Bookkeeping and Tax Compliance for Self-Employed/Freelancers/Home-based Businesses

In recent years, there has been a noticeable increase in the number of individuals turning to freelancing as a means of generating income instead of traditional employment. These individuals often choose to be either self-employed, leveraging their knowledge, talents, or skills, or to establish themselves as sole proprietors of businesses, selling goods or services.

While many find success in the world of freelancing, a significant portion encounters financial difficulties due to their inability to effectively manage and account for their earnings.

Additionally, they may face substantial tax liabilities and penalties for failing to adhere to tax and other government regulations after registering as self-employed or sole proprietors.

This article aims to provide guidance on the fundamental bookkeeping and tax obligations that freelancers, self-employed individuals, and sole proprietors must closely monitor and comply with in order to avert potential future issues.

Although the title suggests that this advice is primarily geared towards freelancers, it is equally applicable to small business owners, home-based enterprises, and all businesses registered as sole proprietors.

Registering your home-based or freelance business is the first step to establish credibility as a freelancer. This involves registering with the following government agencies:

1. Department of Trade and Industry (DTI) for securing a trade or business name.

2. Local Government Units (LGUs), such as the Barangay and Mayor's Office (Professional registration with the Philippine Regulatory Commission (PRC) may exempt you from this step).

3. Bureau of Internal Revenue (BIR) for obtaining a new Tax Identification Number (TIN) or updating your registration.

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

Maintaining proper accounting records is the next crucial step after registration. Freelancers should maintain the following accounting books:

1. General Journal

2. General Ledger

3. Cash Receipt Journal

4. Cash Disbursement Journal

It's essential to ensure that these accounting books are registered with the BIR. For further information on accounting books, please consult our article on "What are the Books of Account?"

After registering, it is necessary to register your invoices and receipts with the BIR before commencing operations or providing services. The process varies based on whether you use manual or computerized invoices and receipts. For manual invoices and receipts, consult an accredited printer for their production. If you use computerized systems, such as Point-of-Sale (POS) or Cash Register Machines (CRM), you must register your system with the BIR.

For detailed information on invoices and receipts, please refer to our article "Difference Between Sales Invoice and Official Receipt."

Keeping records of your business expenses is crucial, even for freelancers, as they are incurred in the course of business operations. Expenses are subtracted from gross sales to determine net income. Thus, it's imperative to retain expense receipts to accurately assess financial performance and profit.

Filing and paying tax returns on time is a key responsibility for registered freelancers. Monthly and quarterly tax returns must be submitted promptly, including forms such as BIR Form 1601E, BIR Form 2551M, BIR Form 2550M, and BIR Form 2550Q. Additionally, quarterly income tax returns (BIR Form 1701Q) and annual income tax returns (BIR Form 1701) are due within specified time frames.

Annually, freelancers must renew their licenses and permits with LGUs before January 20th. Furthermore, the annual income tax return (BIR Form 1701) must be filed and paid by April 15th each year based on the preceding year's net income.

Taking proactive measures to adhere to these bookkeeping and tax requirements can help prevent future complications and hardships. A well-maintained accounting record can also prove invaluable when seeking potential investors for business expansion.

Your small, freelance, or home-based business could be the next big thing, and having your financials in order is a step in the right direction.

If you have further questions on this topic, please feel free to leave a comment. If you're interested in outsourcing your bookkeeping and tax requirements, we offer special rates; you can request our proposal by using this form.