Did you know that Freelancers and Self-employed individuals are taxed differently (Singapore tax)? During the Singapore tax season (that is coming), it can get increasingly frustrating for both freelancers and the self-employed if they need clarification about their tax obligations. This article will share the difference between freelancers and self-employed and the methods of basic tax computation.
Who Are Considered As Freelancers or Self-Employed?
These two terms are often used interchangeably in Singapore, but they mean different things in one way or another. The most significant difference between freelancers and self-employed individuals is the freedom in their roles. Generally, freelancers are always self-employed, but self-employed people aren’t always freelancers.
Who is a freelancer? Freelancers work for different companies with different sets of tasks to complete on a short-term or contract basis and must fulfil their contractual obligations. A freelancer usually works for multiple clients and is not necessarily dedicated to one. One thing that also sets them apart from full-time employees is that they can choose what jobs they work on.
On the other hand, self-employed individuals may work on their premises and sell their ideas. Self-employed people are loyal to their businesses and customers purchasing their products or services. They earn a living by doing a business, profession, or vocation. They are also considered sole proprietors and partners if they are registered with the Accounting and Corporate Regulatory Authority (ACRA).
Singapore Tax – What Taxes Do Freelancers Pay?
Freelancers must pay taxes (for the business income they earn in a year). It will be considered trade income, and it will be taxed at individual income tax rates.
You must pay income tax once your income exceeds $20,000 a year. However, you are exempted from paying taxes if you are earning less. It means that if you’re getting an average take-home pay of ~$1800/month, you will have to pay income taxes to IRAS.
However, tax rates may vary depending on your tax residency. You will be treated as a tax resident for a particular YA if you are:
- Singaporean citizen or Singapore Permanent Resident residing in Singapore;
- A foreigner who has stayed/worked in Singapore (excluding the director of a company) for 183 days or more in the previous year.
Here is an overview of the resident’s tax rate:
If it is all too complicated, you can head over to the IRAS website for the Personal tax Calculator to calculate the amount of taxes you have to pay.
How to file income tax?
Paying tax in Singapore involves:
- Determining tax obligations.
- Deciding on the accounting period (January-December/July-June).
- Preparing a two or four-liner statement (as shown in the figure below).
- Filing income tax to IRAS.
Most businesses set their accounting period as the end of December, but as a freelancer, you get to decide on the accounting period. At the end of the accounting period, you must prepare a Statement of Accounts which comprises:
- Profit and Loss Accounts
- Balance Sheet
By preparing your Statement of Accounts, the information will be helpful for you to know whether your business is making a profit or a loss, and it will help ease the process of your tax filing. Depending on the income earned, you are required to prepare a 2-line statement or a 4-line statement for filing your Income Tax Return.
For income earned less than S$200,000, you should report your business using a 2-line statement:
1st Line – Revenue
2nd Line – Adjusted Profit For income earned more than S$200,000, you should report your business using a 4-line statement:
1st Line – Revenue
2nd Line – Gross Profit/Loss
3rd Line – Allowable Business Expenses
4th Line – Adjusted Profit & Loss
Kelly provides consultancy services and offers consultation to companies. He earned S$80,000 last year. His allowable business expense is about S$5,000. Using the 2-Line statement, this will be the calculation:
Natalie sells kids’ clothing. She earned S$500,000 last year. The cost of her goods is $150,000. Her allowable business expense is S$50,000. Since her income earned is more than S$200,000. She will report her tax by using a 4-Line statement.
|Allowable Business Expenses||S$50,000|
How can Freelancers reduce the amount of Income Taxes to pay?
Often freelancers are unaware that claiming certain expenses helps reduce their taxes like capital allowances, regular business, medical, and R&D expenses. These claimable expenses refer to any business expenses incurred during your business’s running. However, the government may deduct only allowable business expenses from your income.
Some tax reliefs and rebates are targeted at certain groups of taxpayers to promote specific social and economic objectives:
|General Reliefs Available to All Taxpayers||Additional Reliefs Available to Married/ Divorced/ Widowed Taxpayers|
|Available to Male and Female Taxpayers||Available to Female Taxpayers|
|Course Fees Relief|
CPF Cash Top Up Relief*
CPF Relief*CPF / Provident Fund Relief: For Employees Only
CPF/ Provident Fund Relief: For Self-Employed/ Employee who is also Self Employed
CPF/ Provident Fund Relief: Compulsory and Voluntary Medisave Contribution
Earned Income Relief
Handicapped Brother/ Sister Relief
Life Insurance Relief
NSman (Self) Relief
Parent/ Handicapped Parent Relief (For maintenance of parents, grandparents & great-grandparents, including in-laws)
Supplementary Retirement Scheme (SRS) Relief
Applicable to Singapore Citizens and Singapore Permanent Residents (PRs) only.
|NSman (Parent) Relief|
Qualifying/ Handicapped Child Relief
Spouse/ Handicapped Spouse Relief
|Foreign Domestic Worker Levy Relief|
Grandparent Caregiver Relief
NSman (Wife) Relief
Working Mother’s Child Relief
To know more about the individual tax reliefs, you may refer to this comprehensive list.
Consider opening a separate bank account for your personal and freelance funds
To help you manage your funds and keep track of all your revenue and expenses better, freelancers should consider opening two separate accounts: one for personal, the other for their freelance job. This method can make tracking your income and expenses from your freelancing job easier, since all the money from your freelance account would be easier to trace since it isn’t mixed up with your personal funds.
Another benefit of having a separate bank account is that it could be used as your company account if you choose to move up from freelancing into a full-blown private limited company. One of the requirements of starting a private limited company is having a separate bank account, since a private limited company is a separate legal entity. So, if you already have this, that’s one step closer to getting your company started, plus you get to practise proper money management early.
There are many great banks in Singapore that you can choose to open your freelance account with, but some banks offer more perks that can help you grow your business. Be sure you consider certain factors first before choosing a bank.
When Should Freelancers Level Up the Company Structure to Private Limited?
Despite having the flexibility to choose different projects and clients, freelancers may want to set up a company as it helps sustain the business in the long run. If the company’s business has increased over time, and you plan to create systems and hire more help to complete the work, you may want to consider levelling up the company structure to private limited.
There are many advantages to incorporating a private limited company, such as the income earned will be taxed at a corporate tax rate and the business structure having its own separate legal identity. A limited private status will help to create a professional image for the client and assist in fundraising or bidding for more projects.
Check out our article on the benefits of setting up a company in Singapore if you want to learn more about the topic.
If you are a freelancer considering taking the next step by turning your freelancing gig into a company and need help incorporating, Lanturn can assist you with the administrative process.
Fill up our 5-minute incorporation tool and appoint us as your company secretary. We also have different incorporation packages with various add-ons that you can pick and choose according to your business structures.
For a quick guide on Singapore incorporation, read here.
We also help small businesses with accounting and bookkeeping services. We can even help you open a corporate bank account if needed!
Furthermore, we’ve built our own platform, LFS, which allows you to manage your compliance deadlines, submit your invoices and accounts payable and communicate directly with our corporate secretary and accounting specialists. With this, you can focus on your business while we care for the rest.
If you’d like professional help with your incorporation, contact us today!
Need a tip on what accounting system you can use for your expenses? Check out these blogs: