Singapore tax guide for self-employed, freelancers, part-time business owners, and partners
In Singapore, it’s common to see enterprising employees running a side-business on top of their day-job, or experienced professional working as a self-employed. In both cases, your side gig or full-time incomes are fully taxable. In this special guide, we give a glimpse of what’s taxable and what’s not, and share some common deductions enjoyed by self-employed individuals or partnerships.
Understanding taxable items and exemptions
Generally, there are a few income sources that you will have to pay tax on, these include:
- Your employment income: Basic salaries, bonuses, Director’s Fee, commissions, gains from exercise of stock options, income received from overseas, pensions, and retirement & retrenchment benefits
- Income from Trade, Business, Profession or Vocation: Your income derived as a self-employed person, from a partnership, or income received in the form of virtual currencies are taxable under this criteria. Income received as a government grant like PIC bonus, Special Employment Credit, and Wage Credit Payout is also taxable in the year of Assessment when the payout is received.
- Other sources of income: Other sources of incomes that are taxable include estate and trust income, royalties, annuity bought from insurance companies or from a gift or inheritance, withdrawals from Supplementary Retirement Scheme (SRS).
Common deductions are available to reduce individuals’ tax bills, including: Employee deductions, Deductions for the self-employed, and Deduction on donations.
- Employee Deductions: In general, employees may be able to claim tax deductions on employment expenses ‘wholly and exclusively’ incurred in the production of earning your employment income in Singapore, as ‘allowable expenses’. Some examples of allowable expenses include expenses incurred in entertaining clients, subscriptions paid to professional bodies or societies, fees paid for networking, or travel expenses incurred on public transport such as taxis, if for one, the expense was not reimbursed by your employer and two, the expense was incurred while carrying out your official duties. You may use IRAS’s employment expenses schedule to record your expenses.
- Deductions for the self-employed: A self-employed individual, sole proprietor or partner who meet the qualifying conditions set, you would be able to claim deductions for regular business expenses, capital allowances, PIC, medical expenses, and others.
- Deductions on donations: You can claim tax deductions on donations made from the year 2009 to 2018. The tax deduction claim can go up to 2.5-3 / 3 times the amount of donation. These include cash, artefact, shares, computer, or land and building donations.
- Other forms of income: Lastly, there are other forms of employment income you receive that could be exempted from taxes. For instance, you may receive income in the form of Benefits-in-kind granted administrative concession like outpatient treatment, corporate dinners, death gratitude, or sponsored outings. Those are fully exempted from taxes.
Tax deductions for Employees versus Self-Employed or Partners
In general, employees may be able to claim tax deductions on employment expenses ‘wholly and exclusively’ incurred in the production of earning your employment income in Singapore, as ‘allowable expenses’. Some examples of allowable expenses include expenses incurred in entertaining clients, subscriptions paid to professional bodies or societies, fees paid for networking, or travel expenses incurred on public transport such as taxis, if for one, the expense was not reimbursed by your employer and two, the expense was incurred while carrying out your official duties. You may use IRAS’s employment expenses schedule to record your expenses.
There’re certain deductions that sole-proprietors, self-employed individuals or partners in a partnership may enjoy, whilst not enjoyed by employees
1. Expenses incurred before commencement of business: This refers to costs or expenses incurred before a business starts its operations and your deemed date of business commencement is the date of your first dollar of revenue. Generally, only expenses incurred “after” the first dollar of revenue is received will be tax-deductible but in order to encourage entrepreneurship, after YA 2012, the government has allowed the deduction for revenue expenses one year prior to the deemed date of business commencement.
For instance, you have registered a Limited Liability Partnership (LLP) with a couple of friends in Jan-2014, taking in your first dollar of revenue in March-2014, while incurring some web development cost in Sep-2013 (within 1 year before the first day of commencement of business in Mar-2014), such cost would be tax deductible.
2. Business expenses: This is widely understood. This refers to expenses incurred while running the business. Allowable business expense such as employee costs (compulsory CPF contributions, insurance for employees, salaries and bonus, etc), finance and professional costs (of engaging a professional accountant, lawyer, etc), running costs (advertising, business license renewal, COE for motor vehicles) can be deducted against income to reduce payable tax.
3. Productivity and Innovation Credit (PIC): As a business owner in the Singapore community, you’d likely be familiar or have heard about PIC. If your expenditure falls under the six qualifying activities, and your business fulfil the qualifying criteria, you may enjoy 400% tax deductions for YA 2015 to 2018 under the PIC+ Scheme.
Some examples of qualifying activities are the costs of training your employees (plus the added subsidy from government for dedicated ETS training), cost of acquisition and leasing of PIC IT and automation equipment, cost of acquisition and licensing of Intellectual Property Rights (IPR), cost of registration of patents, designs and trademarks, cost of R&D, and costs of investment in design projects.
4. Medical expense: As a general rule of thumb, you may claim deduction for medical expenses of up to 1% of the total employee remuneration for the year. Remuneration includes employees’ salaries, allowances, bonues, allowable CPF contributions, but excludes sole proprietors and partners salary, bonus, allowances, Medisave, CPF contributions, and also exclude Foreign Workers Levy (FWL).
Keeping a proper record for your business and filing taxes
As you would reckon, you are required to file your taxes each assessment year. Therefore, keeping a proper record is important, which gives you a proper basis to computing and filing your taxes come year-end. If you are self-employed, you shall remember to define your accounting period, which is typically 12 months, and declare your business income.
Keeping proper records and accounts is recommended by IRAS, such as a Profit & Loss statement and a Balance Sheet for your business, so when it comes year-end you could arrange your taxes accordingly. When in doubt, you may always engage a professional book-keeper for suggestions.
Filing taxes – What to do about it and best practices
Income is assessed on a precedent year basis ending 31st December of each year and taxes payable on the amount earned. For instance, your income earned over Year 2016 would come under tax returns for the Year of Assessment YA 2017.
If you receive an SMS or letter from IRAS asking for your tax filing, you should do so regardless whether your employer is participating in the Auto Inclusion Scheme (AIS) or not, or the amount of income you earn the previous year. In cases where you are overseas for an extended period of time, you could engage a third party to handle your tax matters on your behalf, provided a proper authorization is being made in advance.
You are required to file for tax returns to IRAS by the 15th April of the following year, and 18th April in case of electronic filing. Online filing of tax can be done through My Tax Portal of which you need a SingPass / IRAS PIN. You can get this by applying for one online and you will receive a PIN within 4 working days.
The income tax bills are then usually sent to individuals by September.
- Prepare the required documents (IR*A, Dependants particulars, Business registration number, or other income details)
- Login to My Tax Portal
- Verify your details
- Update existing tax reliefs
- Declare other source of income if any
- Receive acknowledgement receipts
For form filing, IRAS sends in paper tax returns between February & March every year. If you do not receive the forms, you should contact IRAS.
- If you are a tax resident, you should fill form B1 Appendices 1 and 2
- If you are self-employed, you should fill form B Appendices 1 to 3
- If you are non-resident, you should fill form M Appendix
- Signature should be put on page 1 of the form and the form mailed back to IRAS
Getting more tax-efficient as your business grows
As your sole-proprietorship business or partnership grows, it pays to consider other corporate structure (e.g. a Singapore Private Limited) that could lower your effective taxes. We have written an extensive Singapore corporate taxes guide here, but in essence, newly start-up companies (i.e. those in existence for less than three years) are entitled to attractive tax exemptions as in the firm’s first SGD $100,000 of chargeable income would be completely tax-free, with the next $200,000 being 50% exempted.
This means for your firm’s first $300,000 of profits, you are only paying a tax amounting to $17,000, an effective rate of 5.67%.
You may reference to Piloto’s extensive guide on pros and cons of common Singapore business entities.