Did you hear the word “tax,” especially “freelancer tax”? Well, most people, specifically in Pakistan, aren’t familiar with the nitty-gritty details of taxes. Now, throw freelancers tax in Pakistan into the mix, and it can get even more confusing.
You’re reading this, so you’re likely a freelancer, considering becoming one, or just curious about the topic. Whatever your reason, you’re in the right place to get the all-encompassing guide tax guide to avoid those stressful penalties and stay ahead of the curve.
What is the Freelancer Tax System in Pakistan?
So you are a freelancer. It means people call you a self-employed individual. It also means that the responsibility of filing your taxes with the Federal Board of Revenue or named as FBR falls squarely on your shoulders.
Your taxes aren’t automatically withheld by your employer. Thus, it’s up to you to report your income and pay the taxes.
Although the procedure may initially seem a little overwhelming, it isn’t as difficult as it first appears. You need to register yourself with the FBR through their online portal. This registration is much-needed because it officially signs you as a taxpayer in Pakistan.
But remember, the tax system applies whether you work locally or internationally. It is all related to a specific income level.
However, why is filing taxes such a big deal? Is there a tax exemption for freelancers? Well, it not only helps you to meet your legal requirements, but it also positions you for financial gains.
Once you’re formally registered, you can take advantage of many benefits such as bank loans, tax returns, and enhanced credit scores. And don’t talk about how you can avoid troublesome penalties. We all know that better. Right?
How Much Tax Do Freelancers Pay in Pakistan?
Here comes the burning question on every freelancer’s mind. You are probably thinking, how much do I have to pay? Or do I fall in this category currently?
Well, there is no fixed number answer. The amount and source of your money will determine the tax on freelancers in Pakistan.
For local income, tax rates vary. It depends on your earnings. For instance, if your income is less than PKR 600,000 a year, you may not have to pay any taxes. But if you exceed this threshold, tax applies to you. And the more you earn, the higher the percentage you’ll pay.
However, if you work for foreign clients and get paid in dollars, then the tax rates are much lower with multiple benefits. Reductions in tax rates are available to you; they typically range from 0.25% to 1%, depending on your registration status and if you’re considered a “tax filer.”
Step-by-Step Guide to Filing Taxes for Freelancers
Here’s a clear explanation of what you need to do to become a freelance tax filer in Pakistan. And don’t worry, there is no such technical jargon here that hinders your process of learning.
First Step: Register for Your NTN (National Tax Number)
- Visit the Federal Board of Revenue (FBR) website.
- Find the section for income tax registration.
- Fill out the online form with your information.
- Assemble the necessary paperwork, such as proof of address and CNIC.
- Submit the form and documents. This submission will initiate your registration process.
Step 2: File for Business Registration
- As your NTN is approved, the FBR will get in touch with you – mostly through email.
- To formally register your earnings as a freelancer, declare your income source. At this point, you need to complete Form 181. Don’t miss out on this step as it is a crucial element to legitimize your freelance income and meet tax regulations.
Third Step: File Your Tax Returns
- First Sort through your income records and file your tax returns for the current fiscal year.
- If you haven’t filed for previous years, file for those as well to regularize your tax status.
- Keep records of your income, expenses, and any documents that can help lower your taxable amount.
- If you require assistance understanding the procedure, speak with a tax professional—it’s better to be safe than sorry!
Fourth Step: Join the ATL, or Active Taxpayer List
- Pay the 1000 PKR ATL fee online or by bank transfer. You can also go with Easypaisa.
- After the payment is processed, your name will be added to the Active Taxpayer List in a matter of hours.
- If your name appears on this list, you will receive a reduction in the withholding tax rate.
Tax Deductions and Benefits for Freelancers
Here is the cool thing for taxpayer freelancers.
Get Your Tax Benefits
The lower tax rate is one of the main benefits of registering with the Pakistan Software Export Board (PSEB). You will only be taxed at 0.25% on export receipts, as opposed to the standard 1%. That’s a significant savings that puts extra cash in your pocket!
Gain Access to Government Initiatives
Enrolled in the PSEB? Not yet. Well, it is one of the keys to accessing multiple government programs that can support your expanding freelance business. You can obtain government contracts, finance for exports, and even free training.
Boost Your Client’s Trust
Clients like working with people they can trust. Being registered with PSEB adds a stamp of credibility to your name.
Your Entry into the Global Market
You have access to foreign markets with PSEB. Now, You can discover new prospects overseas with the assistance of PSEB’s global connections.
Specific Perks
Also, you will get free training. ICT interns, and free promotions-all with PSEB.
Common Mistakes to Avoid When Filing Your Freelancer Taxes
- If you mess up your deductions, it can lead to an audit or tax issues for you. Pay close attention to the numbers you calculate.
- Likewise, failure to track your income and expenses can result in incorrect filings and penalties. So, keep thorough records.
- Similarly, combining personal and corporate costs may result in inaccuracies with taxes and increased expenses. Always keep your distinct records.
- If your tax returns are filed after the deadline, you can be subject to fines and additional stress. Make sure to file on time.
FAQ
What are the tax rates for freelancers in Pakistan?
| Income Range | Tax Rate |
|---|---|
| Up to PKR 600,000 | No tax |
| PKR 600,001 to 1,200,000 | 5% |
| PKR 1,200,001 to 2,400,000 | PKR 30,000 + 10% |
| PKR 2,400,001 to 3,600,000 | PKR 150,000 + 15% |
| PKR 3,600,001 to 4,800,000 | PKR 360,000 + 20% |
| PKR 4,800,001 to 6,000,000 | PKR 660,000 + 25% |
| Above PKR 6,000,000 | PKR 1,050,000 + 30% |
How can I file my freelance income tax return online in Pakistan?
To file your freelance income tax return online in Pakistan:
- Log in to the FBR website with your NTN.
- Fill out your income tax return form.
- Submit the form and required documents.
- Keep a copy of your submission for reference.
Do freelancers need to register for an NTN in Pakistan?
Yes, freelancers in Pakistan need to register for an NTN (National Tax Number). You aren’t exempt from this. The reason? The NTN is the main requirement for legitimizing your income and tax filing.
To register for an NTN, visit the FBR website, complete the registration form, and submit your CNIC and proof of address.
Can freelancers claim tax deductions on their expenses?
Yes, freelancers can claim tax deductions on their expenses. You can deduct costs such as:
- Computers, printers, and software
- Internet bills, office supplies, and professional services
- Business travel costs and vehicle expenses
- Rent for office space or a portion of your home used for business
What happens if a freelancer doesn’t file taxes in Pakistan?
In Pakistan, freelancers who fail to file their taxes may be subject to various penalties, such as:
- Penalties for failure to comply or file on time
- Fines that rise in value over time for unpaid taxes
- Being taken off the list of active taxpayers (ATL), which raises the rate of withholding taxes
- Possible legal proceedings, such as FBR notices or investigations
