How to estimate Malaysia taxes for self-employed?

Navigating taxes as a self-employed individual in Malaysia can seem complex, but it’s a straightforward process once you understand the key steps. This guide is for Malaysian freelancers, sole proprietors, and small business owners who need to accurately estimate their income tax and ensure they are compliant with LHDN regulations.

How to Estimate Your Malaysia Taxes for Self-Employed

Malaysia’s tax system for the self-employed operates on a self-assessment basis, meaning you are responsible for calculating, filing, and paying your own taxes. The following steps will guide you through the calculation.

Step 1: Calculate Your Business’s Net Profit

Your tax is on your net profit, not your total revenue. You must first deduct all allowable business expenses from your gross income.

Formula: Gross Income – Allowable Expenses = Net Profit

• Gross Income: All money earned from your business activities, such as client payments, sales, or service fees.
• Allowable Business Expenses: Costs “wholly and exclusively” incurred in generating your income. Keep detailed records for everything.
  • Examples of Expenses: Home office rent (prorated), utilities (internet, electricity), professional fees (accountant), advertising, travel costs, and software subscriptions.

Real-Life Example: Calculating Net Profit

• Gross Income: RM80,000 (from a freelance graphic design business)
• Allowable Expenses:
  • Laptop & software: RM5,000
  • Home office utilities: RM1,200
  • Marketing fees: RM800
  • Total Expenses: RM7,000
• Net Profit: RM80,000 – RM7,000 = RM73,000

Step 2: Determine Your Taxable Income

Your taxable income is your net profit after deducting all eligible personal tax reliefs.

Formula: Net Profit + Other Income – Personal Reliefs = Taxable Income

• Other Income: Any income not from your main business, like rental income or dividends.
• Personal Tax Reliefs: The government allows you to deduct specific expenses to lower your tax bill.
  • Common Reliefs: Self-relief (RM9,000), lifestyle relief (for books, laptops, sports equipment), medical expenses, and EPF contributions.

Real-Life Example: Calculating Taxable Income

• Net Profit: RM73,000
• Personal Reliefs:
  • Self-relief: RM9,000
  • Lifestyle relief: RM2,500
  • Medical check-up: RM1,000
  • Total Reliefs: RM12,500
• Taxable Income: RM73,000 – RM12,500 = RM60,500

Step 3: Apply Malaysia’s Progressive Tax Rates

Once you have your taxable income, apply the progressive tax rates for the relevant Year of Assessment. The rates increase as your income bracket gets higher.

How to calculate:

Use the latest tax brackets from LHDN. For a taxable income of RM60,500:

• Tax on the first RM50,000: RM1,500
• Tax on the next RM10,500 (RM60,500 – RM50,000) at 11%: RM1,155
• Total Estimated Tax: RM1,500 + RM1,155 = RM2,655

FAQs about Self-Employed Taxes in Malaysia

• How do I file my taxes as a freelancer?

Freelancers and other self-employed individuals must file their income tax using Form B through the MyTax (e-Filing) portal. The deadline is typically June 30th (with an extension for e-Filing).

• What is the difference between Form B and Form BE?

Form B is for individuals who have business income, while Form BE is for those with only employment income (like salaried workers). As a self-employed person, you must use Form B.

• Can I claim my laptop or smartphone as a business expense?

Yes, you can claim these items under the Lifestyle Tax Relief, up to a certain limit. However, if the item is used exclusively for business, you may claim it as a business expense.

• Why is it important to keep records of my expenses?

LHDN requires you to keep all your receipts, invoices, and financial records for at least seven years. These records serve as proof for the expenses and reliefs you have claimed, especially in case of a tax audit.

• Can I make tax payments in installments?

Yes, if your estimated tax payable is significant, you can make tax payments in bi-monthly or monthly installments. This helps manage your cash flow and avoids a large lump-sum payment at the end of the year. You can do this through the LHDN MyTax portal.