Why Self-Employed Individuals Are Not Earning As Much As You Think They Are

One of the benefits of being self-employed is the potential to earn more than a fixed salary. The concept is straightforward: as a self-employed individual, your earnings are not capped by a monthly salary. If you work hard and excel in your field, you can increase your income.

In Singapore, examples of self-employed individuals include insurance and property agents, private-hire drivers, freelancers, gig economy workers, and small business owners. These individuals typically control their work hours, which directly impact their monthly income. If they work longer hours, they can earn more.

Aside from time management, the potential for a high income is a significant attraction of self-employment. For those considering this path, the prospect of earning a substantial monthly income can be very appealing. You might also ask self-employed friends about their earnings and be drawn by their high figures. However, before you jump into self-employment, it’s important to first understand why the earnings that your friends share with you, assuming they are true, might not be as high as they appear.

Earnings Does Not Equate Into Income

The first thing to remember is that the earnings you make as a self-employed individual do not necessarily equate to your net income. This is because, as a self-employed individual, you must cover the costs of your business operations.

For example, as a property agent, you need to bear advertising costs. As a private-hire driver, you are responsible for fuel expenses. As a freelance designer, you likely pay for multiple software subscriptions and necessary equipment. All these expenses come out of your pocket.

IRAS provides a Fixed Expense Deduction Ratio (FEDR) framework, which suggests a reasonable amount of expenses self-employed individuals will incur. This framework offers a good estimate of the operational costs you can expect.

CategoryFEDR on annual gross income
Commission Agent25%
Public-hire car/taxi driver60%
Delivery WorkerOn foot/bicycle – 20% PMD/PAD – 35% Van – 60%

Based on IRAS guidelines, it is reasonable to say that a property agent would spend about 25% of their gross income on expenses due to the nature of their work.

Here’s the challenge: if you ask your property agent friend about their average monthly salary, there’s a good chance they will tell you their gross earnings without accounting for expenses. For example, if a property agent earns about $4,000 in commissions each month and you ask about their income, they will likely say they make around $4,000 a month.

Although they are not lying, the truth is that their actual net income is lower. Using the IRAS suggested ratio of 25% for commission agents, their actual income would be $3,000 after covering expenses.

Lack Of Employer’s CPF Contribution

If you want a like-for-like comparison, you need to compare apples to apples. Unfortunately, when comparing the salaries of employed individuals to those of self-employed individuals, we often fail to make an accurate comparison.

As an employed individual, when you discuss salaries with your peers, you likely share your gross salary. This is the amount you earn before accounting for your 20% employee CPF contribution. For example, if you earn $5,000 a month, you would typically say you earn $5,000 a month, even though your actual take-home pay is $4,000 after accounting for the CPF contribution.

However, you are not considering your employer’s CPF contribution, which is 17% of your gross salary for employees under 55. While this amount goes directly to your CPF account, it still belongs to you. Thus, for someone earning $5,000 a month, the total remuneration from their employer is actually $5,850 a month.

To make a like-for-like comparison between an employed and a self-employed individual, here’s a simplistic way of doing so:

Assume a property or insurance agent incurs expenses of about 25% of their total earnings. The self-employed individual would need to earn approximately $7,800 a month to be equivalent to an employed individual earning $5,000 a month.

 Employed Individual
Gross Salary$5,000
Employer’s CPF Contribution (17%)$850
Actual Remuneration$5,850
 Self-Employed Individual
Gross Earnings$7,800
Operational Expenses (25% of gross earnings)$1,950
Actual Remuneration$5,850

Another misguided way of comparing salaries is to compare an employee’s take-home pay against the gross earnings of a self-employed individual.

For example, with a gross salary of $5,000, an employee’s take-home pay is $4,000 after accounting for the CPF contribution. This amount appears much lower than the gross earnings of a self-employed person making $7,800. However, as our previous comparison shows, both individuals are actually earning equivalent amounts once we account for business expenses and CPF contributions.

Self-Employed Individuals Do Not Enjoy Bonuses

Lastly, unlike employed workers who may receive a year-end bonus that increases their overall annual income, self-employed individuals do not typically receive any bonuses. Therefore, the amount they report as their average monthly earnings is usually an accurate reflection of their salary.

Employed individuals rarely include their year-end bonus when sharing their monthly salary with peers. For instance, a person earning $6,000 a month who receives a 13th-month bonus earns $78,000 a year, or $6,500 a month. Including the employer’s CPF contribution of 17%, their total remuneration comes to $91,260 annually.

On the other hand, for a self-employed individual to earn the same $91,260, they would need to gross $121,680 per year, or more than $10,000 per month, assuming they have expenses amounting to 25% of their earnings.

This article makes the point that we should avoid assuming that self-employed individuals are making significantly more than employed workers based solely on their gross earnings. This is because, in addition to not receiving any employer CPF contributions, self-employed individuals also have to cover the costs of their business expenses.

Read Also: Complete Guide To Employer’s CPF Contributions In Singapore

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