1. Under-Reporting or Not Reporting Side Income

THE MISTAKE
Many Malaysians assume:

“It’s small income, no need to report.”
“I didn’t register a company, so no tax.”
“Cash sales don’t count.”

But in Malaysia, ALL income is taxable, whether cash, bank transfer, e-wallet, crypto, or online marketplace earnings.

LEGAL BASIS
Income Tax Act 1967 – Section 4(a) “Gains or profits from any trade, business, or profession”
This covers any side hustle.

THE CONSEQUENCE

LHDN can issue penalties up to 45% of unpaid tax
Additional penalty for “understatement of income”: up to 100%
Audits for 5–7 years of past records

THE FIX
Declare side income under:
e-Filing > Section B > Business Income (B Form)

If you’re only doing side income (no salary), still use B Form.

2. Not Claiming Legit Tax Deductions (Burning Money)

Most side hustlers don’t know they can legally deduct business expenses such as:

petrol & mileage
toll & parking
equipment (laptop, camera, tools)
phone & internet
software subscriptions
delivery fees (Grab, Lalamove)
packaging, ingredients, supplies
studio/office rental
advertising (FB ads, TikTok ads)
commissions paid to agents

LEGAL BASIS
Income Tax Act 1967 – Section 33: Deductible expenses must be “wholly and exclusively incurred in producing income”.

THE CONSEQUENCE
You pay higher tax than necessary.

THE FIX
Deduct every eligible business expense.
You are allowed to claim expenses even if you operate as an individual (non-Sdn Bhd).

3. Claiming the Wrong Expenses (LHDN Rejects These)

Common mistakes include:

personal meals
personal travel
clothing (unless uniform or protective)
personal electronics not used for business
gym memberships
near-zero usage laptop claims
claiming home rent when working from dining table

LHDN checks for “private benefit”.
If an expense benefits your personal life, they will disallow it.

LEGAL BASIS
Income Tax Act 1967 – Section 39: Non-deductible expenses.

4. No Records, No Receipts, No Proof

Many assume LHDN won’t check small hustles.
They will especially with the rise of e-payment data trails.

WHAT YOU MUST KEEP FOR 7 YEARS

invoices
receipts
bank transactions
e-wallet screenshots
order history (Shopee, Lazada, Grab, Foodpanda)
mileage/toll/parking logs
payment proofs
WhatsApp agreements with customers

LEGAL BASIS
Income Tax Act 1967 – Section 82: Records must be retained 7 years.

CONSEQUENCE
LHDN can disallow your expenses, meaning you pay more tax.

5. Using the Wrong Form (BE Instead of B)

Most salaried Malaysians file Form BE (employment income only).
But if you have any side income, you MUST use:

FORM B

For individuals with:
✔ salary income
✔ and side-hustle / business income

Using BE is considered under-reporting.

6. Not Registering a Business When Income Is Continuous

LHDN does NOT require SSM registration for tax purposes.
BUT if your side hustle becomes a continuous business:

marketplace selling
home bakery
teaching classes
freelancing
flipping items

SSM registration is recommended because:

it legitimizes your business
it protects you legally
it improves audit credibility
you can open business bank account
you can claim business-related expenses more cleanly

It doesn’t affect tax rate, individuals are still taxed under personal income tax unless they set up a Sdn Bhd.

7. Thinking EPF Isn’t Relevant for Self-Employed

This one shocks many.

Side hustlers can contribute to EPF i-Saraan and still get:

✓ Tax relief up to RM4,000

(confirmed under LHDN’s Personal Tax Relief list)

EPF contributions are one of the BEST legal tax-saving tools for freelancers and side hustlers.

8. Mixing Personal & Business Money

This creates audit red flags.

LHDN may challenge:

which expenses are business
which income is personal

THE FIX

separate bank accounts
separate e-wallets
separate cards
track income automatically using apps

Even if you don’t have SSM, separate accounts = cleaner audit.

9. Thinking Small Income = No Tax

If your total annual income (salary + side income) exceeds the taxable threshold:

RM34,000 – RM37,000 after EPF

you must file tax.

Low-income earners often skip filing, leading to issues later when LHDN cross-checks:

bank deposits
e-wallet top ups
marketplace payouts
gig platform data
invoice numbers
payment processor records

Malaysia is moving toward e-invoicing, enforcement will only increase.

10. Not Saving a Portion of Income for Tax

Freelancers often get shocked when they see how much they owe because employers normally handle PCB.
You must set aside:

15–25% of side income

(depending on your bracket)

If you can’t pay, LHDN issues penalties and compounds.

Final Thoughts: Tax Isn’t the Enemy, Ignorance Is

Malaysians don’t get in trouble because they earn side income.
They get in trouble because they don’t understand how tax actually works.

The good news?
Side hustlers have MORE tax advantages than employees, more deductions, more flexibility, more control.

If you treat your side income like a real business, even on a small scale, you’ll legally pay less tax, avoid penalties, and keep more money in your pocket.

Keep Reading

If you found this guide helpful, here are more RinggitWise deep dives you’ll enjoy:

How to Start a Small Business in Malaysia (2025 Guide)
https://ringgitwise.my/how-to-start-a-small-business-in-malaysia-2025-guide/
These Malaysians Earn Extra Cash in the Most Unexpected Ways
https://ringgitwise.my/these-malaysians-earn-extra-cash-in-the-most-unexpected-ways/
How Malaysians Flip Domains for RM10,000 Profit — 2024 Guide
https://ringgitwise.my/how-malaysians-flip-domains-for-rm10000-profit-2024-guide/

Warning: These Tax Mistakes Are Costing Malaysian Side Hustlers Big

1. Under-Reporting or Not Reporting Side Income

2. Not Claiming Legit Tax Deductions (Burning Money)

3. Claiming the Wrong Expenses (LHDN Rejects These)

4. No Records, No Receipts, No Proof