Working as a full-time freelancer means you don’t have an employer to assist you with tax-related matters. This can complicate the tax filling procedure come tax season. So if you are new to freelancing and haven’t registered a tax file, here’s a quick guide on how you can do it.
If you think freelancing is a way to circumvent taxes, then you are greatly mistaken.
As the old adage goes, there’s two things in life that are certain: death and taxes. You could even argue that paying taxes is part of our civil responsibility and obligation as a citizen of the country.
Unfortunately, pocket money or extra income earned from side-gigs or side-businesses aren’t exempted from being taxed, and there’s no real way to escape paying taxes irrespective of your type of employment, i.e. freelancing and being self-employed.
Having an employer, however, does come with some advantages. For example, your company will carry out the payments for you, making the entire process much easier and smoother - but as a freelancer, that’s not really the case and you’ll need to manage the entire process by yourself.
If you are a freelancer, it’s not uncommon to feel unsure of how to manage and deal with all of your tax-related documents. If you need more help on how to file your income tax as a freelancer, read on.
How do you define freelance work?
If your payment is directly dependent upon the profits earned from the goods and services produced then you are categorised as a self-employed worker, according to The World Bank. And guess what? The description pretty much applies to freelancers, too.
Don’t take filling your income tax lightly as you could be fined or imprisoned by Lembaga Hasil Dalam Negeri (LHDN). For example, failure to (without reasonable excuse) to furnish an income tax return form could result in a fine of RM200 to RM20,000 or imprisonment for a term not exceeding six months.
There’s no escaping taxes - so first establish if you are taxable!
To be taxable, you have to fulfill certain requirements as a resident in Malaysia.
- An individual who earns an annual income of RM34,000 (after Employees Provident Fund (EPF) deductions).
- An individual who earns income from a business (through gains or business profits).
According to LHDN, businesses that are liable to tax include sole proprietorship/self-employed, individuals carrying on a business on their own, partnerships - including any business venture of two or more individuals combining ownership, authority, work force or skill in running a business where profits are shared. Examples of taxable businesses include sundry business, direct selling, agriculture and farming, stalls, clinics, law firms or other professional practitioners, writers and actors and remisiers.
If you fulfill the requirements, then you are definitely taxable. However, if you didn’t already have a tax file registered to LHDN, and your income is below the chargeable amount (RM34,000), you don’t need to register a tax file.
However, you will still have to submit your return form if you had already reported a tax file from your previous employment - regardless if your annual or monthly income falls below the chargeable level.
How is filing for income tax as a freelancer different to a regular employee?
Employees will usually receive a document called an EA form detailing their total salary earnings as well as their total EPF and SOCSO contributions for the year. This form is crucial when filling in your return form because it provides you the nitty gritty details you need to complete your tax return.
Conversely, since full-time freelancers don’t make a fixed income per se, they'll have to figure out their earnings by themselves by going through their own invoices and expenses.
Another big difference between freelancers and full-time employees is that the latter would usually go through the Monthly Tax Deduction (MTD) programme, where employers would make monthly tax deductions for their workers. Freelancers, on the other hand, will typically have to pay a lump sum figure to LHDN come tax season, and this can be rather hefty if your earnings are large.
Are all earnings considered taxable and what tax form should freelancers use?
If you haven't registered your services or freelance work as an official business, you should use the Form BE, specifically catered for individuals who don’t own a business. Part-time freelancers may find themselves in this situation the most because their side-gigs may or may not be long-term projects. But if you have a registered company, you’ll need to file your taxes with Form B.
The reality is most of your earnings or royalties from freelancing will be taxable; but there are freelancing-related tax reliefs and exemptions that you should take advantage of to pay less tax. We list them below. By the way, this is not the exhaustive list of exemptions; you may be qualified for other exemptions so be sure to check that out as well.
Note: Income earned from foreign companies, in other words, businesses that are not based or registered in Malaysia, are exempted from tax, as of YA 2004.
Royalties are not taxable or exempted if they do not exceed the following:
|Types of royalty
|Publication of artistic works/recording discs/tapes
|Translation of books/literary works
|Publication of literary works/original paintings/musical compositions
For a full list of exemptions, click here.
Here are quick tips to make filing for income tax (as a freelancer) easier:
1. Take advantage of all the eligible tax reliefs
This is not a freelancer-exclusive tip, but if you are looking to reduce your income tax payment, the best option is to take advantage of all the different tax relief efforts that you are eligible for.
For example, you could take advantage of a slew of recently announced tax reliefs in Budget 2021. The most notable tax reduction is the reduction of personal income tax by one percentage point to 13% for those earning RM50,001 to RM70,000 annually. According to the Finance Ministry, the proposal will benefit 1.4 million taxpayers in the country. This tax cut revision is the first since the last revision in 2018, which saw a reduction from 16% to 14% for the same income bracket.
Other noteworthy tax reliefs include the Private Retirement Scheme (RM3,000 relief which has been extended to 2025), tax reliefs for immunisation programmes and insurance products and a lifestyle tax relief specifically for sports-related expenditure, which has been raised to RM3000. Check our article for a full list of Budget 2021 related tax reliefs. By the way, it also doesn’t hurt to contribute to EPF as this will qualify you for a RM6,000 relief, it also helps you save up for retirement.
2. Hire a tax consultant
This may not be the most ideal tip especially if you are a small-time freelancer just looking to make an extra buck. This solution also wouldn’t make much sense to you if you don’t make a lot on the side anyway.
But if your freelance income is significant - which could potentially make filing tax returns complicated - then it wouldn’t be such a bad idea to consider getting a professional to help you manage your tax returns. They could also help you claim business expenses and get as many deductions legally possible. Who doesn’t want to pay less tax, right?
3. Register your business
Having a proper, registered business comes with obvious benefits - higher credibility and visibility with clients, better chances of securing a loan as a freelancer, better tax rates and eligible to claim for business expenses and deductions.
4. Contact LHDN directly
If you are still unsure or have doubts over filing your income tax, our next advice is to seek direct help from LHDN who can provide more clarity over your tax concerns with regard to your line of business.
There’s undoubtedly a lot of uncertainty over the standard operating procedure for tax returns for full-time freelancers in Malaysia. On top of that, every freelancer will have very specific issues or concerns, so it’s safest to go directly to the main source.
Don’t skip your tax returns because it comes with a heavy price!
Although filing for a tax return, especially as a freelancer, sounds complicated, the process would flow smoother once you start getting a hang of it and doing it on a regular basis.
Never try to skip a tax return because you could, by law, be punished and fined. Do as much research as you can, and if things are just too complicated, get help from LHDN.
We hope you found this article helpful!