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Best Tax Options for Small Businesses

Today is the deadline for filing annual income tax returns. Self-Employed and Professionals that have not yet filed their returns, especially those who have to file manually, are no doubt panicking now. That sort of panic tends to spread, and taxpayers who shouldn’t have to worry tend to join the hype and panic as well.

Employees, which comprise 49.73% of all registered taxpayers and 84.48% of all individual taxpayers, are not required to file. Provided, that they only have one employer during the year and their income tax has been correctly withheld.

Self-Employed and Professionals (SEPs), unfortunately, do not have that option. All SEPs are required to file their returns, even those exempt from tax. One thing to keep in mind is that filing returns is not necessarily the same as having to pay taxes.

Sometimes, the taxes have already been withheld while, in other times, the taxpayer is exempt (as is the case of Barangay Micro Business Enterprises or BMBEs).

BMBEs are only one of the options for small businesses. There are a variety of options that affect the taxes micro, small, and medium enterprises (MSMEs) have to pay. These options also determine the forms they should use and their method of filing and payment.

For income tax, the first option (aside from registering as a BMBE) starts with the choice of income tax schedule. There are two main options – the default graduated income tax rates or the flat 8% income tax rate.

The graduated income tax imposes rates ranging from 20% to 35% on taxable income. On the other hand, the 8% income tax is, as its name implies, imposes an 8% tax on gross sales/receipts.

These options already require different forms and methods for filing income tax returns. But the options still do not end there.

Should the taxpayer decide to use the graduated rates, they still have to choose their mode of deduction. The two modes of deduction are the Itemized Deductions or the Optional Standard Deduction.

GRADUATED RATES AND ITEMIZED DEDUCTIONS

The first, and more tedious of the two deductions, is the Itemized Deduction. Under Itemized Deductions, the taxpayer can list down all their deductible expenses and could even result in the taxpayer having zero tax due. However, the taxpayer would have to substantiate every deduction which can end up being tiring for some.

Taxpayers availing this option need to use BIR Form No. 1701, comprised of four pages. The same form needs to be used whether your income is purely from business/profession or if it is mixed income.

GRADUATED RATES AND OPTIONAL STANDARD DEDUCTION

Under Optional Standard Deduction, the taxpayer can avail up to 40% of their gross sales or receipts as a deduction. This means that only 60% of their gross sales or receipts will contribute to their taxable income.

While this deduction is generally smaller than the itemized deduction, it is also much more convenient. Keep in mind that not being required to substantiate the OSD is not the same as not being required to keep receipts. All SEPs are required to keep receipts, no matter which tax options are availed.

From here, if the taxpayer opts to use the OSD, there are two methods of filing.

SEPs who also have compensation income are called mixed income earners and, for the purpose of tax filing, are required to use the BIR Form No. 1701 mentioned earlier.

However, SEPs who receive income purely from business or practice of profession, they can use the simpler and shorter BIR Form No. 1701A.

8% FLAT INCOME TAX RATE

Aside from the graduated rates, the next option is the 8% Flat Income Tax Rate. Under this option, the modes of deduction cannot be availed.

This method is much simpler than either of the first two options.

However, not all taxpayers can avail this option. VAT-registered taxpayers and compensation income earners, for instance, are disqualified from using the 8% Flat Income Tax Rate.

Mixed income earners can still avail the 8% Income Tax but only on their business/professional income. Their compensation income will still be subjected to graduated rates.

For those earning purely from business/profession, the form to be used is BIR Form No. 1701A. Mixed income earners availing the 8% Flat Income Tax Rate are required to use BIR Form No. 1701.

FILING AND PAYMENT

For all these different options and forms required, the filing and payment method remains the same. There are three methods of filing and payment – manual, eBIRForms, and eFPS. For the new forms, the eFPS are still not yet available. The BIR has provided workaround procedures for those mandated to file via eFPS.

For manual filers with tax due, the taxpayer needs to file the new forms to Authorized Agent Banks. For manual filers with no tax due, they can already file through the latest Offline eBIRForms package.

Taxpayers mandated to use eBIRForms (such as accredited tax agents) or eFPS (such as the Top 5,000 Individual Taxpayers) are required to file via eBIRForms, whether or not there is payment to be made.

For the payment of taxes due, taxpayers have the option to do so manually or online.

Manual payment needs to be done through Authorized Agent Banks or, if there is none, the Revenue Collection Officer. Online payment needs to be done through GCash Mobile Payment, Landbank’s LinkBiz Portal, or DBP Tax Online. However, these only apply to manual filers and eBIRForms-mandated taxpayers. eFPS filers need to pay via the eFPS facility.

EASE OF PAYING TAXES

With online filing slowly becoming the norm and tax forms being simplified, the BIR is taking large steps in improving the ease of paying taxes.

But why is it important? It is not just a matter of improving our scores in the eyes of the World Bank or any other international economic organizations. It is not just a matter of being a better destination for foreign investors.

It is about unburdening taxpayers who, for the longest time, have been suffering tedious forms and long queues under the summer heat.

Recent initiatives will further improve the ease of doing business in the country (and by extension, ease of paying taxes). The Ease of Doing Business and Efficient Delivery of Government Services Act of 2018 for instance will be simplifying transactions and streamlining various processes.

The BIR’s most recent initiative as well, the Electronic Tax Software Providers Certification (eTSPCert) System will allow third-party software such as the TaxWhizPH mobile app to get accredited and be authorized for online filing and payment of taxes. With various tax software competing for the attention of taxpayers, it can encourage innovation among the private sector on how best to improve tax compliance for everyone.

For more questions, you can contact us at [email protected] or (02) 622-7720.  

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