We’ve all heard the heroic stories of doctors staying up all night with critical patients or leaving family gatherings to handle emergencies. They dedicate so much to their patients’ wellness but often overlook their own, especially their financial health. This neglect can lead to a lot of financial myths being taken as truth. Let’s debunk five common myths about personal services income for doctors and dentists:
1. Delayed Filing Reduces the Risk of Audits
There’s a popular myth that the names of people who will be audited are finalized at the same time each year. So, ITR filers think that they can dodge an audit by filing their taxes later. However, tax authorities are aware of this strategy. They include some late filers who requested extensions too. So, delaying your filing doesn’t help avoid getting into the audit list.
2. Social Security and Medicare Corporation Help Reduce Tax Liability
Many tax consultants advise doctors or dentists to list their practice under Social Security and Medicare. This is supposed to attract a lesser tax. While that may be partly true, the extra cost of accounting and filing returns could wipe out any gains made. Dividends from such corporations aren’t subject to payroll taxes, but it’s important to remember that these dividends come from the revenue generated by the doctors’ own efforts.
3. Stuffing the ‘Cost of Goods Sold’ Section of Tax Return
Some medical professionals mistakenly believe that inflating business expenses, such as lab supplies and medical fees, will reduce their taxable income. This strategy often involves incorrectly categorizing these expenses under a section titled “Cost of Goods Sold” (COGS), which might not be relevant to their profession in all tax jurisdictions. It’s important to remember that tax authorities primarily focus on total taxable income when selecting audit cases, not just on specific line items like gross profit. Consulting with a qualified tax professional familiar with the specific tax regulations in your country is crucial to ensure accurate and compliant tax reporting.
4. Tax Depreciation Claims Are Always Welcome
Across the globe, tax regulations often allow businesses to deduct a portion of the cost of certain assets over their useful life, known as depreciation. This deduction can significantly reduce taxable income, especially for new businesses with substantial initial investments. However, claiming the maximum allowable depreciation in the early years may not always be the most advantageous strategy.
If a business is just starting and has a low initial income, it might not have enough taxable income to fully utilize the entire depreciation deduction. In such cases, maximizing depreciation deductions in the early years could lead to missed tax benefits, as some countries may not allow carrying forward unused portions to future tax years. Consulting with a tax advisor familiar with your specific country’s regulations is crucial to determining the optimal depreciation strategy for your new business.
5. An Employee is a Worker is an Independent Contractor
Doctors and dentists can’t run their practice all alone. They need to hire staff to support their practice. The tricky part is figuring out whether to classify these hires as independent contractors or employees on their tax returns. Both categories would have different impacts on the tax return. It is important to understand these implications at the time of hiring and categorize them accordingly.
Conclusion
Doctors and dentists don’t have time to dig into the details of tax laws themselves. So, they often believe these myths. Following these myths without proper validation can be risky. That’s why they need to hire experienced tax consultants who can sort out the facts from the fiction. This way, doctors and dentists can focus on their patients while the experts handle the financial side of things.