- Do your part as a citizen and pay your taxes.
- What are the differences between filing taxes as an employee and as a freelancer?
- As a freelancer, which tax form should you use?
- Do you need to pay taxes on all of your earnings?
- What if your freelance income is from outside of Malaysia?
- What can you do to make it easier on yourself as a freelancer when tax season comes?
- How to further reduce tax deductions?
- Do you know that you have a better solution to automated bookkeeping?
As a freelancer, you have to equip yourself with a different field of knowledge as you’re working on your own without any employer to assist on financial matters, for example, taxes. Having an employer is an advantage for employees as they have the company to represent them. For a freelancer, that is not the case.
If you’re still new to freelancing, you might have this unsure and unsettling feeling how to manage and deal with all of your tax-related documents. If you have no experience in managing the documents, read on to find how you can solve this problem.
Despite being a freelancer, you will still need to file your taxes. If you have already reported a tax file (from previous employment), you have to submit your return form even if your annual or monthly income falls below the chargeable level which is RM34,000 after deduction from the EPF.
However, if you haven’t registered a tax file and your income is below the chargeable amount, you don’t need to register a tax file.
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.
What are the differences between filing taxes as an employee and as a freelancer?
There are no apparent differences between employees and freelancers. In fact, both may also use the same form depending on whether or not a business has been licensed or registered.
But there are a few differences, for example, employees will receive a document called an EA form describing their annual compensation earnings as well as annual year-round EPF and SOCSO contributions.
The required summary of income will become helpful when filling out your return form. As for full-time freelancers, they would need to work out their earnings by tabulating their profits through invoices and expenses.
Employees can also be under the Regular Tax Deduction (MTD) scheme, where their employer calculates for them and makes tax deductions. When the time comes to file taxes, every employee can pay just a small sum due to the MTD or even obtain a refund if they have overpaid. Besides that, employees and full-time freelancers would have to go through the same process to file taxes.
As a freelancer, which tax form should you use?
If you haven’t registered your freelance work officially as a business, you can use Form BE. From BE is for individuals not carrying on a business. Nonetheless, you’ll need to file your taxes with Form B if you’ve registered a company.
But if you’ve registered a company, you’ll need to file your taxes with Form B.
Do you need to pay taxes on all of your earnings?
You still need to pay taxes, but not on all types of earnings as there are certain exemptions applied:
- A maximum exemption of RM10,000 for royalties received for use of your copyrights and patents such as publications of artistic works
- RM12,000 for translation of books and literary work for certain purposes
- RM20,000 for publications of literary works, paintings and musical compositions.
Find out about the other types of income that you may receive exemptions for here.
What if your freelance income is from outside of Malaysia?
For freelancers, earning revenue from foreign companies (not based or registered in Malaysia) is not uncommon. Here’s some good news, income earned from outside Malaysia is excluded from tax as of YA 2004.
What can you do to make it easier on yourself as a freelancer when tax season comes?
1. Contribute to your EPF account and private retirement scheme
Since you don’t have an employer to make monthly tax deductions, if your earnings are large, the figure you pay will be in a lump sum, which can be quite heavy.
Take advantage of tax relief for pension contributions: EPF (RM6,000 relief) and private retirement schemes (RM3,000 relief), as well as life and health insurance to pay less in tax.
2. Register your business
It’s hard to get a loan as a freelancer but when you have a successful, legal company, your chances are improved.
In addition, you might enjoy better tax rates (for sole proprietors), claim for business expenses and deductions, and maybe even give your clients greater reputation.
3. Hire a tax consultant
While this isn’t a must, at least for the first time it would be wise to hire a specialist to assist it with your taxes.
Particularly if your freelance income is small or the numbers look especially complicated, that would be a major help.
They will help you legally claim to pay less in tax for business expenses and deductions.
More significantly, they will show you how to prepare your taxes (legally), and file them the following year.
4. Have a visit to IRB/LHDN
There are certainly some grey areas when it comes to full-time freelancing and as each freelancer has unique tax problems to deal with, it’s best to go straight to the source.
Make an appointment or write to the Inland Revenue Board (IRB) or Lembaga Hasil Dalam Negeri (LHDN) with a view to clarifying all your tax issues about your business line.
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.
Do you know that you have a better solution to automated bookkeeping?
Instead of hiring an accountant which will cost you money for your business, you may save up costs and manage your business anytime, anywhere. If you are a business owner, we suggest you try out Biztory, a cloud accounting software that caters to people who are not tech savvy, as everything is designed in the simplest form.
With this smart business assistant, you can manage their tasks in billing, inventory, and tax estimation & submissions, while monitoring business performance through summarised reports and analytics generated in real time.
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 generating an invoice online, 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.
Therefore, Biztory now collaborates with RW William PLT to help you to solve the taxes problem with the professional for advice and guidance. As a result, you can more easily and clearly understand the taxes which they need to submit and avoid the government penalty.