The structure of your medical practice is critical in determining how your income will be taxed and the legal frameworks that you will need to comply with. These decisions often spark debate amongst medical practitioners. We, therefore, thought we would share some of our insight into the topic.

Tax efficiency is often at the top of medical practitioners’ minds. As a starting point, you will need to understand the difference between a sole proprietor and an incorporation.

A Sole Proprietor is an individual like you and me. When running a medical practice as a sole proprietor, you are your own business.

An Incorporation is a registered business, similar to a private company. You own the shares in your business, and you are also an employee of your business.

How are these entities taxed?

Sole proprietors are taxed on a sliding scale (per the SARS individual tax tables) from 18% to 45%. Income earned less your allowable expenses results in a profit. This profit is then applied against the individual tax tables to determine the amount of tax you will need to pay.

Incorporations are taxed at a flat rate of 28% on the profit (income less allowable expenses) earned by the incorporation. Part of the allowable expenses in determining this profit would be your salary earned from your incorporation. The salary that you earn is taxed on the same individual tax tables as a sole proprietor mentioned above. Therefore, before you receive your salary each month, a calculation would be performed by your accountants to determine the amount of tax you would need to pay. This tax, called PAYE (pay as you earn), is deducted from your salary and is paid to SARS; the remainder is paid into your bank account.

So, we can deduce the following from this:

  • Let’s assume there are no other expenses in the medical practice except for your salary and your salary is equal to your income each month.
    • If your practice earned R100 000 in a month and your salary was R100 000, then the tax paid in the sole proprietor and the incorporation would be the same.
      • The sole proprietor would be taxed on the sliding scale on the R100 000 income.
      • The incorporation would pay the PAYE on a R100 000 salary, which is based on the same sliding scale as the sole proprietor, leaving zero profit in the incorporation to be taxed at 28%.
  • Let’s assume, using the above example, that your salary is only R80 000.
    • As a sole proprietor, you will still be taxed on a R100 000 income.
    • As an incorporation, you will pay PAYE on R80 000, which would leave R20 000 (R100 000 less R80 000) as profit in the incorporation. This R20 000 would be taxed at 28% and result in R5 600 being paid to SARS.
      • Now, you have R14 400 (R20 000 less R5 600) left to the incorporation. If you want this money for your own personal use, then a dividend would be declared, and an additional 20% dividend tax would be levied on the R14 400.

From these basic examples, you may be unclear as to the best structure for your medical practice. At lower income levels, it can be more tax efficient to operate as a sole proprietor. At higher income levels, it is likely that an incorporation would be more beneficial.

There are many additional factors that play a role in this decision.

At Inaura Chartered Accountants, we advise and guide our clients to ensure their medical practices are optimised for tax efficiency.

 Sole ProprietorIncorporation
Tax RatesThe individual is taxed according to personal income tax rates ....view tax tablesFlat rate of 28%. Unless the Inc qualifies as a small business corp.
Pay as you earn (PAYE) registrationRequired if you have employees.The Incorporation must be registered for PAYE and the director’s salary will be subject to PAYE.
Value added tax (VAT)Required if turnover exceeds 1 million in a 12 month period.Required if turnover exceeds 1 million in a 12 month period.
Financial StatementsNot required.Registered with CIPC.
Business RegistrationThe owner and the business are the same legal entity.Separate legal entity.