As of December 2021, the average salary for a business owner in Singapore is $6,250. But as a business owner, what factors should you know before determining the amount on your pay check? Should you be receiving Central Provident Fund (CPF) contributions? How would the payouts be taxed by the Inland Revenue Authority of Singapore (IRAS)? Bear in mind that based on the structure of your business, you will also need to follow certain rules about how much and what needs to be paid.
Here are the different types of payouts for the following business structure:
As an employment-based savings scheme, CPF is compulsory as long as you are a Singapore citizen or Permanent Resident earning more than $50 per month. Sole proprietors are considered a self-employed person (SEP) and not employees. The income earned from the business are business income instead of salary. Hence, CPF contributions are not payable.
However, sole proprietors earning an annual Net Trade Income (NTI) exceeding $6,000 are required to allocate a portion of their salary to the MediSave account on a yearly basis. Your NTI should exclude all allowable business expenses, capital allowances and trade losses as listed by the Inland Revenue Authority of Singapore (IRAS).
If you are a sole proprietor, it is important to contribute into your MediSave account as you are not eligible for CPF contributions. This ensures you have sufficient savings for healthcare and medical expenses in the later stages in life. You can calculate the amount to put in using CPF’s Self-Employed MediSave Contribution Calculator.
Your net trade income, together with other income such as rental income, employment income from another employer (if any), will be subject to tax at the individual income tax rates from 0% for income not more than $20,000 to 22% for income in excess of $320,000. On the other hand, if you have trade loss from the business, it can be offset against other income to arrive at the net chargeable income subject to tax.
Partners employed under a contract of service with the partnership are considered as employees where CPF contributions are payable. Otherwise, the partners are considered as self-employed person (SEP), where the same apply as sole proprietors where no CPF are payable.
If the partner is an individual, the salary and share of income from the partnership will be taxed based on individual income tax rate. And if the partner is a corporate, the share of income from the partnership will be taxed based on corporate tax rate of 17%.
When you are first incorporating a company, you must appoint a director to comply with the requirements of setting up a business in Singapore. In general, there are two different payouts to directors:
Directors under a contract of service, also known as a contract of employment, are considered as employees under the company. If the director in your company earns a salary, CPF contributions will be required and the amount is taxable at personal level. A general rule of thumb is as long as you are a Singapore tax resident – living in Singapore for more than 183 days and earning an income –, you are taxed at a progressive tax rate basis between 0% to 22%. Non-resident directors are taxed at a flat rate of 15% or the progressive tax rates on the employment income, depending on which is the higher tax amount. It’s the employer’s obligation to withhold tax at 22% of the director’s fee payable to non-resident directors before
Director’s fee requires approval by the board of your company and CPF contributions will not be payable. The amount, however, will be taxable based on personal tax rates. For resident directors, it will be taxed at a progressive tax rate between 0% to 22%, whereas for non-resident directors, the tax rate is 22% and it’s the company’s obligation to withhold the tax at 22% prior to making payment of remuneration to the non-resident directors.
The company may declare dividends to shareholders whenever it makes a profit or out of accumulated profits from prior years. This can come in the form of cash, corporate stocks etc. In Singapore, take note that the distribution of dividend payments to shareholders is tax-free at the shareholder’s level since the amount is declared by the company from after-tax profit.
However, in the case of dividends paid by co-operatives, these will be subject to income tax in the hands of the individuals receiving the dividends.
As salaries and various other payouts can make up the largest portion of a company’s expenditure, it is crucial to know it beforehand – even your own – while you start planning your financial projections for 2022.
Furthermore, as a business owner, you are also legally obligated to provide CPF to your employees. When done otherwise, this can lead to hefty penalties as a result of non-compliance. If you’re looking for advisory services for finance-related matters ranging from tax to cash flow and accounting in Singapore, feel free to contact our team at Chartsworth for assistance.