WHAT TAXATION TERMS SHOULD I BE FAMILIAR WITH?
Here are some terms that will be used in tax forms and in the sections below, so you may want to familiarize yourself with them:
Gross income means gross sales less sales returns, discounts and cost of goods sold, i.e. all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
Allowable deductions are other business expenses that are incurred to generate the gross income, such as interest, marketing, rent, wages, and utilities expenses. In lieu of itemized deductions, you may opt for an Optional Standard Deduction which is 40 percent of the gross income.
Personal exemptions refer to the amounts that you can use to further reduce your gross income, depending upon your status.
A dependent child is a legitimate, illegitimate, or legally adopted child chiefly dependent upon and living with the taxpayer. To qualify as a dependent, that child should not be more than twenty-one (21) years of age, married, or gainfully employed. A child can also be considered a dependent if, regardless of age, he or she is incapable of self-support because of mental or physical defect.
HOW DO I COMPUTE MY INCOME TAX?
If you’re an employee, what you are generating is called “compensation income,” and you don’t need to worry about filing and computing your own taxes because your employer is legally mandated to do it for you. The rationale behind this system is to relieve the BIR from the burden of running after several potential tax evaders: one employer is easier to chase compared to hundreds of employees.
If you’re self-employed, or an employee with other sources of or “mixed” income (like sidelines), you need to file your own forms and pay your own annual income taxes. This means that you need to compute your taxes using these basic steps and formulas:
1. Compute your taxable income using the formula below.
Annual Gross Income
Less: Allowable Deductions
Less: Personal Exemptions
2. Use your taxable income to compute your annual income tax using this formula:
Multiplied by 5% to 32%
Annual Income Tax
HOW CAN I TELL WHAT EXEMPTIONS AND DEDUCTIONS APPLY?
As of 2008, each individual taxpayer, whether single or married, shall be allowed a basic personal exemption amounting to P50,000.00. Such individuals shall be allowed an additional exemption of P25,000.00 for each qualified dependent child, not exceeding four (4) children. Although sexist, the additional exemption for dependents is presumed to be claimed by the husband unless he explicitly waives this in favor of his wife.
An expense may be claimed as as a deduction only if: (1) it is ordinary and necessary; (2) it is paid or incurred during the taxable year; (3) it has been paid or incurred as part of the trade or business operations of the taxpayer; (4) it is supported by receipts, records or other pertinent papers; (5) it is not contrary to law, public policy or morals; and (6) the appropriate amount of withholding tax on the certain expenses (like wages on your employees) have been withheld and remitted to the BIR.
An "ordinary and necessary" expense is one that is directly connected with, and proximately resulting from, business operations, and is appropriate and helpful in developing your business through the acquisition of income. For example, salaries, rentals and utilities (water, electricity and telephone bills) are common types of “ordinary and necessary” expenses because they directly contribute to the generation of revenue.
Don’t forget that you need official receipts or, by exception, some adequate records to prove that you incurred such expenses. The BIR is very strict with this requirement to prevent taxpayers from just claiming all sorts of deductions. Just because you paid a bill, it doesn’t mean it’s deductible.
WHAT PERCENTAGE SHOULD I MULTIPLY MY INCOME BY TO GET MY ANNUAL INCOME TAX?
Using the tax table appearing at the back of the BIR forms, you can compute your income taxes based on the net taxable income. All you need to do is use the applicable tax bracket to your net income tax.
For example, if your net taxable income is only P5,000, the tax table states that you just multiply this by 5 percent. Hence, your income tax due is P250.
But if your taxable income is P50,000, you would have to pay a basic income tax of P2,500 plus 15 percent of the excess over P30,000. So your income tax would be P5,500, which is the sum of P2,500 and P3,000 ([P50,000 - P30,000] x 0.15).
WHAT FORMS SHOULD I FILL UP?
For annual income tax payments, BIR Form No. 1700 is used for employees whereas Form No. 1701 is used if you are self-employed or have mixed income. In both cases, BIR Form No. 0605 is used for payment. If you are self-employed or earn mixed income, you can further reduce your annual income tax with those taxes you have paid in advance for the first, second, and third quarters of the year, which would be evidenced by BIR Form No. 1701Q. You need to accomplish at least three (3) copies per form.
You may download BIR Forms and get other relevant information at www.bir.gov.ph.
WHERE DO I FILE MY TAXES?
Your forms should be filed and payment made with any Authorized Agent Bank (AAB)—usually a commercial bank within the vicinity—of the Revenue District Office (RDO) where you are required to register, or where you have legal residence or place of office. In places where there are no AABs, the return should be filed with the Revenue Collection Officer or duly authorized city or municipal treasurer. If you have no legal residence or place of office in the Philippines, the return should be filed with the Office of the Commissioner or Revenue District Office No. 39, South Quezon City.
The BIR website offers information as to where your RDOs are and how to contact them. You may also pay a visit to the nearest RDO and look of the Officer of the Day (OD) who can further assist you.
WHEN SHOULD MY TAXES BE FILED?
If you’re self-employed or an employee with “mixed income,” you need to file your first quarter income tax also on April 15 using BIR Form No. 1701Q in addition to the annual income taxes. Second and third quarter income taxes are paid on August 15 and November 15, respectively.
WHAT HAPPENS IF I CAN’T MAKE THE DEADLINE?
Needless to say, it’s important to pay and file on time. You are penalized with interest at 20 percent per annum for late filing; should you not file at all, you are imposed a 25 percent surcharge in addition to interest. As a matter of practice, the BIR discourages extensions, and you should not assume that your request will be granted. If it can’t be helped, you can pay taxes first then amend your return later to mitigate the penalties.
WHAT IF I COMPUTE MY TAXES INCORRECTLY?
The BIR knows that taxpayers commit mistakes. So even after filing the appropriate forms and paying the taxes, the BIR has three (3) years to assess if what you did was correct. This period becomes ten (10) years if the BIR finds that you committed fraud in paying your taxes.
Computing your own taxes and remitting them may be a chore, to say the least. If you have a growing business, you may want to consider outsourcing the job to a bookkeeper or accountant, meaning you would have to weigh the cost of professional fees with gaining more time to devote to your enterprise. As in most professions, the best way to get a good accountant is through the referral grapevine. Ask around, or you can visit the website of the Securities and Exchange Commission (SEC) at www.sec.gov.ph. Whatever your decision may be, it is good to know how the tax system works because it is an integral part in any venture. Good luck!
(Photo source: sxc.hu—page 1; page 2)
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