Imagine losing your livelihood because you did not make your compulsory CPF contribution.
This is a reality faced by many freelancers or Self-Employed Persons (SEPs) in Singapore. While the share of self-employed in the resident workforce may have fallen from 14.7% in June 2020 to 13.6% in June 2021, there are around 248,500 people in 2021 who are classified as regular own account workers.
Own account workers are self-employed persons who are engaged in a trade or business without employing any paid workers. While, a majority of these regular primary own account workers might be working as private-hire car drivers, taxi drivers, insurance agents, delivery workers, and real estate agents, they can also be knowledge workers like graphic designers, content producers, and social media specialists.
And, as SEPs with an annual net trade income (NTI) of more than $6,000, one of their obligations is to contribute to their Medisave. Otherwise, their licenses, such as for the abovementioned professions, may not be renewed by the licensing authorities. In some cases, the CPF Board may even take court action against recalcitrant defaulters.
This is particularly concerning as about 60% of SEPs do not make their Medisave obligations “in full in a lump sum in a given year”, according to MOM. To solve this issue, the government introduced CAYE, or Contribute As You Earn.
How Much Should SEPs Contribute To Their MediSave?
The Medisave Account (MA) was created as part of the CPF system in 1984 to help Singaporeans meet their rising healthcare needs, such as their hospitalisation bills and MediShield Life premiums.
While salaried employees or contract of service workers have to contribute anywhere between 5% and 20% of their wages to their combined CPF accounts based on their age, SEPs only have to contribute towards their Medisave account. Based on their age and income, the Medisave contribution rate (and limit) ranges between 4% (maximum of $5,760) for those under 35 years of age and 10.5% (maximum of $7,560) for those 50 years and above.
The Labour Force 2021 report highlighted that healthcare-related concerns were the fourth biggest challenge faced by regular own account workers in 2021.
This reinforces why self-employed persons must set aside a portion of their income to build up their MediSave savings in preparation for future healthcare requirements, particularly in old age when they have retired.
Current System Requires SEPs To Pay A Lump Sum Within 30 Days
Currently, whether you are a self-employed person or concurrently an employee, and earning more than $6,000 in Net Trade Income (NTI) a year based on your tax submission to IRAS or income declaration to the CPF Board, you need to contribute to your Medisave Account.
Licensing authorities like ACRA or LTA will only process a SEP’s licence renewal or application provided there is no outstanding Medisave payable.
The Medisave contribution, which is calculated based on your age and NTI, is due 30 days from the date of issuance of the Notice of Computation from IRAS or Notice of Contribution from the CPF Board. This leaves a short period of time for some SEPs to make the full lump sum payment due to a shortfall in cashflow or simply missing the payment as life gets in their way.
A SEP could get around this problem by applying for GIRO payment of the mandatory Medisave contributions and could even make voluntary contributions. The CPF Board would deduct on the 25th (or next working day) of each month from the SEP’s bank account.
However, for some SEPs, this may not be practical as their earnings could be seasonal and they may have months where they might be tight on cash.
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This is where the pilot CAYE programme was introduced to address the concerns of such SEPs, who may have irregular earnings and cash flows throughout the year.
What Is Contribute-As-You-Earn or CAYE
Contribute-As-You-Earn or CAYE, which commenced from 1 January 2020, is a pilot scheme targeted at SEPs who provide services to the government to make smaller and more regular Medisave contributions.
Under CAYE, the government as the service buyer will credit a portion of the SEP’s payment into their Medisave Account (MA) first before paying out the remainder in cash.
To illustrate this further, assume the SEP, John is a 47-year-old music teacher and is being contracted to conduct 3-hour weekly training sessions by an MOE secondary school. For his services, John is paid $120, and he incurs an expense of $20, effectively earning him an income of $100. Before the CAYE system, John would have received the full $120 payment.
However, now with the CAYE, the secondary school will help John to make the Medisave contribution of $10 from the payment due and pay the remaining $110 to John. The amount that the school contributes to John’s Medisave is determined by his CAYE contribution rate, which in this case is 10%.
Read Also: How Much Self-Employed Persons Need To Contribute To MediSave (And What Happens If You Don’t)
How Is CAYE Contribution Rate Determined
Your CAYE contributions are determined based on your estimated annual revenue and expenses.
CAYE contribution rate = (A x B)/C
A: The Medisave contribution rate for your estimated annual Net Trade Income (NTI) and age for the year;
B: Your estimated annual NTI for the year; and
C: Your estimated annual revenue for the year
As the CAYE contributions are only an estimate of your required Medisave contributions, you still need to declare your actual NTI to IRAS/CPF Board the following year to calculate your Medisave payable amount as a SEP.
Lastly, you can ask for a refund or keep any CAYE contribution amount that is in excess of your actual Medisave payable. However, should there be a shortfall despite your CAYE contribution, then you would need to top up at the end of the year.
One Benefit Of CAYE, It Helps SEPs To Make Regular But Smaller Medisave Contributions
With CAYE, SEPs will first be able to make regular but smaller Medisave contributions each time they receive a payment. This would help SEPs better manage their cashflows as they do not have to worry about paying a large lump sum at the end of the year.
The second benefit is the convenience that SEPs could derive from the CAYE scheme. For example, if you, as the SEP, are contracted with a government agency, it will help to channel your contributions to your Medisave account based on your contribution rate without you having to bother about reporting or filing the claims.
Lastly, the small contributions made over time will help SEPs earn more interest on their CPF monies compared to holding them in a bank savings account. Bank saving accounts in general tend to yield a lower interest rate compared to the MA interest of 4% and up to 5% for the first $60,000 of your combined balance, which allows you to compound your money faster.
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Private Firms Could Benefit From Implementing CAYE For Their Contract For Service Vendors
While only government agencies are required to implement CAYE for now, it would benefit more workers in a contract for service employment, like freelancers, should more of their clients (private companies) were to onboard on this scheme.
For private companies, there is no additional cost for implementing CAYE for the payment of services to their self-employed vendors. Moreover, only a one-time boarding is required before they can start participating in CAYE. The company’s officers do not need to compute the CAYE contributions of their self-employed vendors as the calculation is done automatically and deducted when the company processes the invoice. Lastly, the company will have convenient access to all the payment records of the self-employed vendors from the dashboard and can download them easily to facilitate finance reconciliations.
To implement CAYE, the company needs to only add and assign a CAYE digital service ID via the Corppass website. Thereafter, the company as a corporate service buyer (CSB) needs to apply for a CAYE CPF submission number (CAYE CSN) before they can start making CAYE contributions for their self-employed vendors. CPF has a step-by-step guide on applying for a CAYE digital service ID that you can refer to here. Do note, however, that companies cannot use the CSN to pay for their regular employees.
Another Similar Private Scheme Is The Drive And Save (DAS) Scheme
One similar private initiative that encourages SEPs to make their Medisave contributions is the Drive and Save (DAS) scheme. Under the DAS scheme, around 26,300 (Labour Force 2021) taxi drivers who contribute at least $20 will receive a co-contribution of another $20 from their taxi operators. While these contributions count towards the mandatory Medisave contributions payable for the year, it also helps those taxi drivers earning less than $2,300 ($2,500 from work year 2023) to qualify for the Workfare Income Support (WIS) cash payouts and Medisave account top-ups.
Read Also: What Is The Drive And Save (DAS) Scheme, And How It Benefits Taxi Drivers
Contributing To The CPF Has More Benefits Than Just Saving For Medical Expenses
Contributing to one’s CPF accounts goes beyond the benefits of just saving for medical expenses. CPF funds could also be used by members to pay for their housing needs through their ordinary account and help with their retirement adequacy through their special and retirement accounts. Furthermore, CPF funds are, in a way, guaranteed by the Singapore Government, and it pays out a stable interest of up to 5% on the Special and Medisave accounts. The CPF can be a good and safe investment vehicle for financially unsavvy SEPs to reach their financial goals in their retirement years.
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Private companies can help SEPs who are agreeable to make CAYE contributions as it lessens the burden on them and ensures they face a lower risk of losing their licence for not making the mandatory Medisave contributions. This will benefit companies as they will face a lower risk of losing their freelancers due to administrative issues.
Hence, the CAYE scheme can benefit both freelancers and their clients mutually.
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