Self-employed persons are required to pay profits tax on their business income, while employees are required to pay salaries tax on their employment income. Very often taxpayers are not sure whether their role is self-employed or employee. They report their income and expenses in the profits tax part of their tax returns because of the income they earned and incurred related expenses. However, after investigation by the Inland Revenue Department, the role of the taxpayer is actually an employee. Therefore, it is incorrect to report income in the profits tax section. The Hong Kong Tax office (Inland Revenue Department) will remind taxpayers that the income should be reported in the salaries tax part. Since not all expenses deducted from profits tax can also be deducted from salaries tax, taxpayers may not be able to claim all expenses.
The difference between a self-employed person and an employee is that the employee and the employer have a close employment relationship. For example, with employment conditions, the employee’s work will be subject to greater supervision by the employer. The employee has a fixed salary and does not need to be self-financing and does not need to ask an assistant for help. No need to buy equipment to work, etc…
Although self-employed persons can claim more deductions for expenses, they also have to bear certain tax liabilities. For example, if they apply for business registration, they must report to the Hong Kong Tax office (Inland Revenue Department) the salaries paid to employees, keep all business records, and solve the shortage of funds problems. The business is affected by all kinds of risks and uncertainties.
We welcome your Hong Kong taxation inquiries.