How to calculate Malaysia income tax for freelancers?

Navigating income tax as a freelancer in Malaysia can feel like a complex puzzle. Unlike salaried employees with automatic deductions, you’re responsible for calculating your own earnings and making a single annual payment. Getting this right isn’t just about compliance; it’s about maximizing your take-home pay through smart deductions and reliefs.

This guide provides a clear, step-by-step process for freelancers and gig economy workers to calculate their Malaysia income tax.

Step 1: Determine Your Total Income

Start by adding up all your earnings for the entire year, from January 1 to December 31. This includes every payment you received for your services, whether it’s from local or international clients. Don’t forget to include side income from things like content creation, online sales, or ride-sharing gigs.

Step 2: Choose the Correct LHDN Tax Form

The form you file with the Lembaga Hasil Dalam Negeri (LHDN) depends on your business structure.

• Form B: Use this form if you have a registered business with the Suruhanjaya Syarikat Malaysia (SSM), such as a sole proprietorship. This is the recommended choice for full-time freelancers as it allows you to deduct business expenses.
• Form BE: Use this form if you do not have a registered business. This form is for individuals with non-business income sources, like a salaried job with a side hustle. Your freelance income will be declared under “Other Gains and Profits.”

Step 3: Calculate Your Chargeable Income

This is the amount of income that will actually be taxed. It’s your total income after all eligible deductions and tax reliefs.

• For Form B Filers:
  1. Gross Income (All freelance earnings)
  2. Minus Business Expenses (Costs “wholly and exclusively incurred” to generate your income)
  3. Equals Statutory Income
  4. Minus Personal Tax Reliefs (explained below)
  5. Equals Chargeable Income
• For Form BE Filers:
  1. Gross Income (from all sources, including freelance and employment)
  2. Minus Personal Tax Reliefs (explained below)
  3. Equals Chargeable Income

What Are Business Expenses?

When you file Form B, you can significantly reduce your tax bill by claiming legitimate business expenses. Think of it as reducing your taxable profit.

• Examples:
  • Equipment: Laptops, cameras, software subscriptions (e.g., Adobe Creative Cloud, Figma).
  • Utilities: A portion of your home internet and phone bills, if used for work.
  • Professional Fees: Accounting services, legal advice, or professional association fees.
  • Marketing: Advertising costs, website hosting, and domain fees.

Example 1: The Freelance Graphic Designer

A designer earned RM75,000 for the year. Her business expenses (software, new laptop, co-working space fees) totaled RM10,000. Her personal tax reliefs amounted to RM15,000.

• Statutory Income: RM75,000 – RM10,000 = RM65,000
• Chargeable Income: RM65,000 – RM15,000 = RM50,000

In this case, she will be taxed on RM50,000, not the full RM75,000 she earned. This is a huge saving!

Step 4: Apply Malaysia’s Progressive Tax Rates

LHDN uses a progressive tax system, meaning the tax rate increases as your income rises. Your final tax payable is calculated by applying the current tax brackets to your chargeable income. Always use the most recent tax table from LHDN.

Chargeable Income (RM)	Calculation (RM)	Rate (%)	Tax (RM)
First 5,000	On the first 5,000	0%	0
5,001 – 20,000	On the next 15,000	1%	150
20,001 – 35,000	On the next 15,000	3%	450
35,001 – 50,000	On the next 15,000	6%	900
50,001 – 70,000	On the next 20,000	11%	2,200
…and so on	…	…	…

Example 2: The Freelance Writer’s Tax Calculation

Using the previous example of the designer, her chargeable income is RM50,000. Here’s how to apply the tax rates:

• First RM35,000: Tax is RM600 (RM150 + RM450).
• Next RM15,000: The remaining income (RM50,000 – RM35,000) is taxed at 6%. Tax is RM15,000 x 6% = RM900.
• Total Tax Payable: RM600 + RM900 = RM1,500.

Note: The tax rate changes on your income as it crosses each threshold. You’re not taxed at a single, high rate.

Step 5: Don’t Forget Tax Rebates

After calculating your tax payable, you can claim a final rebate to reduce the amount you owe.

• RM400 Rebate: You are eligible for a RM400 rebate if your chargeable income is RM35,000 or less.
• Zakat Rebate: The full amount of Zakat paid during the year can be claimed as a rebate.

Frequently Asked Questions (FAQ)

Q1: How do I get an income tax number as a freelancer?

You can register for a tax file number online through the LHDN’s MyTax portal. You’ll need your MyKad, a phone number, and an email address to get started.

Q2: Can I claim tax reliefs for my EPF contributions?

Yes, you can. Although freelancers don’t have mandatory EPF deductions, you can make voluntary contributions through the i-Saraan program and claim a tax relief of up to RM8,000.

Q3: What happens if I don’t file my taxes on time?

Missing the tax filing deadline can result in penalties, which include a 10% penalty on the amount of tax payable and a fine from LHDN. It’s crucial to file by the April 30 or June 30 deadline.

Q4: Do I need to pay taxes on my foreign freelance income?

Generally, income earned from outside Malaysia by a Malaysian resident is exempt from tax, provided certain conditions are met. Always keep proof that the income was from a foreign source.

Q5: Why do freelancers pay tax as a lump sum?

Unlike employees whose taxes are deducted monthly via the PCB (Potongan Cukai Bulanan) system, freelancers are responsible for a self-assessment tax regime. This means you must calculate your total tax liability and pay the full amount in a single lump sum when you file your return.