Taxation For New Doctors
Wednesday, April 19, 2023 ꞏ 10 min read
Medtax Solutions, Inc. (2023) | Paul Erik D. Caracas, CPA
As a doctor who has recently secured their Certificate of Registration (COR), it is crucial to understand the fundamental aspects of taxation in the Philippines to ensure proper compliance with the Bureau of Internal Revenue (BIR). This article aims to provide a brief overview of the essential taxation elements that newly registered doctors should be aware of, including common tax types, filing schedules, and tax rates.
Please note that this article is not an exhaustive guide, and we may publish separate, more comprehensive articles on these topics in the future. This introduction serves as a starting point to help you become familiar with your tax obligations as a medical professional.
Common Tax Types
When starting a medical practice in the Philippines, newly registered doctors need to be aware of their tax obligations as outlined in the Certificate of Registration (COR) issued by the Bureau of Internal Revenue (BIR). The COR indicates the specific tax types that a doctor is required to file for, ensuring compliance with the country’s tax regulations. In this article, we will provide a brief overview of the common tax types that typically appear in the COR of newly registered doctors, including Percentage Tax, Income Tax, and the Annual Registration Fee. Understanding these tax obligations is crucial for maintaining compliance with the BIR’s requirements and staying free from complications and penalties with the BIR. Here are the common tax types that are present in the Certificate of Registration:
Annual Registration Fee (ARF)
The Annual Registration Fee is a mandatory fee that costs PHP 500.00 and is due annually, on or before January 31st. This fee is intended to cover the cost of registering and maintaining a taxpayer’s records within the BIR system. This amount is fixed regardless of income level and professional activity and failure to pay this can result to penalties. Form 0605 is used when filing for this tax and such form should always be accompanied by proof of payment.
Percentage Tax (PT)
Percentage Tax is a tax applied to doctors whose revenues do not exceed PHP 3,000,000 and are not subject to Value-Added Tax or VAT. This serves as a simplified tax system, providing an alternative to the more complex VAT system. The percentage tax rate is 3% however under the CREATE Law passed on March 2021, a lower percentage of only 1% applies from July 01, 2020 until June 30, 2023. From July 01, 2023, the 3% tax rate shall be applied. Form 2551Q is used to file the Percentage Tax.
Income Tax (IT)
Income tax is a direct tax levied on the earnings of doctors, after accounting for allowable reductions. Income Tax is aimed at generating revenue for the government based on the ability to pay, as determined by the income. This is calculated by applying either the Graduated Tax Rate, which ranges from 0% to 35%, or the 8% Flat Rate. The forms used to file Income Tax are as follow:
- 1701Q – quarterly tax return for the for the 1st, 2nd and 3rd quarters
- 1701 – annual tax return for Mixed Income Earners (see below)
- 1701A – annual tax return for Self-Employed doctors (see below)
| Tax Type | Quarter | BIR Form Used | Tax Filing Deadline | Internal Target |
|---|---|---|---|---|
| Individual Income Tax | 1st Qtr | 1701Q | May 15 | May 05 |
| 2nd Qtr | 1701Q | August 15 | August 05 | |
| 3rd Qtr | 1701Q | November 15 | November 05 | |
| 4th Qtr/Annual | 1701A or 1701 | April 15 of the following year | April 05 of the following year | |
| Percentage Tax | 1st Qtr | 2551Q | April 25 | We will send separate communications for those who are under Graduated Tax Rate |
| 2nd Qtr | 2551Q | July 25 | ||
| 3rd Qtr | 2551Q | October 25 | ||
| 4th Qtr | 2551Q | January 25 of the following year | ||
| Registration Fee | Annual | 0605 | January 31 | January 15 |
Depending on the circumstance, other tax types may be included such as Expanded Withholding Tax (EWT) and Value Added Tax (VAT). These tax returns must be filed regardless of your income level, as they serve as a record of your financial activities throughout the year. Failure to file tax returns could result in Open Cases and penalties imposed by the Bureau of Internal Revenue (BIR). This requirement extends to doctors who are on residency, fellowship, or taking an extended hiatus from earning income, as they still need to fulfill their tax reporting obligations to remain compliant with the BIR.
Graduated Tax Rate vs 8% Flat Tax Rate
There are two main tax rate options available to doctors as self-employed professionals: the (1) Graduated Tax Rates and the 8% Flat Tax Rate. This section aims to provide an overview of these tax rate options and help you make an informed decision about which one suits your specific situation.
8% Flat Tax Rate
The 8% Flat Tax Rate is an option that is accessible to doctors whose revenues do not exceed PHP 3,000,000 within a taxable year. The tax is computed as 8% of the gross income, regardless of expenditures incurred, after the PHP 250,000 allowable reduction has been deducted, if not employed. The formula therefore is:
8% Tax = (Gross Sales or Receipts – PHP 250,000) * 8%
When opting for the 8% Flat Tax Rate, it is important to note that this has to be done during the registration of Certificate of Registration, by ensuring this is properly reflected in the registration form or Form 1901, and ultimately in the Certificate of Registration. Another method is to signify the intention to avail of this method during the first tax filing of the taxable year. Keep in mind that the decision to avail of the 8% flat tax rate is irrevocable for the taxable year, and you cannot change your tax rate option once it has been filed.
Graduated Tax Rate
The graduated tax rate is applied to the net income, which is the remaining income after deducting allowable expenses and exemptions. This is a progressive system, with tax rates ranging from 0% to 35% depending on the taxable income bracket. Higher income levels are taxed at higher rates under this system. Under the graduated tax rate system, taxpayers can choose between Itemized Standard Deductions (ISD) and the Optional Standard Deduction (OSD).
- Itemized Standard Deduction (ISD)
Itemized Standard Deductions refer to the actual and documented expenses that doctors incur in earning their income, such as rent, transportation and other operating expenditures. It is important to note that such expenditures need to be necessary and directly related to the exercise of profession. In order to claim the itemized deductions, doctors must keep accurate records and documentation to substantiate the claimed expenses such as official receipts issued by suppliers. Such documents need to be in accordance with BIR guidelines, such as the usage of official receipts.
- Optional Standard Deduction (OSD)
Optional Standard Deduction is an alternative to Itemized Deductions that allows taxpayers to claim a fixed percentage of their gross income as a deduction, without the need to provide documentation for individual expenses. The OSD rate for doctors is 40% of their gross income. The OSD simplifies the filing of Income Tax Return (ITR), as doctors do not need to submit Financial Statements/Audited Financial Statements as attachment. However, it may not always be the most advantageous method, especially if the taxpayer has incurred substantial expenses that exceed the fixed percentage allowed under OSD.
The table below illustrates the Graduated Income Tax Rate.
2022
| Amount of Net Taxable Income | Rate | |
|---|---|---|
| Over | But Not Over | |
| - | 250,000 | 0% |
| 250,000 | 400,000 | 20% of the excess over 250,000 |
| 400,000 | 800,000 | 30,000 + 25% of the excess over 400,000 |
| 800,000 | 2,000,000 | 130,000 + 30% of the excess over 800,000 |
| 2,000,000 | 8,000,000 | 490,000 + 32% of the excess over 2,000,000 |
| 8,000,000 | 2,410,000 + 35% of the excess over 8,000,000 | |
2023 Tax Table
| Net Taxable Income | Rate | |
|---|---|---|
| Over | But Not Over | |
| - | 250,000 | 0% |
| 250,000 | 400,000 | 15% of the excess over 250,000 |
| 400,000 | 800,000 | 22,500 + 20% of the excess over 400,000 |
| 800,000 | 2,000,000 | 102,500 + 25% of the excess over 800,000 |
| 2,000,000 | 8,000,000 | 402,500 + 30% of the excess over 2,000,000 |
| 8,000,000 | 2,202,500 + 35% of the excess over 8,000,000 | |
Other Tax Components
Withholding Tax
Withholding tax is a mechanism to collect income tax at the source of income. It is the tax withheld by the payer (or withholding agent) from the income of the payee (the recipient) and remitted directly to the Bureau of Internal Revenue (BIR). For doctors, there are two key types of withholding taxes that may be relevant:
- Withholding Tax on Compensation (WTC)
This applies to doctors who are employed by a hospital, clinic, or other medical institution. The engagement has to be employer-employee, where the employer is responsible for withholding income tax on their compensation (salary, bonuses, etc.) and remitting it to the BIR, along with NHIP, HDMF and SSS or GSIS. The amount of tax withheld is based on the employee’s taxable income and the graduated tax rates, which range from 0% to 35% depending on the income bracket. - Creditable Withholding Tax (CWT)
For self-employed doctors or those engaged in private practice, the Creditable Withholding Tax is applicable. CWT is withheld by the payer (e.g., hospitals, clinics, or patients) when making payments to doctors for professional fees or services rendered. The withholding tax rate for professional fees is typically 10%. This can be reduced to 5% by submitting an Income Payee’s Sworn Declaration of Gross Receipts/Sales.
Allowable Reductions
The allowable reduction refers to the income tax exemption on a specified portion of a taxpayer’s income. The threshold is set at PHP 250,000, which is exempt from income tax.
The purpose of the allowable reduction is to provide tax relief to lower-income earners and ensure that a minimum level of income is not subject to taxation. This threshold is applicable to all individual taxpayers, including doctors.
Taxpayer Classification
As taxpayers, doctors can be classified into three distinct categories based on their employment status: self-employed, employed, and mixed-income earners. Here’s an explanation of the differences between these categories:
- Self-Employed
Self-employed doctors are those who work for themselves as professionals. They are not employed by any company or organization and do not receive regular salaries or wages. Self-employed taxpayers are responsible for registering with the BIR by securing the Certificate of Registration. They are also responsible for calculating, filing, and paying their own tax returns. Under this category, payers (hospitals, companies and other institutions) issue Form 2307, to reflect the taxes which have been withheld and remitted to the BIR.
- Employed
Employed doctors work for an employer, such as a company, organization, or government agency, and receive regular salaries or wages. An indicator of this type of engagement is that employers are responsible for factoring in the PhilHealth (NHIP), Home Development Mutual Fund (HMDF) and Social Security System (SSS) contributions. Employers are responsible for withholding income tax from their compensation through the Withholding Tax on Compensation (WTC) mechanism and remitting it to the Bureau of Internal Revenue (BIR). Employed taxpayers are subject to the graduated tax rates and their income tax is based on their net income after accounting for allowable exemptions, deductions, and withheld taxes. Employers issue Form 2316 either at the end of the year or at the end of employment, to account for the salaries and taxes paid. - Mixed-Income Earners
Mixed-income earners are those who receive income from both employment and self-employment or business activities. For example, a doctor who works at a hospital (employed) and also runs a private clinic (self-employed) would fall into this category. These taxpayers need to comply with tax obligations for both employed and self-employed categories. They must account for the Withholding Tax on Compensation from their employment income, as well as calculate, file, and pay taxes for their self-employment or business income. This is done by securing the 2316 at the end of the year or engagement, and integrating the taxes deducted onto their tax returns. For their self-employment or business income, mixed-income earners can choose between the 8% flat tax rate or the graduated tax rates, and claim deductions through itemized deductions or the OSD.
Tax Forms
Withholding agents (companies, hospitals and other institutions) who withhold taxes from the income of doctors are required to issue specific tax forms to document the taxes withheld. The primary tax forms issued by withholding agents for doctors include:
- Form 2307 (Certificate of Creditable Tax Withheld at Source)
Issued by withholding agents who withheld taxes from payments made to self-employed doctors or those in private practice. This form serves as proof of the taxes withheld and can be used by the doctor to claim credit against their annual income tax liability. Doctors should receive a Form 2307 for each transaction subject to withholding, and they need to attach these forms to their annual income tax return (Form 1701 or Form 1701A) when filing.
- Form 2316 (Certificate of Compensation Payment / Tax Withheld)
Issued by employers who withheld tax from the compensation of employed doctors through the Withholding Tax on Compensation (WTC) mechanism. This form serves as proof of the compensation received by the doctor during the taxable year, as well as the taxes withheld by the employer. Doctors should receive a Form 2316 from their employer at the end of each taxable year, and in some cases, they may use this form as a substitute for filing an income tax return, provided they meet certain conditions specified by the Bureau of Internal Revenue (BIR).
These tax forms play an essential role in ensuring transparency and accurate documentation of taxes withheld from doctors’ income. Doctors should keep these forms for their records and use them when filing their income tax returns, as they provide evidence of taxes already paid or withheld, which can be credited against their tax liabilities.
It is important to note that doctors need to exert all efforts to secure these forms. In their absence, the taxes that have been withheld already may not be claimed.
Income Payee’s Sworn Declaration of Gross Receipts/Sales
The Sworn Declaration of Gross Receipts/Sales is a formal, notarized statement made by a self-employed doctor whose gross receipts does not exceed Php 3,000,000. This is available for both Graduated Tax Rate and the 8% Flat Tax Rate. This declares the total gross receipts or sales for a taxable year. This document is required in order to reduce the withholding tax deducted by withholding agents, from 10% to only 5%.
There are two types of Sworn Declaration typically used by doctors:
- Annex B-1 – this applies to doctors with several income payors
- Annex B-2 – this applies to doctors with lone income payors
Based on common practice, Annex B-1 is filled in since doctors tend to have multiple engagements with various hospitals, clinics, organizations and individual clients.
To make it legal, this document needs to be properly filled in, notarized by a notary public and attached with a documentary stamp tax. An original copy needs to be submitted to the payor or withholding agent on or before January 15th of the taxable year, or before the first pay is released.
The information provided in this article is for general informational and educational purposes only and is not intended to serve as legal or tax advice. The contents of this article do not supersede any revenue regulations or pronouncements issued by the Bureau of Internal Revenue (BIR) or any other relevant authorities.
This article contains condensed information, and specific circumstances can vary among doctors or other taxpayers. As such, the content should not be relied upon as a basis for any legal or BIR proceedings, nor should it be considered a substitute for professional tax advice.
Readers are encouraged to consult with a tax professional to address their specific situations and to obtain tailored guidance regarding their tax obligations and compliance. The primary aim of this article is to provide a better understanding of BIR rules and taxation in general, and it should not be used as the sole basis for making decisions related to tax matters.