How Does the IRD Tell Between Employees and Independent Contractors?
The Inland Revenue Department (IRD) primarily distinguishes between employees and independent contractors based on the type of contract they work under, among other factors.
If you operate under a “contract for services,” it means that your company, consisting of you as the employee, was hired to provide a specific service or project, allowing you to control work schedule, staff management, but also bearing sole responsibility for any risks taken.
Whereas if you work under a “contract of service,” you work for someone else under an employment relationship, and while you relinquish control over your work schedule and staff management, ultimate responsibility will fall to the company you work for.
| Factor | Independent Contractor | Employee |
| Control | You decide how, when, and where work is done | Employer controls work procedures and schedule |
| Tools and Equipment | You own and provide your own tools | Employer provides necessary equipment |
| Financial Risk | You bear the risk of profit or loss | You receive fixed salary regardless of business performance |
| Hiring Assistants | You can hire your own helpers | You cannot hire others to do your work |
| Business Operation | You run your own business and bear management responsibility | You are part of the employer’s organization |
Should I Earn a Salary or Live Off the Profits?
Now that we’ve settled the difference between employees and independent contractors, let’s dive into how independent contractors can set up their income.
Since independent contractors are effectively employees of their own company, they can choose to live off the business profits or pay themselves a salary. Some even earn a salary from part-time work while earning profits from their side business.
What are the rates for Salary Tax in Hong Kong?
Hong Kong uses both the progressive and standard salary tax rate, where the tax payer will pay the lower result between the two rates, using chargeable income after deductions but before allowances.
Progressive Salary Tax Rate
| Income Segments | Net chargeable Income (HK$) | Tax Rate | Tax (HK$) |
| 0 to 50,000 | 50,000 | 2% | 1,000 |
| 50,000 to 100,000 | 50,000 | 6% | 3,000 |
| 100,000 to 150,000 | 50,000 | 10% | 5,000 |
| 150,000 to 200,000 | 50,000 | 14% | 7,000 |
| Remainder above 200,000 | 17% |
Standard Salary Tax Rate (2024/25 onwards)
| Income Segments | Net chargeable Income (HK$) | Tax Rate | Tax (HK$) |
| 0 to 5 million | 5,000,000 | 15% | 750,000 |
| Remainder above 5 million | 16% |
For sole proprietors and partnerships, Hong Kong offers a two-tiered profits tax system, where the first HK$2 million of assessable profits is taxed at 7.5%, and any assessable profits above that HK$2 million is taxed at 15%.
Salary Tax Calculation Example
As an example, let’s say you gave yourself an annual salary of HK$300,000. Using the progressive tax rate, a salary of HK$300,000 per year would be calculated as follows:
| Income Bracket | Tax Rate | Tax Amount |
| First $50,000 | 2% | HK$1,000.00 |
| Next $50,000 | 6% | HK$3,000.00 |
| Next $50,000 | 10% | HK$5,000.00 |
| Next $50,000 | 14% | HK$7,000.00 |
| Remaining $100,000 | 17% | HK$17,000.00 |
| Total | HK$33,000 |
Calculated using the standard rate, your tax would be calculated as follows:
| Income | Tax Rate | Tax Amount |
| $300,000 | 15% | HK$45,000 |
The IRD would make the comparison, and bill you for the smaller amount of the two.
What are the rates for Profits Tax in Hong Kong?
Profits tax in Hong Kong is calculated using the two-tiered system for qualified companies, and is comparatively simpler to calculate next to salary tax.
Net Assessable Profits (HK$) |
Two-Tier Rate Qualified Companies |
Unqualified Companies |
0 to 2,000,000 |
7. 5% |
15% |
Remainder over 2,000,000 |
15% |
You can deduct expenses that are necessary and ordinary for running your business from the assessable profits before applying the profits tax rate. Common deductible expenses include:
- Employee salaries (Your own if you’re a sole proprietor)
- Business premises rent, utilities, and telephone fees
- Office supplies and equipment
- Business trademark, design, or patent registration fees
- Professional fees for accounting and legal services
- Marketing and advertising costs
- Business travel expenses
- Depreciation on business assets
Anything outside of this list cannot be deducted and may result in penalties and an audit if found.
As a sole proprietor, you could simply live off the profits after tax instead of giving yourself a salary, which leads to the question:
What are the benefits to giving yourself a salary?
- Access to Personal Assessment
When you pay yourself a salary, you can elect for personal assessment, allowing you to combine all your income sources and claim deductions against your total income.
- Access to Allowances
Personal allowances can reduce your overall taxable income. The basic allowance alone is HK$132,000 for 2024/2025, with additional allowances that can be applied for dependents, children, and other qualifying circumstances.
- Simplified Tax Planning
A regular salary makes it easier to estimate your quarterly tax payments, while avoiding the uncertainty of fluctuating business profits.
- MPF Benefits
Paying yourself a salary allows you to contribute to mandatory provident fund (MPF) schemes, building retirement savings while reducing your taxable income.
How do I choose between filing for profits tax and filing for personal assessment?
If there are deductions on the personal assessment that you can apply for, it is recommended to give yourself a salary and apply for personal assessment to lower your overall tax bill. If none of the deductions apply to you, you could simply file for profits tax and save yourself the hassle.
Filing Procedures for Independent Contractors
How you choose to proceed will dictate which form you will need to fill, as well as your business structure and status in Hong Kong.
| Form | Applies To | Purpose |
| BIR60 | All individuals | Annual Return – Individuals (used to elect personal assessment) |
| BIR60 | Sole proprietors | Reports business income for sole proprietorships |
| BIR52 | Partnerships | Profits Tax Return for non-corporate entities |
| BIR54 | Non-residents | Profits Tax Return for non-Hong Kong residents operating a business |
| IR76C | Qualified individuals | Personal Assessment |
What supporting documents do I need to prepare?
In addition to filling out the relevant form, you may need to reference any business-related documents that you’ve accumulated over the past financial year, including:
- All invoices and receipts
- Bank statements and financial records
- Contracts and agreements
- Correspondences related to your business
- Past Tax returns and payment records
Legally, you must keep these documents for up to 7 years, and be ready to present them whenever the IRD or your auditor makes a request.
Filing Deadlines
What are the key tax filing deadlines?
The IRD will typically mail you a letter containing the forms you have to fill and the deadlines you have to submit them by, usually providing one month barring an extension request.
| Tax Type | Deadline | Notes |
| Individual Tax Return | April 30 | For reporting all personal income from previous year |
| Profits Tax Return | November 30 | For all business profits chargeable to Profits Tax |
What if I haven’t received a tax return?
If your income exceeds the basic tax exemption (HK$132,000) and you have not received a tax return in the mail, you must notify the IRD in writing. You have 4 months from the end of the assessment period to request a tax return.
Conclusion
The life of the self-employed seems attractive, but also comes with more responsibility and self-learning. Understanding how to maximise your earnings as a new business owner and as a newly self-employed is important to starting your new career. If you have any questions about starting out or want to incorporate your sole proprietorship, drop us a message and we’d be happy to help!
