Taxes Payable on Balance Sheet | Owing Taxes
If you’re just starting out in the world of business, the language of accounting can seem really daunting. In particular, when it comes to taxes payable on the balance sheet, things can get especially dicey. Aren’t you supposed to always be paying taxes? Why are they “payable”? Let’s explore this topic in full today.
Taxes Payable on Balance Sheet | Taxes Not Yet Paid
Put simply, if you see taxes payable on the balance sheet, it means that the business or individual owes taxes that have yet to be paid.
The balance can consist of Sales Tax, Income Tax, or both.
What are Taxes Payable?
The taxes payable account on the balance sheet is a current liability, or simply: something you owe that should be repaid within a year.
an example balance sheet with taxes payable
The balance in the account represents the amounts that have accumulated in the current period. This accumulation happens due to a variety of reasons and transactions:
Tax payment periods–for business owners, taxes aren’t always paid immediately. That means if you earn income, you owe income tax on those earnings, but they’re not paid immediately. Instead, businesses may pay taxes quarterly, or monthly. As a result, income taxes are “accrued”, or built up over time and paid out periodically.
Tax payments are needed for both income tax and for sales tax–if you own a business that charges sales tax to customers, you are expected to “hold” that sales tax and pay it out to the proper jurisdictions periodically.
Separately, you may also owe income tax on your earnings. Both tax balances can be combined in a single taxes payable account on the balance sheet, or in separate taxes payable accounts such as “Income Taxes Payable” and “Sales Tax Payable”
Confused yet? Don’t worry. Just remember, taxes payable on balance sheet occurs when:
Business owners have to pay income tax on earnings, but don’t always pay it immediately, so they have to carry a balance and pay it off at a future date.
For many business owners, they also have to collect Sales Tax from customers, then at a future date, they pass the Sales Tax they collected to the proper jurisdictions (State and Local level).
Examples of Taxes Payable | Real Life Applications
Let’s say you operate a retail store selling hats in the city of Los Angeles, California. Because you sell a physical good, you must charge sales tax to your customers on any sale of your products.
You sell 5 hats to a customer for $15 each, or a total of $75.
Being a vendor in the city of Los Angeles means you must charge sales tax on sales to several jurisdictions:
State of California: 6%
City of Los Angeles: 0.25%
County of Los Angeles (local): 1.00%
County of Los Angeles (district): 2.25%
Total: 9.5%
When you ring up your customer, their bottom line will be $75 x 1.095 = $82.13 (rounded), with $7.13 as Sales Tax.
As the business owner, you do not get to keep the Sales Tax you charged to customers, instead you have to pay that to the above jurisdictions…but not right away. So what happens? You book that $7.13 as a Sales Tax Payable liability on your balance sheet! The balance then accumulates until it is paid out.
Similarly, because you made money selling the hats, you also need to pay income taxes on those profits. If it cost you $5 to buy each hat, then you’ve made a profit of $75 - $25 = $50 on the 5 hats you sold. However, unlike an employee, where your taxes are automatically withheld and summarized on the W2, businesses are responsible for tracking how much they might owe in income taxes at the end of the year. To do this, they may use a taxes payable account on the balance sheet to record it. No, it’s not an exact science. A business owner can’t be entirely certain just how much profit they might make in a year, which is why income tax payments are often paid on an “estimated quarterly” basis.
Wait, so what’s a Tax Expense vs. Tax Payable? | P&L vs Balance Sheet Transactions
This may appear confusing if you’re unfamiliar with accounting, but expense items are Income Statement (or P&L) accounts, whereas a payable item lives on the balance sheet.
A tax expense entry on the P&L is what decreases the taxes payable amount on the balance sheet.
Tax expense accounts are usually used by corporations to show the actual amount of taxes paid in that period, this is often a different amount than the taxes payable liabilities. A tax expense line item simply captures the amount of taxes paid for that period and lowers the taxes payable account for the next period.
FAQs:
Is taxes payable an asset or liability?
Taxes payable are current liabilities and are meant to be paid off within a year.
Are taxes included in a balance sheet?
Both income tax and sales tax generally live on the balance sheet as current liabilities. These balances then “reduce” when the taxes are paid directly to the proper government entities and jurisdictions.
What is income taxes payable on a balance sheet?
Income taxes payable is a liability account that tracks how much tax is owed to the government and has not yet been paid, based on a percentage of profits.
