Freelancing is a choice for a lot of young professionals nowadays. It is categorized primarily as being able to “work from anywhere” and with the possibility of having multiple clients or sources of income.
Here in the Philippines, the benefits of freelancing simply outweigh the cons. You don’t have to worry about a spending a lot of time in a long commute, deciding on what clothes to wear everyday, and many more.
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If they start out employed, freelancers usually take on extra “gigs” as a way to increase their income. Eventually, if they enjoy it or become successful, they may leave their employers to pursue a full-time freelancing career.
When this happens, they are required to register their business. But then they get stuck. They panic. They don’t know what to do. So, before you get into this situation, find out if you need to register your freelancing work.
3 Signs You Need to Register Your Freelancing Work
1) Your clients are asking for a receipt
Corporations and organizations that follow the law usually have an accounting team that implements a strict policy on recording revenues and expenses. Understanding this concept will help you deal with this issue properly.
See, on the company’s side, you are part of their “expenses.” Meaning, they pay you to do something for them as oppose to them hiring their own.
As proof of their payment to you, they will ask you to issue an official receipt in the name of the company. Why? Because this is the only way they can claim your services as a valid expense. Let me explain that further.
The BIR, and consequently, audit firms will look for official receipts because they want to ensure that the expense is relevant to the business (e.g. graphic design for marketing collateral) and is not just made up to lower the tax due.
There have been cases where the BIR disallows certain expenses because they do not meet the requirements stated above. This affects the company in two ways:
- They end up paying a more taxes
- They have to pay the corresponding penalties on top of this for the mistake.
And, your clients don’t want this to happen to them. That is why they ask for official receipts.
2) You cannot pass your client’s or potential client’s accreditation process
Another instance where you need to register your freelancing work is when your client or potential client is asking for some documents that you cannot provide. Most of the time, this document is the BIR Certificate of Registration (COR) or BIR Form 0605.
It is the legal document that serves as the proof of your registration. In it, you can find your tax details, industry, tax types (very important for accounting), etc.
Some companies are known to have this accreditation process. It acts as an automatic filter and protection for them.
You won’t just hire anyone to work for you, right? You need to have their backgrounds checked, verify the info they submitted, etc.
That goes the same for going through the accreditation process. It helps them avoid the hassle in the future of you not performing your work and just taking their money, or them not being able to claim the money they paid you as a valid expense.
Whatever that reason is, going through the accreditation process is the only way to get them as a client. And you can’t do that without registering your business.
3) Your client is deducting withholding taxes
The other sign that you need to register your freelancing work is come payment time, you get less cash accompanied by a document called a Certificate of Creditable Withholding Tax, or BIR Form 2307.
For example, your original contract price was PhP100,000, but you only received PhP90,000 in cash and a 2307 with 10,000 worth indicated.
What does that mean? That 10,000 is actually your money but already paid on your behalf in advance to the government by your client. And you can use the 2307 as a deductible to your income tax due.
So, if you have an income tax due of 20,000, you can subtract the 10,000 there, so you don’t have to pay the full amount.
Note that you can’t do this if you are not registered. You just have to accept that the cash you receive will always be less than your original contract amount because of this.
Being aware of these 3 signs can help you identify if it’s the right time to register your freelancing work. If it is, then you have to decide which structure is best for you. But if you are simply planning to make a career out of freelancing, I strongly suggest you do it right the first time by registering. You avoid all the headaches and complications in the future.