Whether you are a freelancer or a self-employed individual, when it comes to tax season (coming up in April for Singapore citizens and residents), it can be overwhelming and confusing in terms of obligations and claims. However, not filing your taxes can result in tough penalties and negatively affect your job and future work.
The Difference Between the Self-Employed Individuals and Freelancers
Often, people assume they are the same and think they have interchangeable meanings and uses, but while they have some similarities, many differences set them apart.
A freelancer is someone who essentially works from project to project. He offers a service or does a piece of work for a client and is then paid based on a fee or commission. More than likely, the contracts are short and vary with each client, and the freelancer will usually work on multiple projects due to having an unstable income.
A self-employed individual is someone who owns his own business, works for himself, and provides a service or product that is his source of income. He is responsible for his own equipment repairs and other expenses and may employ helpers on projects.
Paying Tax as a Freelancer
If, as a freelancer, you are earning more than S$22,000 per year, you would need to file for income tax; anything less than this figure means you are exempt from paying taxes. You can determine the accounting period, which must be 12 months long but needn’t necessarily run from January to December.
As a freelancer, you must prepare a Statement of Accounts at the end of your business accounting period, which pertains to one, Profit and Loss Accounts and two, Balance Sheet. Having these prepared will make filing your taxes that much more efficient and will require either a 2-line or 4-line statement, depending on your earnings category.
If you are earning less than S$200,000, your statement will be as follows:
2 Line statement
· Revenue
· Adjusted Profit
If you have earned more than S$200,000, you will need to submit a 4-line statement as follows:
4 Line statement
· Revenue
· Gross Profit/Loss
· Allowable Business Expenses
· Adjusted Profit and Loss
Claiming Back
Getting money back is always a great feeling, and many freelancers may not realise that claiming back certain business expenses can help reduce their taxes, though they can only do so for the business expenses they incur from running the business.
Do take note, though, that only a certain percentage of allowable business expenses may be deducted from your income. The tax you do end up paying is calculated based on personal tax income rates.
Paying Tax as a Self-employed Individual
Paying tax in Singapore requires a few steps and obligations, and because this can become confusing and overwhelming, begin by following these simple steps and a quick checklist to get the ball rolling for you to submit your tax information:
1. You will need to determine what your tax obligations are.
2. What is your tax accounting period (January – December/July – June)
3. See whether you will need to submit a 2 or 4-line statement.
4. File your income tax to IRAS.
1. Your tax obligations
As a self-employed individual, you will report income earned not as a salary but rather as a business income earned from business operations. You can consider yourself self-employed when you can earn a living from your business or profession, and generally, as a sole proprietor, you will have registered with ACRA (Accounting and Corporate Regulatory Authority) as a self-employed person.
2. Accounting Period
The 12 months throughout a year is considered your accounting period and where you calculate your profits or losses. You will need to think about the dates and decide on the start and finish of this period when you first start your business.
3. Records and Accounts
This step is probably the most important for tax purposes and the running of your business. From the moment you begin trading or offering a service or product and are getting paid for it, you need to keep a record. Every business transaction must be put in writing and supported by invoices, receipts, vouchers, and any other documents you will have received from the transaction.
Estimates are not accepted, and IRAS will not accept improper records, so be sure to have a good system in place from day one.
4. Statements and Accounts
When you have come to the end of your accounting period, you will need to complete and submit your statement of accounts, which is your Balance Sheet and a record of your Profits and Losses. Just as a freelancer, you will need to ensure you are aware of whether you need a 2 or 4-line statement to submit.
Once you have all your prepared documents and paperwork, you will usually receive a notification or a Form B or B1 (Individual income tax return form) from the IRAS for you to complete. Here you will state all the income you have earned from your business and any other sources.
Good to Know
If you aren’t sure when you will need to pay or when the money will be deducted from you, then this may help. The year you file your taxes and paperwork (let’s say it is 2022) is what is known as the Basis Year, and once that assessment is completed, you will be notified of the amount payable and the tax to be paid, which will happen the following year (in this case 2023), which is the Year of Assessment. You can refer to Tax Filing Due Dates in Singapore For 2023.
In general, you should ideally plan to set aside 25%-30% of your taxable freelance income to pay taxes on income earned. Singapore does offer a few favourable tax policies for business owners and people living in Singapore, which is why it is considered a tax haven for many individuals. If you are prepared and organised, submitting your paperwork for tax purposes can be done effectively and efficiently.
As a highly developed and significantly successful free-market economy, the corruption-free environment makes a living in Singapore, even if you have to pay a small amount of tax, a pleasure.
If you need help managing your taxes, you can always engage an accounting and taxation consultant. They would ensure all your documents are in order and filed on time, every time.
