Income generated from freelancing, reviews, brand endorsements and social media promotion are subject to income tax as stated by The Inland Revenue Board of Malaysia (Lembaga Hasil Dalam Negeri – LHDN). Since many freelancers earn money from these activities, here are a few questions you may have on this topic:
Do your part as a citizen and pay your taxes.
As of 2018, it is stated that you must pay taxes if your annual income exceeds RM34,000 per year. So yes, if you are a freelancer, you are subject to income tax and therefore must file your income tax. On the bright side, you only need to pay taxes on your chargeable income, which is your total annual income minus all the tax reliefs and exemptions that Malaysian residents are eligible for. An example would be if someone with an RM50,000 net profit/income could reduce their chargeable income with some basic tax reliefs such as medical insurance, family, children and next of kin, etc, this person would only need to pay about RM80 in taxes after claiming tax reliefs and deductions.
How to further reduce tax deductions?
Register your business.
If you have not registered a sole proprietorship, we advise you to do so immediately because it is an ideal business structure for freelancers. The reason why we ask you to do this is because by registering a sole proprietorship, the business will give you the benefit of various tax deductions. By identifying your operating expenses from personal finances, you are able to reduce your net income, resulting in a reduced amount of tax you would actually need to pay. Even if you have a full time job, you should also register for a business. This will help you even further with tax deductions and an added advantage in having your business pay for business expenses. Also for your information, your taxable income is the sum of both your full-time employment and business income (minus tax reliefs and deductions).
Do your bookkeeping accurately.
Be sure to do your bookkeeping accurately and precisely otherwise an incorrect declaration of your taxes (incorrect income and incorrect tax amount paid) will lead you to fines and an audit request from LHDN, which will result in possible jail time. It is also practical to open a business bank account. This way, you are able to separate your personal finances and business finances, making your bookkeeping, tax filing, and accounting much easier. If you feel a business bank account is unnecessary for your business, you should opt for a second bank account to better organize freelance income and expenses.
Try out a cloud accounting software
Instead of hiring an accountant which will cost you money for your business, why not learn how to do it yourself? If you are a business owner, we suggest you to try out Biztory, a cloud accounting software specifically made for business owners and not accountants. Skip the hassle of bookkeeping whereby you have to send your invoices, statements, and receipts to your accountant for all your transactions. Alternatively, simply by making an invoice, you get to avoid painstakingly going through bookkeeping, which is difficult to manage if you are not an accountant.
Don’t be afraid to ask for help!
Hiring a professional accountant will help ensure that you fulfil your tax obligations correctly and avoid having to deal with LHDN. You may not like to do it, but it’s better than having to pay more unnecessary tax, being blocked from getting a car/home loan, receiving fines, or worse, getting an audit request from LHDN, and possible jail time.