Many of us who start a business come from a regular employment setting. So when we decide to register our business with the Bureau of Internal Revenue (BIR), it comes as a shock when we learn that there are several types of taxes.
Yes, aside from income tax, there are other types of taxes that a business owner needs to pay–and that they need to file various tax forms many times a year.
Of course, we can’t spare you the payments, but we can at least spare you the shock.
Here, for your reading pleasure, are all the basic types of taxes and fees every professional or business owner needs to pay once they have registered with the BIR:
Types of Taxes
1. Monthly taxes
So you thought you’d need to file taxes only once a year, hey?
You actually need to file taxes at least once a month. #truthbomb
Non-VAT businesses know this monthly tax as percentage tax, because it is computed very simply, usually as 3% of your gross monthly earnings. (Some industries like property rentals are taxed at a different rate, like 7%, but 3% is standard for most industries.)
VAT businesses know this as monthly VAT, and it is computed less simply: 12% of your gross monthly earnings minus 12% of your VAT-receipted expenses.
Now this bears repeating for non-VAT businesses: the monthly tax is based on your gross income. It does not take your expenses into consideration at all.
In other words, if you bought your product at P90 and sold it for P100, you’ll need to pay taxes on the P100 that your customer paid, not the P10 that is your net earning from that transaction.
So factor this tax in when you’re deciding how much you’re going to price your products. Otherwise, you might end up earning much less than you expect.
2. Quarterly taxes
This is tax you pay based on your total gross (yes, gross again) income from January to March, April to June, and July to September.
October to December is included in your annual income tax, so there is no quarterly tax filing for that one.
You may be wondering now: Are you being taxed a second time for the same set of income that you already paid taxes for in your monthly tax filing?
Yes, you are.
Quarterly taxes are computed based on the table below:
|Amount of Net Taxable Income||Rate|
|Over||But Not Over|
|P10,000||P30,000||P500 + 10% of the Excess over P10,000|
|P30,000||P70,000||P2,500 + 15% of the Excess over P30,000|
|P70,000||P140,000||P8,500 + 20% of the Excess over P70,000|
|P140,000||P250,000||P22,500 + 25% of the Excess over P140,000|
|P250,000||P500,000||P50,000 + 30% of the Excess over P250,000|
|P500,000||P125,000 + 32% of the Excess over P500,000|
For VAT businesses, the process involves a more complex equation that requires a separate blog post. So maybe we’ll talk about that another time.
3. Annual income tax
Now, at last, we get to factor in our expenses. You can either itemize your expenses or take the easy way out: Optional Standard Deduction (OSD).
OSD lets you take your gross earnings and remove 40% of it as your expenses. Voila! No more long calculations of expenses on utilities, communication, supplies, etc.
But wait, that’s not your taxable income yet. You still need to remove your personal exemptions.
That’s P50,000 regardless of whether you’re married or single, plus P25,000 for every child you have by December 31 of the year you are paying taxes for.
But you can only claim exemptions for 4 children. The fifth will no longer make a dent in your taxable income.
Incidentally, the deadline for filing your annual income tax is also the deadline for filing your first quarter income. So many of us end up paying three taxes in April:
- Annual income tax for the previous year,
- Quarterly income tax for January to March of the current year, and
- Monthly tax for March of the current year.
Other Types of Taxes
So those three are the types of taxes every business owner or professional has to pay. In addition, depending on your circumstances, you may also need to pay:
- monthly remittance of the taxes you withhold from your landlord and contractors,
- monthly remittance of the taxes you withhold from your regular employees, and
- annual registration renewal fee.
Finally, if you’re a sole proprietor, partnership, or business, you also need to pay business taxes, etc., annually to your city/municipal hall.
But that’s another story.