Set a percentage of every client payment to move into your tax and MediSave pot.
Mei is self-employed. By the end of June she has invoiced S$30,000 this year (an invented figure, as are all of Mei's numbers), and since module 1 she has been transferring 15% of each client payment into her tax and MediSave pot.
You have probably been doing the same with the 15% placeholder. Nobody worked that number out from your situation, so it may be too low or too high. If it is too low, the pot will not cover your tax and MediSave when they fall due. If it is too high, it pulls money out of your holding account that you didn't need to move, and it can make a base pay figure look out of reach when your income would in fact support it. Swapping it for a figure built from your own estimates takes about twenty-five minutes.
Have these ready: the invoices you've issued this year, a rough idea of the jobs ahead, your business expenses, the MediSave contribution table from the CPF Board, and the tax calculator on the IRAS website.
Start with gross income: the total you've invoiced so far this year, plus an honest figure for the months still to come. For the remaining months, count work a client has already agreed to and look at what those same months earned you last year. Work you are only hoping to win stays out.
Mei checks her bookings and her earnings from the second half of last year. She expects S$32,000 more before the year ends. Adding that to what she has invoiced, S$30,000 + S$32,000 = S$62,000 of gross income.
Next, take off the business expenses and capital allowances you expect for the year. What remains is your net trade income. If you aren't sure which costs qualify as expenses and which as capital allowances, lesson 4.2 sets out the difference. If you haven't gone through this year's expenses yet, use last year's total in their place. Mei expects about S$3,600 of expenses and capital allowances, which leaves S$62,000 - S$3,600 = S$58,400.
Both bills are estimated from net trade income. For MediSave, go to the CPF Board table you used in lesson 2.2 and look up the rate or formula that matches your age and your estimated net trade income. Mei applies the 9% rate from lesson 2.2, which was made up for teaching and is not a real CPF rate. S$58,400 x 9% = S$5,256, and she rounds this up to S$5,300.
For income tax, open the calculator on the IRAS website. Put in your estimated trade income, any income you have from other sources, and the reliefs you expect to claim. At this stage, include only reliefs you're certain of; the Tax & Reliefs course goes through reliefs in full. The calculator gives Mei a tax estimate of S$1,300, and your own figure will be different.
Add your MediSave estimate to your tax estimate. For Mei, S$5,300 + S$1,300 = S$6,600.
Divide that total by your expected gross income. This can feel odd, since net trade income was the base for both bills. The reason is timing: you move money into the pot each time a gross payment comes in, so the percentage must be a share of gross. Then round up. If your estimates turn out low, the extra fraction covers some of the gap, and ending the year with a small surplus in the pot is far easier to deal with than a shortfall. The rounded figure is your set-aside percentage, the portion of every client payment that goes into the tax and MediSave pot.
Mei divides S$6,600 by S$62,000 and gets about 10.6%, which she rounds up to 11%. Her 15% placeholder was more than she needed. Moving to 11% leaves 4% more of each payment in her holding account, and her back test from lesson 1.4 has more room in it than she expected.
You might also land below 15%. You might land above it, perhaps because your income is higher or your expenses are lower. Either way, you find out now rather than when the tax and MediSave notices reach you.
Record your results on a six-line worksheet, one figure per line, in this order:
Estimated gross income Estimated expenses and capital allowances Estimated net trade income Estimated MediSave Estimated income tax Set-aside percentage
Mei's six lines read S$62,000, S$3,600, S$58,400, S$5,300, S$1,300 and 11%. Under the last line, note when the new percentage takes effect: the date of your next client payment.
If you set your percentage in June, as Mei did, half of it rests on a guess about the next six months, so go back to it once a quarter. Replace the estimated part of gross income with what has actually come in, redo the MediSave and tax estimates, work out the percentage again, and look at how much is in the pot. By the end of the year the pot should be close to your full estimate of the year's tax and MediSave. When it is behind, increase the percentage for the remaining months rather than wait for the bills to land. In module 8 this recheck becomes a fixed part of your quarterly review.
People in their first year of self-employment face one extra problem. What you put aside this year pays for this year's tax and MediSave, and those bills only come next year. Meanwhile, the bills for last year can turn up, and you saved nothing towards them. Make a separate plan for those, such as a MediSave instalment plan where the notice offers one, and do not pay them out of this year's pot.
Open this year's invoices beside the IRAS calculator and work through the six lines, then write down your start date.
Fill in the set-aside worksheet and write down the percentage of each payment you will move into the pot, starting today.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).