Estimated chargeable income, or ECI, refers to the projected earnings you can be taxed on each year if you’re self-employed or in business for yourself.
To figure out your ECI, first determine your actual net income and then deduct the appropriate business expenses in order to arrive at your estimated chargeable income.
While this might seem like an intimidating process, it’s actually very simple once you know what steps to take and in what order to take them, which is exactly what this step-by-step guide will provide.
What Is Estimated Chargeable Income
Estimated Chargeable Income, or ECI, is the amount of money that the Inland Revenue Department believes you should be paying taxes on. This number is based on your taxable income, which includes money earned from employment, business, investments, and other sources.
If you are self-employed, for example, then this number would include a percentage of your profits before deducting any expenses. You can calculate your estimated chargeable income by taking the total value of all your income (gross) minus deductions (tax exempt contributions).
The IRD will use this number to decide how much tax you need to pay.
Importance Of Filing ECI
Filing your Estimated Chargeable Income (ECI) is important because it:
- Gives the Inland Revenue Authority of Singapore (IRAS) an indication of the amount of taxes you are required to pay for the Year of Assessment (YA).
- Helps you to plan your finances better as you would know the amount of taxes that you have to set aside.
- Prevents underpayment or overpayment of taxes, which may result in penalties. For example, if you overestimate your ECI and don’t have enough money to cover the tax liability, then IRAS will collect it from a debt collector.
If you underestimate your ECI and don’t declare this additional income on your tax form, then IRAS will impose a penalty on top of any outstanding tax liabilities due.
- Go to mytax.iras.gov.sg and login with your SingPass account number and password
- Select Estimated Chargeable Income tab located at the left navigation bar
- Enter salary received during the year and select Add button next to each salary period until all periods are completed
- Press Calculate Estimated Chargeable Income button
Steps To Calculate ECI
If your business has incurred net operating losses (NOLs), you may be able to carry those losses back or forward to offset profits in other years. Here’s a step-by-step guide to calculating your NOLs.
Step 1: Adding Back Non-Tax Deductible Items
If you’re self-employed, you’re probably used to deducting a lot of expenses on your taxes. But there are some expenses that you can’t deduct, and these need to be added back in when calculating your estimated chargeable income.
Non-tax deductible items include food consumed at home or while traveling, entertainment expenses such as tickets to the movies or concerts, etc. These should be added back into your total income after subtracting them from the line total deductions.
When determining your average monthly living expense, consider every household member’s food costs and entertainment expenditures.
Even if they don’t work outside the home or don’t contribute financially to the household, each family member still has his or her own personal needs for food and entertainment which must be factored into their living costs. For example, assume a couple lives with two children under the age of eighteen.
The parents earn $2,000 per month and spend $1,500 per month on housing costs (including utilities), $500 per month on groceries, $300 per month on fuel for their car (at twenty miles per gallon), and so forth. Each child also earns an allowance of $100 per month, but only spends about half of it on personal necessities like clothing and school supplies.
Thus, the monthly cost for one child is about $150 ($100 allowance + 50% spending) because he or she earns money but doesn’t have any other living expenses; whereas the cost for both children is around $250 ($200 allowance + 50% spending).
Assuming all three members of the family share similar incomes and living expenses, this means that their combined living expenses will be about $4,750 per month ($3,750 for the adults + $1,000 for each child). In this scenario, the adjusted gross income would be $6,800 ($2,000 * 3 people) rather than just $6,400.
Step 2: Deduct Non-Taxable Income
In order to calculate your ECI, you will need to first deduct any non-taxable income from your total income. This includes items such as CPF contributions, life insurance proceeds, and alimony payments. By doing this, you will get a more accurate picture of your true taxable income.
Non-taxable income can be excluded for the following reasons: – CPF contributions are taken out before the tax is calculated.
Thus, when figuring out your chargeable income, you would not include these contributions as they were already taxed. For example, if someone earns $80000 but contributes $20000 into their CPF account then their chargeable income would only be $60000.
If they receive life insurance proceeds in the amount of $2000 then that amount can also be deducted from their total income; however it must have been given willingly by the person who died or suffered bodily injury in order to qualify as non-taxable. These two examples exclude some other types of income which may seem like they should be included because they are not taxed, like gifts received.
Gifts do not qualify as non-taxable income because the person giving them does so voluntarily and thus receives a tax deduction for them. It does not matter how much was gifted nor what type of gift it was, if the giver did so voluntarily then no deduction applies. The last type of non-taxable income is Alimony Payments.
These cannot be counted as taxable income if they were used to provide an ex-spouse with shelter (i.e., mortgage) or support (i.e., living expenses).
Third Step: Deduct Further And Enhanced Deductions
In order to calculate your ECI, you will need to deduct any further and enhanced deductions that you are eligible for. These deductions can include expenses such as research and development costs, and any other professional or business-related expenses. Once you have deducted these expenses, you will then be able to calculate your ECI.
You will do this by dividing the total of your gross income by the number of days in the year. If you work on a Monday-Friday schedule, the calculation would be 365/5=72. If your company’s fiscal year runs from April 1st through March 31st, it would be 552/365=152.
The result is how many days’ worth of chargeable income you have during a given period of time; every day during which you receive wages is one day’s worth of chargeable income.
An exception to this rule is if you work part-time. For example, if someone only works 30 hours per week they would divide their gross income by 60 (working hours per week) rather than 72 (working hours per month).
As long as you meet the definition of employee under Code Section 3401(c), you must use wages paid or received when calculating your ECI. It is important to note that this applies even if an employee’s annual compensation exceeds $200,000 because they may still qualify for certain tax benefits related to their employment status.
Furthermore, calculations are not made according to whether the payer provides fringe benefits. All wages reported on Form W-2 and Box 1 should be included in this calculation regardless of whether those wages represent commissions, bonuses, or tips.
Nonresident aliens who are required to file a U.S. individual income tax return pursuant to IRC §6012(a)(1) should determine their ECI using Wages Paid for Work Done Within U.S.
Fourth Step: Calculate And Deduct Your Capital Allowance
Assuming you are claiming the Annual Investment Allowance (AIA), the first £1 million of qualifying expenditure incurred each year is 100% allowance. This means that it can be deducted in full from your profits before tax is calculated.
If you have already reached the AIA threshold, then any additional qualifying expenditure will receive a rate based on how much profit you made that year. For example, if you made £150,000 profit and you spent £100,000 on equipment this would give a 50% deduction (£50,000).
The cost of replacing an asset is always deductible up to its original value when the new asset was bought. It does not matter whether the old asset has been sold or not as long as it was still available for use at the time. However, once you replace an asset completely with a newer one there is no longer any point in deducting depreciation on that older item as it has now been replaced.
Instead, depreciation should be claimed on the replacement asset. Therefore, you need to calculate the price difference between what you originally paid for the replacement asset and what you paid for the previous replacement and claim that amount less any costs related to disposing of the old asset.
Once you have done this, divide the total by 5 years and multiply by 36 months to get the allowable annual depreciation. Then subtract this figure from your income over five years. Finally, deduct 10% of chargeable income for capital allowances as well as 20% of non-chargeable income from total net business profits before determining the annual chargeable income.
Fifth Step: Add Past Your Capital Allowance
Now that you’ve added up all of your other income, it’s time to add in your capital allowance. This is the amount you can deduct from your taxes for any business-related expenses, such as equipment or office space. It also includes small amounts from investing, dividends and interest.
Add this figure to your net business income after adding back depreciation and amortization. From there, divide by 12 to get your monthly chargeable income. Then use the table below to find out what bracket you fall into:
Income Level Description Tax Rate Up To $200K 10% $200K-$400K 17% $400K-$600K 24% Over $600K 33%.
For example, if you have $20,000 in capital allowance, your chargeable income is $70,000 ($80,000 net business income + $20,000 capital allowance = 100k x 15%) and you’re in the top tax bracket.
That’s an estimated taxable income of approximately $13,500 per month. It’s important to remember that these numbers are only estimates because they’re based on total income — not actual income earned after deductions.
So if you make $100,000 but receive a $30,000 refund for last year’s taxes, then your estimated chargeable income would be closer to $30,000 than the original estimate of $100,000. And keep in mind that these calculations are just guidelines.
Sixth Step: Add Back or Deduct Balancing Allowances and Balancing Charges
If your company is registered for GST, you will need to account for any balancing allowances or charges when calculating your ECI. Balancing allowances are credits that reduce the amount of GST you owe, while balancing charges are debits that increase the amount of GST you owe.
To calculate your ECI, start by adding up all of your taxable income and then add back any balancing allowances. Deduct any balancing charges from this total. This is your ECI.
It represents the gross income generated from your business before accounting for expenses, which will be taken into consideration in a later step. First divide this number by 365 to get an annual figure.
Seventh Step: Deduct any unutilised losses, capital allowances, unutilised donations
If you have any unutilised losses, capital allowances, or unutilised donations, you can deduct these from your ECI. This will lower your ECI and hence the amount of tax you have to pay. Unutilised losses can be carried forward to future years and offset against future profits.
Similarly, unused allowances can also be carried forward for use in future years. You are not allowed to carry over unused donations. For example, if you had a $200 deductible donation in 2012 but only donated $100 in 2013, then you would only claim $100 as a deduction for 2013’s estimated chargeable income calculation
After adding up your income from all sources and subtracting any allowable expenses, you’ll arrive at your estimated chargeable income. This number is important because it’s used to calculate how much tax you’ll owe for the year. Remember, if you have any questions about calculating your estimated chargeable income, you can always speak to an accountant or tax professional.