A few days ago, I received a frantic call from a relative asking for tax advice. She has decided to start her medical practice, something she has always dreamed of and has now excitedly embarked on. She consulted an accountant and is in the process of signing the retainer. Upon receiving the proposal, she was surprised at the amount of bookkeeping and tax work that needs to be done. Not knowing anything about taxes, she asked me if she and her would-be accountant were going in the right direction.
In the process of sending her a long text of all the things she needs to understand, I thought of all the other young doctors and professionals who are in the same predicament. So, if you are a young doctor, lawyer, or dentist starting your practice, here are some tax compliance requirements for you.
BIR registration
You need to register with the Bureau of Internal Revenue (BIR Form 1901) to secure your Tax Identification Number (TIN) as a self-employed professional. However, if you already have a TIN or were previously registered as an employee, you need to file a registration update (BIR Form 1905) to indicate that you will now be self-employed (purely business income) or a mixed-income earner (earning both compensation and business income).
As part of the registration process, you need to either purchase BIR printed invoices or secure authority to print your own invoices. You also need to register your books of account. Your accountant can guide you if you will register manual or loose-leaf books of accounts. Ensure that the books of accounts are properly filled out and ready for BIR inspection anytime.
Income tax
As a professional with your own practice, you are considered an individual engaged in business or self-employed individual. You are subject to the graduated tax rate of 0% to 35%, depending on your annual net taxable income. From your total gross professional fees, you can deduct various business expenses. This is known as itemized deduction. You can deduct office rent, salaries and benefits of your secretary or assistants, and professional fees of your accountant to arrive at your net taxable income. There is a list of other deductible expenses that will help you arrive at your correct taxable income. If you opt for itemized deductions, ensure that you keep the proper invoices and support for your deductions, as the BIR can audit your tax returns for accuracy and correctness.
If you do not want the hassle of itemized deductions, you can opt to avail of the Optional Standard Deduction (OSD). Under this option, you can automatically deduct 40% of your gross fees without needing proof. This means that only 60% of your income will be subject to the graduated tax rates. Take note that you have to indicate in your first income tax quarterly return your choice to avail of the OSD. The option is irrevocable for the entire taxable year. As a bonus, if you opt to avail of OSD, you are not required to submit the Account Information Return (AIF) or Financial Statements.
VAT or Percentage tax
Aside from income tax, you will also be subject to either the 12% VAT or the 3% percentage tax. VAT is applicable to taxpayers whose gross annual income is P3Million or above. If the gross annual income does not exceed P3Million, you will be subject to the 3% percentage tax, or you can opt to be subject to VAT.
8% tax in lieu of income tax and percentage tax
If thinking of income tax, VAT, and percentage tax is too much at this point in your career, you can check if you will qualify for the 8% simplified tax. To be qualified, your annual gross professional fees must be less than P3 million. It is simplified because the 8% tax is in lieu of income tax and percentage tax. All you need to do is add your total annual gross fees minus the non-taxable PhP250,000, then multiply the difference with the 8% tax rate. Et voila! That is your tax payable. You do not need to compute separately for income tax and percentage tax.
Note that if, in addition to your income from business, you also receive compensation income, you are considered a mixed-income earner. As such, you are not entitled to the P250,000.00 reduction on your income from business or practice of profession since said amount has already been applied in computing your income tax on compensation.
The option to avail of the 8% income tax rate must be included in your BIR registration update (BIR Form 1905) and must be signified in your first quarter income tax return on or before May 15. Such election shall be irrevocable for the year unless the gross fees for the year reach or exceed the P3 million threshold.
Withholding tax
As a self-employed professional, you need to withhold on your income payments to your suppliers and contractors. For example, your rent is subject to withholding tax of 5%. Payments to your employees will be subject to the withholding tax on compensation. Payment of professional fees to your bookkeeper will be subject to the 5% or 10% withholding tax. If you fail to withhold the correct tax, the BIR can assess you for deficiency withholding tax and penalties.
Your own income will also be subject to withholding if paid by corporations, businesses, and other withholding agents such as hospitals, clinics, and HMOs. Your clients will withhold 5% from your gross fees if your annual gross fees do not exceed P3 million. Otherwise, it will be subject to 10% withholding tax.
In view of the withholding, the hospitals, clinics, or HMOs shall issue a Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) to you every 20th day following the close of the taxable quarter or upon your request. The tax withheld is an advance tax that you can use as credit against your own income tax. In the same manner, you should also be able to issue BIR Form 2307 to your suppliers to evidence the fact that you withheld your payment to them.
If the 5% withholding is applicable to you, you need to submit a sworn declaration of your gross receipts/sales and a copy of Certificate of Registration (BIR For 2303), to all the income payor/withholding agents not later than January 15 of each year or at least prior to the initial payment of the professional fees. Otherwise, the default 10% will apply.
Issuing invoices
You already have your registered invoices from the BIR or accredited printer. Take note that these invoices are not supposed to be locked in your cabinet, collecting dust. If you are a VAT taxpayer, you need VAT Invoices. If you are not a VAT taxpayer, you need non-VAT invoices.
An invoice must be issued for every transaction valued at least Five hundred pesos (P500.00) or every time the patient requests one, regardless of the amount. However, if the sales amount per transaction is below the threshold but the aggregate sales amount at the end of the day is at least five hundred pesos (P500.00), one invoice will be issued for the aggregate sales amount at the end of the day. VAT-registered persons shall issue duly registered invoice, regardless of the amount.
Posting requirements
This may seem innocuous, but so many professionals have been penalized by the BIR simply because they forgot this requirement. The BIR Certificate of Registration (Form 2303) and the Notice to Issue Receipts/Invoices (NIRI) are required to be posted prominently in the clinic or office.
Audited Financial Statements
If your annual gross fees exceed P3 million, you need to have your Books of Accounts audited by a Certified Public Accountant (CPA). The audited financial statements (AFS) would show your total assets and liabilities, as well as your gross fees and expenses. It is a required attachment to the annual income tax return that you need to file with the BIR no later than 15 April every year.
Understanding the rules
All these rules and requirements may seem a lot to remember, in addition to the demands and rigors of starting a new practice. Thankfully, the BIR conducts briefing sessions for newly registered businesses. Check when you can attend the sessions and ask your questions.
Also, there are accountants and lawyers who can help you with your tax compliance. However, it is important for you to understand the compliance requirements. Educate yourself and read tax articles that can help you understand the rules and regulations better. You cannot just rely on your bookkeeper and feign ignorance when errors are committed. The BIR can impose deficiency taxes and penalties for failure to file the correct return and pay the correct taxes.
Starting a business may seem confusing and even daunting. It takes courage and self-confidence to be your own boss and start your own practice. This is your time to shine. After all, anything worth doing is never easy. Good luck in your career and may you have a tax compliant practice.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 20 August 2024
