to fill out your tax forms. Once you’ve entered your details, it will allow you to submit your accomplished papers to the Online eBIRForms system.
If approved, the BIR will email you a confirmation receipt. However, you still need to visit an authorized agent bank (AAB) of your RDO to settle your tax dues.
When is Your Income Tax Due?
Whether you are manually filing or doing it online, the deadline for submitting your income tax return is every April 15. Late filing counts as a penalty, requiring you to pay a fine of an additional 25% of the balance owed and a 20% interest charged yearly from the payment’s due date.
Get Your Taxes in Order
Many processes and practices are necessary when you’re running a business. Whether a small or big entity, it’s crucial to stay compliant by filing an income tax return.
If you want your tax filing to be stress-free or need any assistance with tax accounting, online bookkeeping, and accounting firm services, check out CloudCfo.
As one of the cloud accounting firms in the Philippines, CloudCfo assists startups and SMEs through various services. To learn more, contact CloudCfo today.