Back in the day, the only ways to advance one’s career in the Philippines was to establish a business or get a job and climb the corporate ladder. However, many Filipinos these days have taken a different route, that of being an independent contractor or a freelancer.
Judging by the continuous growth in the number of freelancers in the country, it is has become quite a popular option. There are still some, however, who prefer the security of stable employment.
Both options offer advantages and disadvantages, and these can be categorized in terms of registration, emotional or personal commitments, as well as tax obligations.
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Independent Contractor vs. Employee
We all know that the government imposes heavy taxes in the Philippines, and most business-related transactions are taxed.
In a country where even business permit renewal can be a tedious process, you can expect that the process involved in paying taxes will be just as challenging—if not more.
Independent contractors and employees are taxed differently. The process for declaring income and paying taxes also differ. So, regarding taxes, which one would be more advantageous, working as an independent contractor or employee?
Freelance as a Business
Below are the pros and cons of working as a freelancer in terms of taxes:
• You will be complying with the Law.
Section 232 of the National Internal Revenue Code requires freelancers to pay taxes, as not doing so will be breaking the law. Complying with the law instead will help you avoid being penalized.
• Your income tax returns are proof of income.
In case you need to apply for a credit card, a phone line, a car or housing loan in the future, you will need to present an actual proof of income and your Income Tax Returns will serve that purpose.
• You will be in control.
Being self-employed is said to be one of the best tax strategies because it gives you the ability to reduce your current income using any losses you have incurred from the course of operating your business, and without the BIR having to dictate how much to declare each year.
• You have to register on your own.
Freelancers usually register their business as a sole proprietor. The process involves registering in various government institutions, which can be very tedious. You need to secure a business permit register under the BIR as well. Renewal of business permit and other licenses or registrations is also something you have to take note of regularly.
• You will be required to register and issue Official Receipts to your customers.
The BIR will require you to register and issue official receipts to your customers or clients. If not, you will be penalized with PHP 1,000 and can be charged with tax evasion.
• You have to maintain books of accounts.
Transparency is required in encoding all your financials, and these must be listed in your books of accounts. You will need a bookkeeper to do this for you if you’re not an accountant yourself, and are unfamiliar with accounting principles and practices.
• You might need to pay Business Taxes (VAT and Percentage Tax) and Expanded Withholding Tax.
Businesses are required by the BIR to pay business taxes regardless if you’re earning or not. This is based on your gross receipts or sales and not your net income. These are remitted monthly to the BIR.
• You will be expected to pay taxes monthly, quarterly, and annually, and renew your registration annually as well.
Monthly Percentage Tax (3% of your gross revenue) must be paid by the 20th of every month. Quarterly Income Tax (based on net income) is due every April 15th, August 15th, and November 15th. Annual and Last Quarter Payment of Income Tax is paid on April 15th of the following year. You also need to submit a Renewal of Annual Registration Tax on January 30th every year.
• You will need to pay local taxes too.
You will need to comply with local tax requirements for your business to legally operate. If not, you run the risk of being sanctioned accordingly.
The 8-6 Grind
Below are the pros and cons of working as an employee in terms of taxes:
• Your employer will take care of all the computations.
The monthly income tax computations will be done by your company’s accounting department. The only thing you have to do is understand how it is computed so that you can double check if it was done correctly.
• Your employer will take care of all the filings.
There is no need for you to go to the BIR and pay your taxes yourself. Your company will do it for you, which saves you time and effort.
• Your income tax can decrease depending on your civil status.
Deductions can be made on your income tax computation depending on whether you are married or not, and if you have qualified dependents.
• Your gross benefits are exempt from taxes under certain conditions.
Gross benefits including 13th-month pay, Christmas bonuses, productivity, and incentive bonuses, and other benefits of the same nature, either in cash or kind are excluded from the computation of gross income, as long as it remains under PHP 82,000. De Minimis Benefits are likewise excluded from the computation.
• Minimum wage earners are exempted from paying income tax.
The law states that minimum wage earners shall be exempted from paying income tax on their taxable income. Their holiday pay, overtime pay, night shift differential pay, and hazard pay are exempted as well.
• You will not have the same tax advantages as freelancers do.
Freelancers or sole proprietors can write off all reasonable and necessary business expenses to lessen the amount of tax they have to pay. Employees do not have this advantage.
• People who earn more are taxed more.
Income tax rates are based on the Income Tax table. The higher you make, the higher your taxes will be.
Both options clearly have their own sets of advantages and disadvantages. What you choose would depend on what kind of arrangement you think will be best for you.
If you are unable to choose just one at the moment, as an employee, you can always choose to have freelance jobs on the side or just pursue it later on instead.