Bookkeeping and Tax Requirement for Freelancer/Self-Employed/Home-based Businesses

In the past years, there has been an increased in individuals who do freelancing, as a means to generate income rather than being employed. These are individuals who prefer to be either a self-employed (offering their knowledge, talents or skills) or sole-proprietor of a business (selling goods or services). Although many succeed as freelancer, they oftentimes end up losing their earnings because of their inability to account and manage their finances. Additionally, they end up paying large amount of tax and penalties because they fail to comply with tax and other government requirements, after they register as self-employed or sole-proprietor.

This article will guide you on the basic bookkeeping and tax requirements that freelancer, self-employed, or sole-proprietor must monitor and comply with to avoid future problems. Though the title implied that this is for freelancers, it is also applicable for small business owners, home-based businesses and all businesses registered as sole proprietor.

Register your home-based or freelance business

If you want to be taken seriously as freelancer, the first thing you need to do is to get registered basically to the following government agencies:

  • Department of Trade Industry (DTI). To secure a trade name or business name.
  • Local Government Units (LGUs), such as Barangay and Mayor’s Office. If you are a Professional registered in Philippine Regulatory Commission (PRC), you may skip this.
  • Bureau of Internal Revenue (BIR). To secure a new Tax Identification Number (TIN) or update your registration.

For more details on registration, please see our article How to Register a Sole Proprietor Business in the Philippines?

Maintain accounting books

After you register, the next step is to keep an accounting record. These are the following accounting books applicable to freelancers:

  • General Journal
  • General Ledger
  • Cash Receipt Journal
  • Cash Disbursement Journal

Important Note: Make sure that your accounting books are registered with the BIR.

For more details on accounting books please read our article What are the Books of Account?

Issue BIR Registered Invoices and/or Receipts

After registering, and before you start operating or offering your services, register your invoices and receipts with the BIR.

  • For manual invoices and/or receipts
    • Look for an accredited printer who will do the printing of your invoices and/or receipts.
  • For computerized invoices and/or receipts, Point-of-Sale(POS), Cash Register Machine (CRM), etc
    • Register your computerized system with the BIR.

For more details on invoices and/or receipts, please read our article Difference Between Sales Invoice and Official Receipt

Keep the receipts of your expenses

It’s typical for business, even freelancers, to incur expenses in order to operate. Expense is deducted from gross sales in order to come up with the net income. As such, ensure that you keep your expense receipts so you can determine the true financial performance (or profit).

File and/or pay the  tax returns on time

Once you’re registered with the BIR, keep in mind that you are required to pay or file monthly and quarterly tax returns, as follow:

Monthly

  • BIR Form 1601E – if you are renting, paying professionals or commissions. This is due for payment or filing on or before 10th of the preceding month.
  • BIR Form 2551M – For Non-VAT individual.  It is the computed sales tax equivalent to 3% of monthly gross sales. This is due for payment or filing on or before 20th of the preceding month.
  • BIR Form 2550M – For VAT individual. It is computed sales tax equivalent to 12% of monthly vatable sales less 12% of vatable purchases/expenses. This is due for payment or filing on or before 20th of the preceding month.

Quarterly

  • BIR Form 2550Q – For VAT individual. It is similar to BIR Form 2550M, but instead of one month, it reports the three months in a particular quarter. It’s due for payment or filing on or before 25th of the preceding month after the close of the quarter.
  • BIR Form 1701Q – This is the income tax for the quarter. It’s due for payment or filing on or before the 60th day after the close of the quarter.

Renew your licenses annually

Once registered, you need to renew your licenses and permits to LGUs on or before January 20th of each year.

File and/or pay annual reports

Last but not the least, on or before April 15th of each year, you need to file or pay BIR Form 1701 – Annual Income tax return based on your net income for the preceding year.

It is said that prevention is better than cure. To avoid future headaches and problems, it’s best if you monitor compliance to these bookkeeping and tax requirements. One good reason for keeping a good accounting record is that, your future investors for your expansion might require it someday. You will never know that your small/freelance/home-based business is the real next big thing.

If you have further question about the topic, please feel free to leave a comment. If you want us to do the bookkeeping and tax requirement of your business, we have a special rates for you, please feel free to request for our proposal by using this form.

PS

You can make us an extension of your office by letting us do the accounting, payroll, tax and business registration so you can focus in growing your business. You may use this form to request for our proposal.

If you chose to do it yourself, you may attend our scheduled workshops to learn and execute faster.

Disclaimer: The content of this article may become outdated because of changes in the rules and regulations over time. It does not substitute the need for inquiring professional advice.

Comments

  1. gie mendoza says:

    This is very informative and very useful for me , I am a licensed Non life Insurance Intermediary of Non life Insurance Companies, we are under the jurisdiction of Phil. Insurance Comm.

    Regards

  2. Hi,

    I registered with DTI in July 2012 in the hope that I can do tiangge or freelancing activities but end up going back to employment. So I did not file any of the above.
    Will I be penalized by BIR? How much? What can you advise me to do if I plan to get another shot in business?

    Your site is very helpful.

    God bless.

  3. Danessa Yu says:

    Will you be needing to file for the 1701 form even if you registered very late the previous year? Like September? If yes, how to compute for the annual tax? Pls reply thank you!