World Bank data shows that 25.26% of Malaysian workers are self-employed and this number is growing.
The MCO had also caused more of us to generate income through the hobbies in which we finally had time to explore and improve our skills.
I personally received many invitations from friends who tried to sell their baked goods and DIY face masks online.
However, online businesses are only one of the sectors recognized in Malaysia's Self-Employed Social Security Act 2017.
The World Bank defines the self-employed as "jobs where the remuneration depends directly on the profits from the goods and services produced". This definition can also be applied to freelancers.
Running your own business doesn't just mean that income can be transferred to a personal savings account in the form of “pocket money”.
Although you are self-employed or self-employed, taxes still have to be submitted, regardless of whether they are full-time or part-time.
Here are 5 best practices for managing your freelance finances to avoid being punished or imprisoned by Lembaga Hasil Dalam Negeri (LHDN).
1. Get a business license
It is ideal to register with Suruhanjaya Syarikat Malaysia (SSM) as a sole proprietor (sole representative) if you are earning income from freelance work, even if it is only a side appearance.
The sole support of a company can also increase the chances of getting a loan from the bank, and SSM makes it easier to register for a business license.
For props alone, registration under a personal name like "Lily's baked goods" costs only 30 RM or for a trade name like "Lovely Bakes" 60 RM.
This way you get a lot of tax deductions that you wouldn't get under a personal spending account.
These deductions can reduce your total net income, reducing the amount of tax you have to pay.
The operating costs for a freelance videographer would be, for example, camera equipment, microphones, editing software and travel expenses for recordings. These expenses can be deducted from total income.
2nd Opening a commercial bank account
If you can't handle the transaction volume and have no difficulty tracking your company's cash flow, you probably don't need one.
It is not required by law, but it is convenient to open a commercial bank account as a freelancer to separate business income and expenses from personal ones.
Of course, if you have your own for all business transactions, you also save yourself the effort when it comes to accounting.
3. Pay for Social Security & i-Saraan
As an independent freelancer, you would be responsible for your own social security and pension plans.
These deductions from your income are also not mandatory. However, if you contribute to these schemes, your taxes payable will be reduced as they can be deducted from your gross income.
The Self-Employed Social Security System (SESSS) provides protection against accidents at work, including occupational diseases and work-related accidents, and is aimed at the self-employed.
It was originally only compulsory for drivers such as taxis, emails and private buses.
However, at the beginning of 2020, SESSS was now expanded (on a voluntary basis) to 19 other industries.
These include sectors such as street vendors, information technology, household services, etc.
You would have to make these contributions either monthly or annually in cash in all SOCSO offices or via online banking on the Perkeso website.
The amount to be paid is based on the chosen plan, which covers things like medicine, education and the benefits of dependent people (people whose basic needs depend on you).
The EPF equivalent for the self-employed is called a voluntary retirement incentive (i-Saraan).
Contributions are made like a savings plan in which you contribute according to your own financial capacity and time.
The system also allows you to withdraw your money at any time. There is no minimum contribution, but a maximum of RM 60,000 per year.
The government will also subsidize 15% of your personal contribution. This is subject to a maximum of RM250 per year until 2022.
4th pay taxes
For starters, anyone earning more than RM 34,000 a year (after deducting SOCSO and EPF) must pay taxes that should be collected annually on or before June 30.
Here it is useful to have this commercial bank account.
Since full-time freelancers do not receive an EA form like regular employees, the income from profits from bills and expenses would have to be tabulated.
Regarding the forms to be used, Form B is aimed at people with business income (for people registered as a company).
For a part-time freelancer who is still employed by a company, the taxable income is the total on your EA form plus your freelance profits.
Freelancers without a business license use the BE form, which is identical to regular employees of a company. The only addition is to state your freelance income under "Other Profits and Profits".
In addition, it is important to follow a paper path as proof of income and expenditure for 7 years when tested by LHDN. This includes proof of purchase and sales invoices.
5. Know what Tax exemptions You are eligible for
But of course not all income is taxable as there are exceptions.
All employees (including the self-employed) are entitled to tax relief such as life insurance and donations up to a certain amount right from the start.
Contributions such as SESSS and i-Saraan can also be deducted from your income.
From the 2004 tax year, all income that a resident outside of Malaysia generates is exempt from tax.
Some other tax exemptions include:
- 10,000 RM for license fees for the use of copyrighted and patented works such as publications of artistic works,
- RM12,000 for the translation of books and literary works,
- 20,000 RM for publications of literary works, paintings and musical compositions,
- 50% of the statutory income from the results of commercialized scientific research.
It is of course best to hire a tax advisor to assist you in this process, especially the first time.
If you do something wrong – for example, specifying and paying the wrong tax amount – this can result in fines and examination requests from LHDN or prison terms.
- Read more about what we wrote about freelance work here.
Selected image source: Pexels