Are you self-employed? You are self-employed if your income arises from the conduct of trade or business and/or practice of profession.
As a self-employed individual, the following are the allowable ITEMIZED Deductions from your gross income:
1. Salaries and wages
2. Rental
3. Communication Expense
4. Office Supplies
5. Travel expenses
6. Gasoline and Toll fees
The following are the criteria for deductibility: deductions must be ordinary and necessary in carrying on in the conduct of business; must be reasonable in amount; and must be adequately substantiated (SEC 34A-1a and 1b).
However, being self-employed, you may also elect OPTIONAL Standard Deduction (OSD) which allows you to deduct 40% of your gross income.
How do you choose between ITEMIZED Deductions vs. OPTIONAL Standard Deduction (OSD)?
Let us assume, for SELF EMPLOYED generating income from rendering services. (Please take note that this is not advisable for seller of goods)
| ITEMIZED | OPTIONAL | |||
|
Monthly Gross Income |
120,000 |
100% |
Monthly Gross Income |
120,000 |
| Itemized Deductions: | ||||
| Wages of Staff |
12,000 |
|||
| Rental |
15,000 |
|||
| Communication |
3,000 |
|||
| Office Supplies | 1,000 | |||
| Travel Expenses |
10,000 |
|||
| Gasoline and Toll fees |
4,000 |
|||
| Total Itemized Deductions |
45,000 |
38% | 40% OSD |
48,000 |
| Net Income for the month |
75,000 |
Taxable Income for the Month |
72,000 |
|
In the above assumptions, choosing Optional Standard Deduction instead of an Itemized Deduction, you reduce your taxable income and consequently your income tax due.
When to choose? Election should be made at the 1st quarter of the year.
A word of caution, “one size fits all” does not apply in taxation. Every individual’s circumstance differs, and a professional advisor can assist you in using the information on this web site to your best advantage.