What Online Sellers, Freelancers need to know before paying their tax

The Bureau of Internal Revenue (BIR) has recently announced that it is giving an extension to online sellers, freelancers, and practically anybody else who are earning from digital transactions until July 31, 2020 to register and settle their accounts.

Here are things you need to know before you panic about your online business.

1) You will need to register your business as either sole proprietorship, self-employed professional or a corporation (depending on your situation). For most home-based online businesses, it’s just sole-proprietorship and you can start by registering your business name with the DTI (see here). You then register with the BIR.

2) If your annual sales or professional fees do not exceed Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 a year, you will pay zero (Php0.00USD 0.00INR 0.00EUR 0.00CNY 0.00) tax. You will still need to file your annual Income Tax Returns (ITR). It’s just that you won’t be paying anything.

3) If you earn more than Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 but not more Php3,000,000USD 51,120INR 4,333,800EUR 48,690CNY 372,300 a year in sales or professional fees, you have the option to pay a flat 8% tax from your gross receipts. To compute your payable tax, just deduct your annual gross sales by Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 and apply 8%.

For example, you earn Php600,000USD 10,224INR 866,760EUR 9,738CNY 74,460 a year from selling cookies and baked goods from home. You subtract Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 from that (Php600,000USD 10,224INR 866,760EUR 9,738CNY 74,460 – Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 = Php350,000USD 5,964INR 505,610EUR 5,681CNY 43,435) and then multiply the remainder by 8%. That (Php350,000USD 5,964INR 505,610EUR 5,681CNY 43,435 x 8%) is the amount you pay to the BIR (Php28,000USD 477INR 40,449EUR 454CNY 3,475). This only applies to sole-prop and self-employed professionals where expenses are very minimal.

Another option is to pay the tax based on graduated income tax (0% to 35%). This is better if you have large operating expenses that are deductible from your annual revenue.

If you look at the tax table above, you can see that you will also pay zero (0) tax if you earn less than Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 a year.

So, for example, if you sell cookies and baked goods with an annual sales of Php600,000USD 10,224INR 866,760EUR 9,738CNY 74,460, you need to add up all your expenses (cost of goods). Let’s say, you spent Php200,000USD 3,408INR 288,920EUR 3,246CNY 24,820 for raw materials, packaging, marketing and delivery of your cookies, your taxable income is only Php400,000USD 6,816INR 577,840EUR 6,492CNY 49,640 (Php600k – Php200k). You belong in the bracket #2 which is 20% in excess of Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025. That means your income tax is (Php400,000USD 6,816INR 577,840EUR 6,492CNY 49,640 – Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025) x 20% = Php30,000USD 511INR 43,338EUR 487CNY 3,723.

You will have to compute your payable tax using these two options before choosing which one to apply for.

4) Remember — even if your sales is below Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 a year and you don’t need to pay any taxes, you still need to register with the BIR and get your receipts printed so you can issue sales invoices to your customers. These invoices will be the bases of your total annual income that will be computed for the tax next year.