Sole Proprietors and Freelancers Must Also Pay Taxes in Hong Kong
Paying taxes is part of earning money and there is no way to avoid it and to be audited because it is important to not make a mistake in doing it. Unlike employees, individuals who are self-employed should not let their taxes be automatically deducted from what they earn. They should be the one to keep track but dealing with issues can be learned even if you are a freelancer or self-employed. Similar to others, you can easily learn what you have to know so that these issues can be dealt with. Therefore, being a freelancer or self-employed does not exempt you from having to pay taxes in Hong Kong because you should and there are ways.
Net Income of Self-Employment
Basic tax planning for persons who are self-employed starts with understanding the way you are being taxed.
The law recognizes freelance professionals as independent contractors. Moreover, their tax is based on net income when they are self-employed – gross receipts minus tax deductible of business expenses. The net amount when it is taxed twice: one for regular income tax and the other one for being self-employed.
The net income can be computed by completing the necessary schedule and form. It is about the profit or loss that comes from the business and you should submit this using tax return. As a sole proprietor, you have not done the legal steps needed to set up your business in other forms like a corporation.
Hiring a Tax Professional
Having an accountant who knows about freelance taxes can become your best friend when tax season comes. In case your income and status of filing do not change a lot every year, then it might be okay for you to do your own taxes.
Although, the majority of the financial situations of people often change and when your tax returns become complicated, help might be necessary.
You also have to remember that the IRS is regularly updating laws about taxes and you need help in understanding how these kinds of changes could have an effect when you pay taxes in Hong Kong.
Estimation of Tax Payments
These taxes should be deducted from how much you earn as a freelancer, not like if you were an employee.
If you are not self-employed, your employer is going to withhold taxes that you pay every period. These include income tax, medical insurance tax, and Social Security tax. You should submit the money to the government together with your own contribution to Social Security and medical insurance taxes.
Sole proprietors should be their own boss so they need to take care of it themselves. Freelancers should send their tax payments the entire year when they send estimated taxes. You are going to pay when you go and this is going to prevent a cash crunch if your estimation is correct since all final tax payments have a deadline.
Being Aware of Geographic Tax Obligations
Majority of individuals know what their tax obligations are but a lot of them underestimate the amount they should owe. The place that is common for the self-employed individuals when it comes to overlooking tax obligations is the level of local tax.
Business owners should know which taxes they are responsible for. They can find information on the city website, which contains freelance business reports from local CPA firms. This helps greatly in the start-up phase of the business. Tax professionals can give advice on specific to geographic taxes. This doesn’t apply to those who are outside their area. For instance, sole proprietors, LLCs, partnerships, s-corporations, and corporations have specific taxes to pay.
Everything Should Not be Deductible
This means that taxpayers may put themselves at the risk of auditing when they try to write bogus expenses. For this to be deductible, it should be necessary and ordinary in running your business. If deductions are reported that are disproportionately too much for what you are earning, it is going to appear suspicious.
You should know that a home office isn’t a mandatory part of the deductible if you’re not using it regularly. The law requires that such property is exclusively for business purposes. Additionally, it has to be the main site of business. If your workspace used to be a spare room, it is something that can be claimed. Although, if you are only taking your laptop to the den, you do not have to deduct it.
Considering Other Expenses
The main thing to prepare for when you are going to pay taxes in Hong Kong is to keep your expenses in check. You should not wait last minute to add everything you spent on. You should use accounting software to easily track your spending and earning.
Planning for Your Retirement
Freelancers should be familiar with retirement planning because there is no company that will do this for them. Employees, on the other hand, get retirement packages for working with a company for a certain number of years. Since you are your own boss, keep deductibles to a minimum as much as possible to increase your retirement savings. Remember that if you do not want to grow old and broke, plan for this as early as now. Regardless of how much you are earning, spend wisely and always think about the future or tomorrow.
When you cannot determine how to pay taxes in Hong Kong as a freelancer or sole proprietor, you will find this information useful. You may not want to do all of the work and keep track of expenses on your own. In this case, get a reliable accountant who knows how to handle these things. Remember that getting your taxes right at the beginning of your career can save you from headaches in the long run.