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How to categorize tax payments

NadiaNadia Member Posts: 2

I'm new to wave and am trying to figure out how to a)categorize a tax payment or b)add a tax payment as a category. I've searched to forums and am not finding answers. Thank you in advance!

in Accounting Technical Support

Comments

  • lylavuonolylavuono Member Posts: 17

    You wouldn't add it as a category, @Nadia, since your sales taxes are already a category. You would just make a journal entry that debits your sales tax and credits your bank account.

    If you were getting a tax return, you'd do the opposite. I'm pretty sure there's an article in the help center, if you want more details.

  • NadiaNadia Member Posts: 2

    Thanks for your response @Lyla " ! My business makes monthly tax liability payments and I would like to be able to properly categorize them. All I find in the help center is information on sales tax. Do you know anything about this?

    edited April 13, 2018
  • lylavuonolylavuono Member Posts: 17

    I figure you would do it the same way, @Nadia. You would create a liability account with a starting balance for what you owe and you would enter payments for those taxes the same way. If you're worried, however, you're probably best to check in with an accountant for anything tax-related.

  • KimptonKimpton Member Posts: 78 ✭✭

    Nadia, you need both a tax Expense account and a tax Liability account.

    When you make your monthly installment:
    Debit Taxes Payable (the Liability account)
    Credit Bank

    At year end when you record your annual tax bill (or for whatever period that the taxes are calculated):
    Debit Tax Expense (the Expense account)
    Credit Taxes Payable

    You can contact me at kimptonb@telus.net for more help.

  • Carter44Carter44 Member Posts: 2

    @Kimpton I too have the same issue. Thank you for your advice. Could you possibly tell me "where" (or what category) to add the "Debit Taxes Payable" please?

    Would it be under "Other Short-Term Liability" perhaps?

  • KimptonKimpton Member Posts: 78 ✭✭

    Yes, it is a Liability account. That would be a good place to put it.

  • HarryHarry Member Posts: 1

    I'm a sole proprietor (not an LLC), and I electronically send quarterly payments to the IRS as the estimated tax for my annual income. So for each payment, am I debiting my Taxes Payable (Short-Term Liability Account), and crediting the Bank Account that I draw the taxes from? I don't quite understand the terminology, because it seems like drawing money from my bank account would be a debit.

    Also I don't understand what to do at the end of the year. Help?

  • MikegMikeg Member Posts: 995 ✭✭✭

    @Harry
    As a sole proprietor your estimated payments are actually owner draws. Neither federal or state income taxes are deductible for a sole proprietor (on Schedule C 1040). Drawing money from your bank is a credit. Here is why, when you debit an asset you increase the value, when you credit it's the opposite. The reverse is the case for liabilities and equity.

  • CommunicArteCommunicArte Member Posts: 1

    Hi,

    I have a single-member LLC. For 2019, I paid quarterly taxes to state and federal. I've always categorized them as "Sales Tax" but when my accountant saw the cash flow report, the name "Sales Tax" was confusing to him.

    I'm not sure if the solutions above apply to my situation. Can someone please offer some advice on how to create a category for the quarterly payments, and where in the Wave structure of categories would it fit?

    Thanks!
    Mariel

  • MikegMikeg Member Posts: 995 ✭✭✭

    @CommunicArte,
    As I mentioned above, those payments are not a deductible business expense for a single member LLC. They should be categorized as owners draw.

  • SumaleeSumalee Member Posts: 1

    @Mikeg (or anyone who knows), I not sure I quite follow. (I'm a seamstress first, my own bookkeeper second!)

    I have a single member LLC. I have several tax payments to categorize (federal, two different state, etc). I know these payments are not deductible operating expenses. I made the payments from my business checking account because it was simplest.

    Is it enough to simply categorize these transactions in Wave as "Owner's Draw"? In reading a few of these threads, I've noticed some people recommend creating a liability or equity account. That's over my head, but I'd like to see if I could learn to understand how to do this myself in Wave before involving my CPA.

  • MikegMikeg Member Posts: 995 ✭✭✭

    @Sumalee,
    As a single member LLC, taxes based on income are not an expense that would be presented on Schedule C of Form 1040. So if you are trying to provide a clean copy of an income statement, then I would suggest classifying any income tax payments as owner draws. Hope that helps.

  • GrayRunGrayRun Member Posts: 2

    OK - I'm going to throw another wrench into this thread. I am an LLC filing as an S-Corp. Would I categorize my quarterly estimated tax payments any differently than an owner draw in Wave?

  • MikegMikeg Member Posts: 995 ✭✭✭

    @GrayRun,
    Estimated tax payments made on behalf of an S Corp shareholder are still considered distributions (owners draw). Hope that helps.

  • GrayRunGrayRun Member Posts: 2

    Indeed it does - thank you.

  • CrystalPRBCrystalPRB Member Posts: 3

    @Mikeg thanks for your comments. My CPA has instructed me to account for my estimated tax payments as owners equity rather than owners draw. Is that incorrect?

  • MikegMikeg Member Posts: 995 ✭✭✭

    @CrystalPRB,
    Either one works because it reduces owner equity. However, if you are tracking how much you have put in and taken out then the drawing account would be a better choice. Some individuals like to know how much they put in at the start and then track additional contributions and distributions separately. In the end though, it does not matter.

  • RafaelPRafaelP Member Posts: 5

    I am still looking for answers but this is what I found in www.daveramsey.com

    "Like it or not, taxes are a part of life. And unfortunately, the government doesn’t do too much to help you figure out what you owe. It’s sort of like Uncle Sam says he knows how much you owe him, but won’t tell you—and if you don’t figure it out correctly, he hits you with a penalty. Talk about a pain. Especially if you don’t fully understand what you owe in the first place.

    This is where tax liabilities come into the picture. What is a tax liability? Glad you asked.

    What Is a Tax Liability?
    A tax liability is a tax debt you owe to a taxing authority—aka the IRS, state government or local government. Essentially, if you’re paying taxes on it, it’s a tax liability.

    Your total tax liability is the total amount of tax you owe from liabilities like income tax, capital gains tax, self-employment tax, and any penalties or interest. This also includes any past due taxes that you haven’t paid from previous years."

    So what I decided was to add a Liability under "Other Long-Term Liability" and I am going to be adding one for every year. Maybe I can keep track of how much I pay taxes every year.

    I wish there was a CPA that could confirm this information.

    Thank you all for the information given before

  • burdeshburdesh Member Posts: 3

    I have a checking account that I use solely for handling gig income and expenses. When I receive gig income, I take a portion of it, e.g,say 20%, and transfer it into a savings account so that I can pay estimated income taxes to both federal and state at the usual times. Should I include this savings account in Wave, or since paying income taxes is considered an owner draw, should I just leave it outside of Wave since I don't think it impacts Schedule C in any meaningful way,

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