Philippines
in numbers
The Philippines has regulated self-employment, but requirements are stringent. Registration is burdensome, involving multiple visits to authorities and physical document submissions, especially for foreign individuals. There are moderate language barriers, though registration fees are low. Regulations tend to favor regular employment over self-employment.
Classification guidance is present but moderately difficult for self-employed individuals to meet. Authorities regularly audit worker classifications and assess factors like client count, fee control, job execution, and the contractor’s ability to work for other clients.
The tax rate for self-employed individuals is mid-range at 20%. Tax returns can be filed online, but some specialized knowledge is required to navigate the process effectively, making it moderately challenging for freelancers.
Reclassification carries relatively low tax exposure, with only a 1.61% increase in tax liabilities for the company if one of their contractors is reclassified as an employee. However, fines and penalties for misclassification can be severe. Long-term contracts also risk creating a Permanent Establishment (PE).
The Philippines scores low due to difficulties in opening a business bank account, which requires multiple approvals from different authorities. Receiving payments can be delayed and involve additional requirements, creating difficulties for self-employed individuals.
The Philippines currently lacks a digital nomad visa, though government plans to introduce one are in progress, offering hope for future improvements in attracting remote workers.
Key takeaways
The Philippines has a highly regulated employment landscape, scoring low on the Future of Work Index due to strict rules governing worker classification and employment relationships. Hiring employees requires establishing a local entity or using an Employer of Record (EOR), while engaging contractors is allowed but must be carefully structured to avoid misclassification. Despite these challenges, the Philippines offers a talent pool with great potential, particularly in the tech, creative, and service industries.
Frequently asked questions
Companies can hire independent contractors in the Philippines without establishing a local entity. However, hiring employees directly is not legally permitted without setting up a local entity or using an Employer of Record (EOR).
Using an Employer of Record (EOR) in the Philippines is legally permitted. While the EOR model is not specifically regulated, it is widely used and accepted in practice. However, misuse* of the EOR model can lead to the worker being reclassified as directly employed by the company, exposing it to compliance risks.
* Misusing an EOR includes hiring full-time employees as temporary roles to bypass benefits and labor laws, ignoring statutory obligations such as minimum wages or collective bargaining agreements, avoiding corporate taxes or employer contributions, terminating workers without adhering to local protections, and withholding from the EOR critical details about employment terms, leading to compliance risks and inaccurate filings.
There are no tax declaration or withholding responsibilities when hiring independent contractors in the Philippines, as contractors are responsible for managing and reporting their own taxes. However, if a company hires employees, it is legally required to handle tax and social security contributions withholding. Without a local entity, companies must use an Employer of Record (EOR) to manage these obligations compliantly for employees.
While offering health insurance to contractors in the Philippines isn't a common business practice, it is also not one of the main indicators of misclassification. However, to avoid potential risks, companies should ensure that contractors retain control over their work and avoid offering benefits that closely resemble those provided to employees.
Determining the correct contractual relationship
If the Philippine authorities review the contract, they are more likely to classify the relationship as a legitimate contractor arrangement if the self-employed contractor:
- Has full control over how, when, and where the work is performed, without direct supervision or micromanagement
- Sets their own rates, manages business expenses, and provides their own tools, equipment, or resources to complete tasks
- Decides independently on how to execute tasks or projects without company-provided training or step-by-step instructions
- Offers services that are not central to the company’s core business operations, focusing on specialized or project-based work
- Works with multiple clients and engages in project-based or fixed-term contracts instead of indefinite or long-term agreements
If the relationship does not meet most of the criteria above, it will most likely be classified as an employment relationship.
Financial risk associated with a potential contract misclassification
If a contractor is misclassified, the foreign entity may owe back payments for unpaid taxes and social security contributions, along with fines ranging from US$500 to US$749. Additionally, the company may have to pay out retroactive employee benefits, such as paid leave, bonuses, and severance pay, which the contractor would have been entitled to as an employee.
The statute of limitations for misclassification claims is of 3 years.
Additional taxes
In the Philippines, the taxes and contributions due by an employee are approximately 1.61%* more than what a self-employed contractor owes. These additional costs are charged directly to the company in the event of misclassification.
*To keep things comparable, we use a gross income of $4,000/month to determine the potential exposure. The calculation takes into account equivalent taxes paid to the authorities by the self-employed person during the same period of time. The exact amounts might be different depending on your regular payouts.
What could trigger a compliance review?
A compliance review may be triggered by factors such as a worker’s complaint, contractor’s irregular tax filings, or routine tax audits where employee classification is scrutinized.
How will any additional amounts be charged?
If the authorities reclassify the relationship, any additional amounts due—such as back taxes, social security contributions, and penalties—will be charged directly to the company, not to the self-employed contractor. If the company is not registered in the Philippines, local authorities may invoke bilateral agreements that permit the collection of taxes through the cooperation of tax authorities in the company’s home country. However, the enforcement of such measures is rarely applied in practice.
Will a local contractor trigger a permanent establishment?
Yes, hiring a contractor in the Philippines for a long period (typically over 6-12 months) can trigger permanent establishment (PE)* status. This can subject the foreign entity to local corporate taxes and regulatory obligations. PE risk increases when a contractor acts in a managerial capacity, regularly negotiates contracts, or is closely integrated into the company’s operations.
*A PE represents a fixed place of business through which a foreign company conducts its commercial activities in the Philippines. If a PE is established, the business income associated with it will be subject to local taxation.
Is paid health insurance one of the indicators used by local authorities to determine if a worker is misclassified?
While health insurance is typically offered to permanent employees rather than contractors, it is not considered one of the core indicators of misclassification. As long as the contractor’s work arrangement and contract are properly structured to reflect an independent relationship, providing health insurance would not pose a significant misclassification risk. However, companies should ensure that other aspects of the working relationship align with contractor status to avoid potential issues.
About the Future of work index
This information is provided by SafetyWing in collaboration with a Big 4 company to assist companies in understanding potential compliance risks. While we strive to provide accurate and up-to-date information, it should not be used as the sole basis for ensuring compliance. Individual circumstances and changing laws may alter the applicability of this information. Please seek appropriate professional support.
