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Hiring Malaysian Workers in Singapore: Key Tax Responsibilities

by Adinda Pryanka

Oct 14, 2024 at 3:19 PM

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When hiring foreign workers in Singapore, including Malaysians, employers need to be aware of specific tax responsibilities.

Getting these right isn’t just about staying on the right side of the law. It’s about ensuring smooth operations and avoiding unnecessary headaches down the road.

From registering workers with the Inland Revenue Authority of Singapore (IRAS) to handling tax deductions and clearances, this guide will walk you through everything you need to know as an employer. Let’s break it down step by step to keep things simple and easy to understand.

Tax Basics for Singapore Employers Hiring Malaysian Workers

As the employer, you are required to make sure taxes are handled properly. That means registering your employees with IRAS, withholding the right amount of taxes from their pay cheques, and paying these taxes to IRAS.

Employing foreign workers, such as Malaysians, comes with specific tax obligations. Here's a breakdown of what employers need to do:

Register the worker: Inform the Inland Revenue Authority of Singapore (IRAS) about the employee.
Deduct taxes: Withhold the correct amount of taxes from the employee’s salary each month.
Pay taxes: Remit the taxes to IRAS on time.

Employer Obligations for Hiring Malaysian Workers

If you’re hiring a Malaysian worker, all these steps still apply. There’s no big difference between hiring a local or a foreign worker in terms of tax responsibilities. You must still:

Make sure the employee is registered with IRAS,
Deduct taxes every month, and
Submit annual tax forms to the authorities.

By doing these things, you stay compliant with Singapore’s tax laws, avoid penalties, and ensure your workers’ taxes are sorted.

The bottom line? If you’re hiring Malaysians, or any foreign workers, as long as you register them, deduct their taxes, and send the payment to IRAS, you’re good to go!

Income Tax for Malaysian Workers in Singapore

When it comes to Malaysian workers in Singapore, the income tax system applies to them just like any other foreign worker. Singapore’s tax system is based on territorial income, meaning income earned in Singapore is taxed. For Malaysians, whether they are classified as tax residents or non-residents will determine how much income tax they pay.

Resident vs Non-Resident Tax Status

Tax resident status is based on how long a foreign worker stays in Singapore during the calendar year.

Resident Foreign Worker:

Workers who stay 183 days or more in Singapore are classified as residents. As tax residents, they benefit from progressive tax rates, meaning their income is taxed in brackets, starting at 0% for lower-income earners and increasing for higher-income levels.

In addition to lower tax rates on the first few brackets of income, resident foreign workers can also claim personal tax reliefs and deductions, just like Singaporean citizens.

This includes reliefs for dependents, Central Provident Fund (CPF) contributions, and other eligible claims that can significantly reduce taxable income.

FYI, CPF contributions refer to mandatory payments made by both employees and employers into the CPF, Singapore’s national savings scheme, which provides financial security for retirement, healthcare, and housing needs.

Non-Resident Foreign Worker:

Workers who stay less than 183 days are classified as non-residents. Unlike residents, non-residents do not enjoy progressive tax rates. Instead, they are generally taxed at a flat rate of 15% or the progressive resident rate (depending on which results in a higher amount). If the worker is in a high-income bracket, this can lead to significant tax differences.

The residency status can change from year to year. For instance, a worker could start as a non-resident but become a resident once they’ve been in Singapore for more than 183 days. It’s important to track this because it directly impacts how much tax they owe.

Impact of Tax Residency on Income Tax Rates

Resident Workers

Taxed progressively: Taxed at progressive rates, starting from 0% - 22%, based on their income. Lower-income workers may not pay any tax, while higher earners will face higher rates.
Eligible for personal reliefs: Can claim tax relief and deductions, such as those for dependents or CPF contributions, which can reduce their tax liability.

Non-Resident Workers

Taxed at a flat rate of 15% on employment income.
Not eligible for personal reliefs: resulting in higher tax liabilities compared to residents with the same income.

Here’s a quick look at how the progressive rates work (as of 2024, based on IRAS website).

Up to $20,000: No tax (0%)
$20,0001 to $30,000: 2%
$30,0001 to $40,000: 3.5%
$40,0001 to $80,000: 7% - 11.5%
$80,0001 and above: 15% - 22%

For example, if a Malaysian tax resident earns $50,000 in a year, the tax calculation would look like this:

First $20,000 = $0 tax (0%)
Next $10,000 = $200 (2%)
Next $10,000 = $350 (3.5%)
Final $10,000 = $700 (7%)
Total tax = $1,250

A resident Malaysian earning S$50,000 pays approximately S$1,250 in taxes. A non-resident with the same income would pay S$7,500. As shown in this example, the tax liability for a non-resident is significantly higher than that of a resident, which makes understanding and managing tax residency status crucial for employers when handling payroll for Malaysian workers in Singapore.

How to Determine Tax Residency for Malaysian Workers

To determine a worker’s tax residency:

Resident status: This applies if they are in Singapore for 183 days or more in a calendar year. The days need not be consecutive.
Non-resident status: Applies if they stay for less than 183 days in the year. Each year is assessed separately.

Employer Tax Duties for Malaysian Workers in Singapore

When hiring Malaysian employees in Singapore, employers need to follow certain steps to manage their tax obligations. These responsibilities include registering workers with tax authorities, making monthly tax deductions and handling annual tax reports.

By understanding these reliefs and exemptions, you can better support your Malaysian employees and ensure they take full advantage of the tax benefits available to them.

1. Register Malaysian Employees:

Employers must register Malaysian workers with the IRAS to ensure proper tracking of their income for tax purposes. Registration is simple and can be done online.

Here’s a basic step-by-step guide:

Go to myTax Portal and log in using your CorpPass account.
Navigate the “Employers” section and select the appropriate e-Service for registering foreign workers.
Fill in the worker’s details, including their full name, Foreign Identification Number (FIN), and employment start date.
Once all the details are entered, review the information and submit a form to IRAS.
You will receive a confirmation email once the registration is successful.
For detailed instructions, you can visit the official IRAS guide on employer registration.

2. Monthly Tax Deductions:

Once registered, employers must deduct taxes from the employee’s salary every month. The amount deducted depends on whether the employee is a tax resident or non-resident. Employers are responsible for withholding the right amount and sending it to IRAS regularly.

3. Annual Tax Reporting:

At the end of the year, employers must submit Form IR8A to IRAS, reporting the employee’s total income. This includes salary, bonuses, and other benefits. The form is due by March 1st each year.

4. Tax Clearance for Departing Employees:

If a Malaysian worker leaves Singapore or ends their employment, employers must file Form IR21 for tax clearance at least one month before the departure. This ensures all taxes are settled before the employee leaves.

Tax Reliefs and Exemptions for Malaysian Workers

When it comes to taxes, Malaysian workers in Singapore might have a few options for reliefs and exemptions that can help reduce their tax burden. Here’s what employers need to know.

Personal relief for tax residents

If your Malaysian employee is a tax resident, they can benefit from personal reliefs, which are deductions that lower their taxable income. These reliefs are designed to lighten the tax load for residents, allowing them to keep more of their hard-earned money.

Here are some of the key reliefs available:

1. Earned income relief

This is a relief for individuals who earn a salary or other income from work. It can reduce their taxable income by up to $1,600, depending on their age.

2. Spouse relief

If your employee supports a spouse who is not working or earns a low income, they can claim a relief up to $2,000.

3. Child Relief

For every child your employee supports, they can claim up to $4,000 for the first child and 6,000$ for the second and subsequent children.

4. Parent relief

If your employee supports their parents, they can claim up to $9,000 per parent if the parent lives with them, or $5,500 if they do not.

Double Taxation Agreement (DTA) Between Malaysia and Singapore

Another important aspect to consider is the Double Taxation Agreement (DTA) between Malaysia and Singapore. This agreement helps prevent double taxation, meaning that your employees won’t have to pay taxes on the same income in both countries.

In simple terms, if your Malaysian worker pays taxes in Singapore, they can claim relief when filing taxes in Malaysia, reducing their tax burden there.

This agreement helps smooth out the financial side of working across borders, making it easier for employers to attract talent from Malaysia.

Ensuring Smooth Tax Clearance for Malaysian Workers Leaving Singapore

When a Malaysian worker leaves Singapore, employers have a crucial role in ensuring that the employee’s tax obligations are met. This process, known as tax clearance, is not just a formality. It's essential for settling any outstanding tax liabilities before the employee departs.

1. Obtain tax clearance

Before your Malaysian employee leaves, it’s essential to settle their tax obligations. This means filing for tax clearance to ensure that all taxes owed are paid.

2. Communicate with employees

Inform your employees about the tax clearance process well in advance of their departure date. This helps them understand what to expect and reduces any last-minute stress.

3. Provide necessary documentation

Ensure that your employee has all the necessary documents for their tax clearance, such as payslips, employment letters, and any other relevant income information.

Process of filing for tax clearance (Form IR21)

Filing for tax clearance involves a few straightforward steps:

1. Gather employee information

Collect all necessary information about the employee, including their total earnings and any deductions for the year.

2. Complete Form IR21

Fill out Form IR21, which is specifically for tax clearance. This form requires details such as the employee’s income, date of departure, and other relevant financial information.

3. Submit Form IR21 to IRAS

Submit the completed Form IR21 to the IRAS at least one month before the employee’s departure date. This gives IRAS enough time to process the application and determine any outstanding taxes.

4. Pay any outstanding taxes

If IRAS assesses that there are any taxes due, ensure these are paid promptly to avoid any penalties.

5. Obtain a tax clearance certificate

Once everything is settled, you’ll receive a tax clearance certificate, confirming that the employee’s tax obligations have been met.

Implications of not Obtaining Tax Clearance

Failing to obtain tax clearance when a Malaysian worker leaves Singapore can lead to serious consequences. Employers may face penalties, and the employee’s remaining salary could be frozen until all taxes are settled. This oversight can cause unnecessary delays, legal issues, and financial complications for both the employer and the employee.

1. Penalties and fines

Employers may face penalties from IRAS for not filing the necessary forms or for late submissions. This could lead to additional costs.

2. Withholding of final salary

If tax clearance isn’t obtained, IRAS may withhold the employee’s final salary, creating frustration for the worker and potential reputational damage for the employer.

3. Tax liabilities for employees

Employees may end up with unresolved tax liabilities, which could follow them to their next job or country of residence. It will be complicating their financial situation.

4. Impact on future employment

Not having proper tax clearance can affect the employee’s ability to work in other countries, as tax issues may be flagged during background checks.

Proper tax management is crucial for employers hiring Malaysian workers in Singapore. This includes registering workers with IRAS, accurately withholding taxes, and filing annual reports like Form IR8A. For non-resident employees, applying the correct flat tax rate ensures smooth payroll operations, while residents benefit from progressive tax rates and potential reliefs. Employers must also manage tax clearance when workers leave the country to avoid penalties.

Staying informed and proactive in these tax responsibilities can help employers avoid penalties and ensure a smooth, compliant process for both resident and non-resident workers.

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