Guide To Paying Tax For Your Business Income As An Individual
Table of Contents
At the onset of the COVID-19 pandemic, many turned to opening side businesses to supplement their income as the global economy became more uncertain. Thanks to the rapid maturity and progress of digital platforms, individuals can monetise almost anything they set their mind to.
Having your very own business is suddenly the dream to strive for, and those who have already started their side business have taken the first steps to building their own brand.
Having side gigs, or making it big in business holds the potential to generate a lucrative income for you regardless if it is your main income source, or just one of many side incomes you may have.
Why you should register your business
Be it a business of sole proprietorship, or one that is being setup in partnership with others, you should register your business with the Suruhanjaya Syarikat Malaysia (SSM). For more information on how to do so, you can go here. Doing so will entitle you to some tax incentives that would otherwise be unavailable to you should you have a non-business income.
Other than that, there are a number of other important reasons for why you will want to register your business:
- Registering your business lets you set up a business profile which customers can access via the Companies Commission of Malaysia (CCM, a.k.a. SSM) website
- Being registered instills as sense of customer confidence in your business ad product
- It allows business losses and expenses to be deducted against business income
- Being registered reduces chargeable income and tax payable
- For partnerships, income is distributed to partners for individual tax computation
Which form should you use?
| Sole Proprietorship | Partnership | Company | |
|---|---|---|---|
| Tax Form | Form B | Form P | Form C |
| Tax Treatment | Individual Business Income | Individual Business Income | Corporate Tax |
| Tax Deduction / Exemption | Individual Tax Relief and Business Expenses | Individual Tax Relief and Business Expenses | Business Expenses |
| Due Date | 30 June | 30 June | Within 7 months after financial year end |
If you’re a freelancer or haven’t registered your side gig as a business with the SSM, then you would have to file under non-business income tax with the Form BE (the deadline was back on 30 May).
If you have registered your business under sole proprietorship, you will need to utilise Form B for your tax filing needs. This is because you are now operating as a business enterprise rather than a regular freelancer. If your business is registered as a partnership, then you will need to use form P instead.
Source: hasil.gov.my
The deadline for filing business income tax is 30 June, 2023.
Read More: Guide To Using LHDN e-Filing To File Your Income Tax
Income tax for sole proprietorship
Income tax filing for sole proprietors is a fairly straightforward process. Instead of filing Form BE, which is filed by individuals under employment or having non-business income, sole proprietors file Form B before 30 June on an annual basis.
While you are in the process of filing the Form B, sole proprietors will need to prepare a wide range of information in order to complete the process and determine the chargeable income and tax payable. These can include the following:
- Statutory income from all businesses and partnerships
- Business losses brought forward
- Statutory income from employment
- Statutory income from rents
- Statutory income from interest, discounts, royalties, premiums, pensions, annuities, other periodical payments, other gains or profits
- Aggregate income (Statutory income from all businesses and partnerships – business loss brought forward + Statutory income from employment, rents, interest, discounts etc.)
- Current year business loss
- Allowable expenses
- Approved donations
- Total relief
- Capital allowances of business and partnership carried forward
- Trading, profit and loss account
- Balance sheet
Source: LHDN
Approved donations
Tax deductions will be given to donors who donate cash or contributions in kind that will be used for fighting against the COVID-19 pandemic as well as helping people affected by the pandemic.
- Gift of money to the Government / State Government / local authority
- Gift of money to approved institutions / organizations / funds (Restricted to 10% of aggregate income)
- Gift of money for any sports activity approved by the Minister of Finance (Restricted to 10% of aggregate income)
- Gift of money or cost of contribution in kind for any project of national interest approved by the Minister of Finance (Restricted to 10% of aggregate income)
- Gift of money in the form of wakaf to any religious authority / religious body / public university or gift of money in the form of endowment to a public university (Restricted to 10% of aggregate income)
- Gift of artefacts / manuscripts / paintings to the Government or State Government (Value determined by the Department of Museums Malaysia or the National Archives)
- Gift of money for the provision of library facilities or to libraries (Restricted to RM20,000)
- Gift of money or contribution in kind for the provision of facilities in public places for the benefit of disabled persons
- Gift of money / cost / value of gift of medical equipment to any healthcare facility approved by the Ministry of Health (Restricted to RM20,000)
- Gift of paintings to the National Art Gallery or any state art gallery ( Value to be determined by the National Art Gallery or state art gallery)
Source: LHDN
Personal reliefs
A sole proprietor or a partner in a partnership are also entitled to personal reliefs, same as employed individuals. However, it should be noted that business-related deductions and personal reliefs must be separated and must be claimed in its rightful category.
For example, a brand new mobile tablet purchased for your own use has to be claimed under personal lifestyle (restricted to RM2,500) and not under business expense.
Following the deduction of all business losses, allowable expenses, approved donations and personal reliefs, a chargeable income is obtained. Based on the chargeable income, tax rate of 0% to 28% is applied.
Tax schedule for year of assessment 2022
| Category | Range of Chargeable Income | Computation (RM) | Rate (%) | Tax (RM) |
|---|---|---|---|---|
| A | 0 - 5,000 | First 5,000 | 0 | 0 |
| B | 5,001 - 20,000 | First 5,000 Next 15,000 | 1 | 0 150 |
| C | 20,001 - 35,000 | First 20,000 Next 15,000 | 3 | 150 450 |
| D | 35,001 - 50,000 | First 35,000 Next 15,000 | 8 | 600 1,200 |
| E | 50,001 - 70,000 | First 50,000 Next 20,000 | 13 | 1,800 2,600 |
| F | 70,001 - 100,000 | First 70,000 Next 30,000 | 21 | 4,400 6,300 |
| G | 100,001 - 250,000 | First 100,000 Next 150,000 | 24 | 10,700 36,000 |
| H | 250,001 - 400,000 | First 250,000 Next 150,000 | 24.5 | 46,700 36,750 |
| I | 400,001 - 600,000 | First 400,000 Next 200,000 | 25 | 83,450 50,000 |
| J | 600,001 - 1,000,000 | First 600,000 Next 400,000 | 26 | 133,450 104,000 |
| K | 1,000,001 - 2,000,000 | First 1,000,000 Next 1,000,000 | 28 | 237,450 280,000 |
| L | Exceeding 2,000,000 | First 2,000,000 For every next ringgit | 30 | 517,450 ……….. |
Source: LHDN
Keep in mind that all business records, expenses, receipts for personal reliefs will have to be kept for audit purposes for a period of 7 years.
Income tax for partnerships
If your business is registered as a partnership, the precedent partner is responsible for filling out the Form P and issuing the Form CP30 to each and every partner. The Form CP30 has to be provided to each partner so as to enable them to declare their partnership income within the stipulated period.
Generally speaking, the precedent partner is the first partner named in a partnership agreement. In the absence of a precedent partner, a precedent partner should be appointed by the other partners to represent the business and fill out the Form P.
The precedent partner is an incredibly important role as they are responsible for filing Form P to declare all income, losses, expenses, profit, loss, and assets, based on the profit and loss account, and balance sheet of the partnership business. As with sole proprietorship, all business records must be kept for a period of 7 years for audit purposes. After Form P is completed, Form CP30 is issued which indicates the apportionment of partnership income or loss to each partner.
Once a partner receives Form CP30, they will declare the partnership income and loss that is stated on their Form CP30 onto their Form B.
Source: LHDN
How sole proprietorship/partnership differs from company tax
While registered companies are subject to corporate tax, other types of businesses such as sole proprietorships and partnerships are also liable to income tax. However, keep in mind that proprietorships and partnerships are subject to a few differences when it comes to filing taxes.
Sole proprietorships and partnerships are the easiest forms of business to be registered, and as such are some of the most popular forms of business. One of the more important points to remember is that the sole proprietor or partner will be personally liable for their business income and losses, and their tax filings are computed into their individual income tax.
Tax filing best practices
Filing your own income tax can be a huge headache on its own. But when filing taxes for your business, things can get even more complicated, especially when you start earning a hefty amount from your side business or if you have not been keeping proper track of your business documents. Here are a few tips to help you make things a little easier.
Stay organised 24/7
It goes without saying that the more organised you are with your book-keeping, the more you save on time and stress. Keep a separate file for taxes, and make sure income and expenses are categorised in organised computer or physical folders, or even both.
Record all revenue and expenses
Keeping good records of revenues and expenses on a daily or weekly basis will prevent a huge pileup at year’s end. Doing so will also help you keep in touch with the cash flow of the company, so you will never be blindsided by outstanding debts and due payments.
Set checkpoints throughout the year
Proactive tax maintenance throughout the year leads to fewer surprises when it finally comes time to sit down and do your taxes. By breaking down tax preparation into smaller, perhaps even quarterly chunks, you’ll find that it becomes much easier to manage things.
Rely on the experts
When it comes to your business, it goes without saying that you want to know and have control over every aspect of your business. However, when it comes to taxes, it is probably best to rely on the professionals to figure out how to pay the lowest amount possible.
If you are a business owner with accounting knowledge, you can probably get by at the expense of your own time. However, investing in an accountant might prove much more efficient.
