If you are serious about going into business someday, then you might be one of the many who have stumbled upon the sage advice of not leaving your day job yet until your fledgling business has shown some promise.
But I’m not going to talk about that per-se. Instead, I will touch on something that is connected to this topic: How to manage your tax obligations while you are still in transition from employee to businessperson.
Okay, first things first. Let’s start by stating that Bureau of Internal Revenue (BIR) payees are categorized as either:
- Partnerships or corporations
Further, when one talks of a self-employed entity, you can either be a sole proprietor or someone practicing a profession (lawyer, real estate broker) as an individual.
Scenario A: Employee in a company while running your own profession
Those who plan to register at the BIR as either sole proprietors; or partnerships or corporations should first register their names with the DTI or the SEC, respectively.
On the other hand, if you are a running your own profession but do not plan to set up a business entity/trade name, you can simply proceed to the BIR and get your certificate of registration for your profession. Once that is done, you then work on the next BIR requirements, which would include having your own receipts that carry your name and profession, and contact details.
Let us assume that you are a licensed real estate broker who happens to also work full-time in a corporation as manager for marketing of, say, perfumes. If your perfumes company pays you a salary of P150,000 per month, you would be a bit hesitant to resign just so you can start your profession as a real estate broker full-time, right? After all, P150,000 is not exactly pay dirt money, and you reckon that it might take you months to earn the same amount from real estate selling if you let go of the day job immediately.
Okay, fair enough.
Supposing again that one weekend, you were able to perfect a real estate sale that promised you a commission of P120,000. You are on seventh heaven. So far, so good.
Then it hits you. You suddenly realize that you now are earning from two sources of income. How then will you be dutifully paying your tax obligations from your real estate practice? This is where you need to visit your BIR branch to register your profession.
Why? Well, first of all, the BIR certificate of registration (CoR) is a requirement by some property developers before they could accredit you as a broker.
But before you ever attempt to go to the BIR office, do your homework first. On the BIR’s official website, go to the Tax Information menu and read on the different types of taxes. This way, you can list down all your questions (and I am sure you will have a lot) before you even proceed to the BIR office. More often than not, the first person you will be asked to see is the Office of the Day.
The Officer of the Day is your BIR guru so throw all your questions at him right from the get-go. Just remember though that with the number people queuing at the head/district office, you would not want to come off as insensitive by taking more than, say, 15 minutes of his time. There are at least a couple of items you would want to be clear about, all of which you might want to ask the Officer of the Day to help you with:
- Will you want to be VAT-registered or non-VAT registered? Well, the answer to that, my friend, is: It depends.
- What forms should you be filling out monthly, quarterly or annually so that both your income from the day job as well as your fees/income/commission from your professional services are properly documented and reconciled in all BIR forms?
To err on the side of caution, it is best that you understand what these forms and tax types are. Tax is not exactly an exciting topic. But it can turn into a frightening one if you start missing on your filings.
If I sound like I am part of the BIR, I assure you I am not. I am simply like you—a struggling (okay, wannabe) entrepreneur. But I am speaking from experience here. For a new business, a missed filing can put a dent on your pocket. After all, the standard penalty for late payments is 25 percent of the tax amount due and 20 percent interest per year up until you decide to pay. Oh, there’s such a thing called the compromise penalty as well, but I am not going to go there anymore.
The moral of the story? As far as taxation is concerned, an ounce of prevention is still worth a pound of cure.