Freelancing in Pakistan has become a popular career choice in recent years. With digital platforms connecting freelancers to global clients, it’s easier than ever to build your own career while enjoying flexibility and independence. However, with freedom comes responsibility, and one of the most important aspects of freelancing is managing your taxes.
At ActiveTaxpayers.com, we understand that taxes can be complicated, especially when you’re self-employed. That’s why we’ve put together this easy-to-follow guide to help you understand tax planning for freelancers in Pakistan. Let’s dive in!
1. Register with the FBR – Your First Step
The first thing you need to do as a freelancer is to get your National Tax Number (NTN) from the Federal Board of Revenue (FBR). Think of it as your official tax ID that links you to the tax system.
How to Register:
- Head to the FBR’s website and fill out the registration form. It’s a straightforward process.
- You’ll need to provide some basic details, like your name, business info, and a few documents.
- Once registered, you’ll get your NTN, which you’ll use for all your tax-related activities from now on.
By registering, you make sure you’re on the right side of the law, and it also opens the door to some potential tax deductions down the road.
2. Know What Taxes You’re Responsible For
As a freelancer, you’re taxed on the money you make throughout the year. There are a few different types of taxes to be aware of:
Income Tax:
Freelancers are taxed based on their annual income. Pakistan has a progressive tax system, which means that the more you earn, the higher your tax rate. Tax rates range from 5% to 35%, depending on your income bracket. So, if you earn more, you’ll pay a higher percentage in taxes.
Sales Tax (GST):
If your freelance work involves providing certain services (like digital services), you might need to register for General Sales Tax (GST). This means you’ll charge GST to your clients and pay it to the FBR.
Withholding Tax:
When clients pay you, they may deduct a small portion as withholding tax, which is then sent directly to the FBR on your behalf. Don’t worry, though—you can use this amount as a credit against your overall tax liability when filing your return.
3. What Can You Deduct? (Tax Deductions)
The good news is, as a freelancer, you can reduce your taxable income by claiming deductions for certain business expenses. Here’s a list of some common expenses you can write off:
Business Expenses:
- Office Supplies: Computers, printers, software, and anything else you use for work.
- Internet & Phone Bills: If you use them for work, they can be deducted.
- Travel Costs: If you travel for business meetings or conferences, those expenses count too.
- Marketing: Expenses related to promoting your freelance services.
- Professional Fees: If you hire an accountant or a consultant to help with your business, their fees are deductible.
Depreciation:
If you own assets like a laptop, camera, or any equipment used for your freelance work, you can claim depreciation on these items. This means you can deduct a portion of their cost each year.
Charitable Donations:
If you’ve donated to any registered charities, you can also claim those donations as a tax deduction.
4. Keep Track of Your Earnings and Expenses
As a freelancer, keeping accurate records of your income and expenses is essential. You’ll need to:
- Track your invoices and payments: Keep a record of everything you earn, whether from local or international clients.
- Save receipts for business expenses: From software subscriptions to office supplies, keep everything organized for tax time.
Investing in accounting software or simply using spreadsheets can make this task much easier and help ensure that you’re always prepared for tax season.
5. How to Calculate Your Income Tax
Here’s the part that can seem a bit tricky, but don’t worry! Let’s break it down step by step:
Step 1: Calculate Your Gross Income
Your gross income is the total amount you earn from freelancing. This includes payments from clients, both local and international.
Step 2: Subtract Business Expenses
Next, subtract any allowable business expenses (like the ones we mentioned above) from your gross income. This gives you your net taxable income.
Step 3: Apply the Tax Slabs
Pakistan uses a progressive tax system, so the more you earn, the higher your tax rate. Here’s how it generally works:
- Up to PKR 600,000: No tax.
- PKR 600,001 to PKR 1,200,000: 5% tax on income above PKR 600,000.
- PKR 1,200,001 to PKR 2,400,000: 10% tax on income above PKR 1,200,000.
- And so on, with higher rates for higher income.
For example, if you earn PKR 1,500,000:
- Taxable income above PKR 1,200,000 = PKR 300,000.
- Tax on PKR 300,000 = 10% = PKR 30,000.
- Your total tax would be PKR 30,000.
Step 4: Subtract Withholding Tax
If your clients have deducted withholding tax from your payments, you can subtract that from your total tax due. For example, if your tax due is PKR 50,000 and you’ve already had PKR 20,000 withheld, you’ll only owe the remaining PKR 30,000.
Step 5: File Your Tax Return
Finally, file your annual income tax return with the FBR by September 30th. This will tell you if you owe more taxes or if you’re due for a refund.
6. Special Tips for International Freelancers
A lot of freelancers in Pakistan work with clients from around the world. If you’re one of them, here are some things to keep in mind:
Foreign Payments:
Payments from international clients are often exempt from withholding tax, but you’ll need to properly document them for tax purposes.
Double Taxation Treaties:
Pakistan has tax treaties with various countries that can help you avoid being taxed twice—once in Pakistan and again in the country where your client is based. Make sure to research whether a treaty applies to you and your client’s country.
7. Why You Might Need a Tax Consultant
If taxes are feeling a little overwhelming, you’re not alone! Many freelancers seek help from tax consultants or accountants to make sure they’re filing correctly, maximizing deductions, and staying on top of changes in tax laws.
A professional can help you navigate the complexities of the tax system, file your returns on time, and ensure that you’re minimizing your tax liability.
Conclusion
Taxes don’t have to be stressful! With the right knowledge, some careful planning, and a bit of organization, you can easily manage your tax obligations as a freelancer in Pakistan. By staying registered with the FBR, keeping track of your earnings and expenses, and understanding the tax slabs, you’ll be well on your way to tax success.
At ActiveTaxpayers.com, we’re here to help make your tax journey smoother. Stay informed, stay compliant, and let us help you make the most out of your freelancing career!
