7th April 2022 - 8 min read
For many people, starting a side business often marks the start of their entrepreneurial journey, with hopes that they can eventually grow their business into an established brand. It is also a way to supplement their existing employment income. And with the rapid growth of the gig economy, digital platforms, and various incentives from the Malaysian government, it is now easier than ever for individuals to give entrepreneurship a try.
That said, having a side business also means that you’ll need to declare and file taxes for the income that you’ve earned from it. If you’re someone who is running a side business on top of earning from a formal employment, you may have some questions as to how to do it. Read on to find out!
For this article, side businesses are defined as secondary enterprises that you run when you already have a prior commitment, such as a day job or a primary business. They can be registered with the Suruhanjaya Syarikat Malaysia (SSM) – whether as a sole proprietor or partnership business – as doing so will entitle you to some tax incentives that are inaccessible to taxpayers with non-business income. Examples of side businesses are plenty, including online stores on e-commerce platforms, blogging, content creation services, and so on.
Assuming that you are registered with the SSM as a sole proprietor business, you will need to use B form when filing your taxes. This is because you are now carrying on a business enterprise rather than the occasional freelancing.
Meanwhile, if you did not register your business, then use the usual BE form (for those with non-business income) to file your tax as a freelancer instead. In this form, you will be able to declare your side income under “Statutory income from interest, discounts, royalties, pensions, annuities, other periodical payments, and other gains and profits.”
To clarify, “…other gains and profits” is defined as payments received for part-time or any broadcasting, lecturing, writing, and other jobs that you take up occasionally. So if your side income falls under any of these categories, you can declare it in your BE form as it does not technically count as carrying on a business.
If you’ve checked out the B form, you’ll notice that it bears some similarities to the BE form – which means the tax filing process for a side business may not be as different as you think it’d be. That said, some additional key information that you must now also prepare include:
In preparing such information, take care to note some crucial specifics, such as the difference between gross income from business and adjusted income from business source – and how to calculate each one.
Gross income from business, for instance, includes revenue from the sale of your goods and services, money that your customers owe to you for the rendering of your services, as well as recovery of bad debts. Adjusted income, on the other hand, is derived after the deduction of business expenses from your gross income. Examples of these business expenses are allowable business expenses, allowable specific expenses, and export allowances.
Additionally, if you are involved in e-commerce and are uncertain about the tax treatment for different e-commerce business models (including domestic and overseas businesses), here’s a guideline from the Inland Revenue Board (LHDN) as well as the official LHDN page to help you out. It lists out the various characteristics that an e-commerce business should meet in order to be subject to Malaysian tax.
As a registered business owner, you will be entitled to a number of tax deductions and incentives on top of the individual tax reliefs that you can also claim for YA2021. Here are two main deductions that you can tap into as a side business owner:
The deduction of your business expense will help to lower the gross income earned by your side business, and by extension, reduce the amount of tax that you need to pay. Here’s a table provided by LHDN that clarifies what falls under allowable business expenses, and what does not:
Further examples of allowable business expenses include commissions, specific trade debts that are written off, travelling and transport costs, repairs and maintenance, as well as promotion and advertisement. As a side business owner, you will be likely able to claim the following as your business operating costs:
Note, though, that your business-related deductions and personal reliefs must be clearly distinguished and claimed under the right category. For instance, a computer bought for your personal use cannot be claimed as a business expense; it has to be claimed under the tax relief allocated for lifestyle.
LHDN states that capital allowance is provided as a “deduction from business income in place of depreciation expenses incurred in purchase of business assets”. In other words, it accounts for the depreciating value of certain assets that you need for your business. Examples of such assets include motor vehicles, machines, office equipment, furniture, and computers.
Additionally, the capital allowance is rated according to types of assets, and can be claimed according to the following arrangement:
The tax rates applied to a side business owner is the same as the one used for taxpayers with non-business income. It will be applied to your chargeable income, which is obtained after deducting all your business losses, allowable expenses, approved donations, and individual tax reliefs. Depending on the range of your chargeable income, the tax rate may fall between 0% to 30%, as per dictated by LHDN:
|Chargeable income (RM)||Calculations (RM)||Tax rate (%)||Tax (RM)|
|0 – 5,000||First 5,000||0||0|
|5,001 – 20,000||First 5,000
|20,001 – 35,000||First 20,000
|35,001 – 50,000||First 35,000
|50,001 – 70,000||First 50,000
|70,001 – 100,000||First 70,000
|100,001 – 250,000||First 100,000
|250,001 – 400,000||First 250,000
|400,001 – 600,000||First 400,000
|600,001 – 1,000,000||First 600,000
|1,000,001 – 2,000,000||First 1,000,000
|Exceeding 2,000,000||First 2,000,000
For every next ringgit
The tax filing process can sometimes get complicated, especially when you start earning a significant amount from your side business or if you have not been keeping proper track of your business documents. Here are a couple of measures that you can take to ensure an easier tax filing process.
Keep a clear record of your business income and expenses throughout the year by filing your invoices, receipts, and bank statements properly and promptly. You can use a basic Excel document to help you with this, or even subscribe to an accounting service to do so. If you want, you may even draw up proper profit and loss (P&L) documents and balance sheets to assist you. Whichever method you prefer, be sure to log these details systematically and according to date so that you can easily refer to them when filing your taxes.
On top of that, remember to keep all your receipts and invoices for a period of seven years, as is required by the Income Tax Act 1967.
While not strictly necessary, it may be a good idea to open a business bank account so that you can keep track of the cash flow of your business. This way, you can keep your business income and expenses separate from your personal finances. Moreover, a separate bank account may also contribute to an easier and better bookkeeping process as you can use your account statements to crosscheck with your invoices and receipts.
Not only that, some business bank accounts may also offer certain promotions and benefits to you, such as business loans with lower interest rates. It would be wise to shop around a little to check for such perks.
We hope that this guide has helped to clarify some questions that you may have as a side business owner who is filing your taxes. If you have other tax-related concerns to clear up, do also check out our step-by-step income tax guide for 2022 (YA2021) here. Additionally, we have other income tax content available for your reference, such as information on the tax reliefs that you can tap into this year, filing your taxes for the first time, and the special tourism tax provided for your hotel stays last year.
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Hi, I hired freelancers for modeling a design as per my patent.
– Can I get tax relief for works involving my hiring talents for my patent or relief from the cost of my patent submission?
hi, I just started online business in year 2021. I do have confirmation of sales for the year 2021. but i do not keep supporting bills for my expenses. How do I claim any expenses deduction for my business
1) If I earn commissions for any product sold from Clickbank.com and the method of their payment is by check to the tune of US$100,000… do I still have to declare tax in Malaysia.
2) Do I need to register with SSM and if so, should it be under sole proprietary or partnership? ( I work alone)
3) Do I need to open a business bank account?