As a self-employed person, you might not have to deal with tyrannical bosses or office politics. But in exchange, you’ve got to deal with the caprices of an unstable income.
To make matters worse, the lack of employer-sponsored health insurance and compulsory CPF contributions can put you in a financially precarious situation later on in life.
But if you’re independent enough to be self-employed, you’re surely resourceful enough to take advantage of these five government policies.
While CPF contributions are generally not compulsory, Medisave contributions are. After filing your taxes every year, you will receive notice from CPF about your Medisave contributions for the year, which you must then transfer into your Medisave account before a deadline of 30 days.
Since you’ve got to make those Medisave contributions whether you like it or not, make sure you know when and how you can use your Medisave funds so you can benefit as much from them as possible.
We’ve put together a complete guide on Medisave here, where you can find out what you can make Medisave claims for.
For starters, it’s a good idea to buy an Integrated Shield Plan, which is a medical insurance plan that works together with MediShield Life to give you better medical coverage than the very basic protection the latter already gives you. Part of your annual premiums can be paid for using Medisave.
It’s important to make your Medisave contributions regularly and on time each year. That’s because if you pay late, you’ll also be made to pay the interest your contributions would otherwise have earned.
It’s a good idea to start saving up your estimated Medisave contributions early on in the year, so you don’t get a rude shock when you suddenly need to pay thousands into your Medisave account.
If making CPF contributions, put aside money every month, not just at the end of the year
CPF contributions are compulsory for salaried employees and deducted monthly from their salaries. But for self-employed people, making contributions to your CPF Ordinary Account and Special Account is totally optional.
We’re not going to say that you should definitely make CPF contributions as a self-employed person. If you’re the type who doesn’t have the discipline to save and invest on your own, it’s probably better for you to put aside money in your CPF OA and SA. But for those who are avid savers and investors, it’s your call.
If you have decided to make CPF contributions, it’s a good idea to put aside a cut of your earnings every month and pay them immediately into CPF, rather than waiting till the end of the year or when you file your taxes.
Another bonus of making your CPF contributions as early as possible is that you can take advantage of the interest rate, which will surely be higher than what your savings account offers.
Know what tax relief you are entitled to as a self-employed person
Tax relief on Medisave contributions
As a self-employed person, you’re entitled to tax relief on compulsory and voluntary CPF and Medisave contributions.
That means that if you can afford to, you can actually make more contributions than necessary if you think that will put you in a lower tax bracket next year.
Other tax deductions
You may also be able to make tax deductions on the following:
- Employee expenses if you’ve hired someone to help
- Business expenses
- Productivity and Innovation Credit (PIC)
- Capital expenditure incurred on renovation or refurbishment works
- Capital allowances on fixed assets
- Medical expenses
- R&D expenditure
- Land intensification allowance
- Expenses incurred before commencement of business
- Business making losses and unabsorbed capital allowances
- Business and iPC Partnership Scheme
- Double tax deduction for internationalisation scheme
Grants that help you upgrade your skills in the industry and thus charge more for your services
The government offers grants for certain categories of self-employed people so that they can upgrade their skills at a low cost and then charge more for their services.
Here are some grants that might interest you.
- Workfare course fee subsidies – If you’re 35 and above and earn not more than $2,000 gross monthly income, receive up to 95% course fee funding on:
- WSQ courses under the Workfare Training Support (WTS) Scheme (here’s a full list of centres offering such courses)
- Part-time ITE skills certificates, NITEC and Higher NITEC courses
- Stand-alone skills-based modular courses, part-time diplomas or advanced/specialist diplomas and diploma conversion programmes offered by a polytechnic
- Skills training courses accredited by SkillsFuture.
If you are 35 and above and earning $2,000 or less a month, you can also get a training allowance of $4.50 for each hour of training when you sign up for a WTS qualifying course on your own dime.
Training Commitment Award
Successfully completed a WTS-approved course? You might be eligible for a reward amounting to up to $200 per course, capped at a maximum of $400 per year.
Understanding TDSR and MSR and the cuts that self-employed folks are subject to when applying for loans due to income
Like most Singaporeans, you probably hope to buy a home someday.
Unfortunately, as a self-employed person, you’re at a disadvantage when it comes to applying for loans.
The Total Debt Servicing Ratio (TDSR) is a rule which limits how much you can borrow to buy a home.
For salaried employees, their total debt repayments (including not just home loan repayments but also repayments of other loans like study loans, car loans and credit card debt) must be not more than 60% of their gross monthly income.
For self-employed persons, the rule is even stricter. When you declare your income, it will be reduced by 30% before the TDSR is applied.
Therefore, if you earn $5,000 a month, it will be taken as only $3,500 for purposes of applying the TDSR. That means your total loan repayments must not exceed $2,100 (60% x $3,500).
By contrast, a salaried employee with the exact same income of $5,000 a month would be able to borrow to the point where his loan repayments are up to $3,000 (60% x $5,000) a month.
HDB buyers face another hurdle—the Mortgage Servicing Ratio (MSR), which limits home loan repayments to 30% of a salaried borrower’s gross monthly income. The MSR is applied to anybody who’s taking out a loan to buy HDB property or ECs.
Self-employed people’s income is subject to a haircut of 30% before the MSR is applied.
That means a self-emloyed person earning $5,000 a month will again have his income taken to be $3,500 before the MSR is applied, just like in the previous TDSR situation.
Knowing this rule can let you use it to your advantage, however. In the year before you’re due to apply for a home loan, you want to make sure you raise your income as much as possible. As a self-employed person, you have some control over how much work you want to take on, so really ramp it up.
Once the loan is secured, you can go back to your previous workload if you wish so long as you can still comfortably make your home loan repayments.