Contract of Service vs Contract for Service

 Corporate Tax


 

What is contract of service?

Contract of service is an agreement whereby a person agrees to employ another as an employee. It establishes a servant–master relationship where the servant (the employee) generally occupies an office or a post, and normally devotes his personal labour to his master (the employer) who has control over the kind of work and the manner in which the work is carried out.

A letter of employment must be issued to the employee under the Employment Act. The letter of employment must include the Key Employment Terms (e.g leave policy, medical benefits) to the employees.

 

What is contract for service?

Contract for service is an agreement whereby a person is engaged as an independent contractor to carry out assignment or project. It establishes a client-contractor relationship between the contracting parties.

 

Tests provided by the Inland Revenue Authority of Singapore (IRAS)

Below are the tests provided by the IRAS to determine whether you are self-employed or an employee:

Contract of service (Employment) Contract for service (Profession)
1)    Exposure to financial risk
  • You are not financially liable for any losses of the payer’s business resulting from any breach of obligations of the contract between your payer and its clients
  • You have no capital investment in the payer’s business.
  • You are not responsible for operating expenses of the payer’s business.
  • You are financially liable if the obligations of the contract are not fulfilled.
  • You have capital investment in the business.
  • You incur on-going business fixed costs regardless of whether work is currently being performed or not.
2) Payment received
  • You are paid a regular (fixed hourly/ weekly/ monthly) wage.
  • You get overtime pay or bonus payment.
  • You may receive a commission payment in addition to your regular wage.

 
  • You are paid a fee on a per-job basis. You have the right to negotiate with the payer the exact amount you would be paid for.
3) Level of control
  • Your working hours are specified
  • You do not hire and pay another person to do your work
  • You may provide suggestions to the payer but the payer has the final word.
  • You do not have anyone overseeing you
  • You control your own hours of work in fulfilling the job obligations.
  • You can accept or refuse work from the payer.
  • You are free to hire other people to do the work you have agreed to undertake at your own expense.
4) Flexibility to provide the same services to more than one person / business at the same time
  • You need to obtain permission from the payer if you wish to do work for other payers.
  • You can provide the same services to more than one person/ business at the same time.
  • You advertise and maintain a visible business location. You are available to work in the relevant market.
5) Provision of the necessary tool, equipment and machinery required
  • The payer supplies most of the tools and equipment required by you to do your work. -The payer is also responsible for repair, maintenance and insurance costs.
  • The payer retains the right of use over the tools and equipment provided to you.
  • You are responsible for the costs of repair, insurance and maintenance to the tools, equipment and machinery.
  • You typically make significant investments in the tools and equipment required to do the work, and therefore retain a right over the use of the assets.
6) CPF contribution and other benefit
  • You are entitled benefits that are normally only offered to employees.
  • For example, employer’s contribution to CPF, medical and vacation leave, medical reimbursement, group accident and health insurance, etc.
  • You do not receive any protection or benefits from the payer.
  • You provide your own medical and insurance coverage. You are required to contribute to your own CPF Medisave account.
  • You are required to pay employer’s CPF contribution to your helpers.

 

The IRAS has provided some examples of a self-employed person:

  • Hawker
  • Taxi Driver
  • Private tuition teacher
  • Freelancer
  • Commission agent
  • Owner of an online business

A self-employed may be a sole proprietor or a partner in a partnership.

 

Why is it important to recognise the difference?

Besides tax implications, there are different implications that will arise (e.g Central Provident Fund (CPF) Act, Employment Act etc). In this article, we will focus on the tax implication.

 

Difference in tax treatment between self-employed person and an employee

Contract of service (Employment) Contract for service (Profession)
Losses (including capital allowance) Not applicable Unutilised losses may be carried forward or carried back to the immediate preceding year (subject to conditions)
Deduction Minimal tax deduction allowable Tax deduction is allowable under SITA
Capital allowance Not allowable Allowable
Exemption

Employment income derived by non-resident will be exempted from Singapore tax if the employment is exercised in Singapore is for

60 days or less in the calendar year

 Not applicable
Relief for non-resident employee Non-resident employees are granted a relief where they will be taxed at 15% of employment income or on a resident basis, whichever is higher Not applicable
Foreign-sourced income Not taxable For a partner deriving foreign-sourced income through a partnership, it may be taxable.
Tax obligation for non-resident Report the employment income in Form IR8A or Form IR21 Report the income in Form IR37A and withhold at 15/22% of the gross/net income