Should Self-Employed Persons File Salaries Tax or Profits Tax? What are the benefits of applying for a business registration certificate?

Slashes are prevalent. At present, many people will develop side jobs, and even jump out of their comfort zone to become “self-employed”. From the perspective of the tax office, how is self-employed person defined? What are their tax responsibilities? And self-employed people with business registration certificates have more tax benefits? This article will answer them one by one.

1. What is the definition of self-employed?

According to the Inland Revenue Department’s website, a “self-employed person” is a self-employed person who earns income from buying and selling goods, provides professional or personal services, and operates a trade, business or profession without any employment relationship.

Business owners, partners, or freelancers without employment are considered self-employed. If you are still confused about this definition, if you don’t have an “employment contract” and you don’t have an employer contributing to your “MPF”, you are basically self-employed.

2. The tax liability of the self-employed? Salaries Tax or Profits Tax?

If you are a freelancer without an employment relationship and have not obtained a business registration certificate, you need to declare salaries tax and submit a “Individual Tax Return (BIR60)”;

If you are a self-employed person operating a business and have obtained a business registration certificate, you need to declare profits tax and submit a “Profits Tax Return (BIR52)”, and may submit relevant financial statements together. Basically, any lucrative business activities in Hong Kong will be regarded as business operations, and you must follow the guidelines to apply for a business registration certificate.

Self-employed persons who are required to declare profits tax are required to fulfill their tax obligations under the following conditions:

• Maintain sufficient business records for at least 7 years;

• Prepare accounts based on your accounting records;

• Complete and file tax returns to report business profits or losses;

• Unless you have received a tax return from the Inland Revenue Department, you should notify the Inland Revenue Department in writing of your need for tax within 4 months after the end of the base period for the year of assessment;

• If your business has ended, you must notify the Inland Revenue Department within 1 month;

• If your address changes, you must notify the Inland Revenue Department within 1 month; and

• Pay your taxes.

Advantages of applying for a business registration certificate for self-employed persons

As mentioned above, self-employed persons are required to apply for a business registration certificate in accordance with the guidelines. The benefits include the following:

1. Free from fines and criminal liabilities

According to the “Business Registration Ordinance”, all business activities engaged in non-employment relationship for profit must obtain a business registration certificate. If the application is not made on time, the offender will have the opportunity to be charged and fined HK$5,000 and imprisoned for 1 year.

2. Easier tax deduction when filing tax returns

Compared with salaries tax, profits tax may have more deductible items, including business expenses, entertainment expenses, etc., while salaries tax deductible items are limited. Therefore, self-employed persons are likely to pay less tax when applying for a business registration certificate.

3. Conditions for applying for funding

The application conditions for many government-funded projects are to obtain a business registration certificate first. If the self-employed person has applied for it, it will be easier to meet the application conditions of the project. In other words, you won’t miss out on funding opportunities by getting your business registration certificate.

4. Good for commercial use

The biggest advantage of applying for a business registration certificate for self-employed persons is that they can apply for a business account, so as to avoid the bank closing your personal account due to too large amount or high-frequency posting.

The above information is for reference only. If you have any questions about tax declaration and accounting, we welcome your inquiries.