Income Taxes Paid Entry

Caryl

I am having trouble finding documentation on how to document income taxes paid (as in, I owed taxes to the government and paid them)...I am assuming this is similar to sales tax...using journal entries, but I am not seeing specific instructions on the names of accounts and how to make it all balanced in the balance sheet (which I assume also is something I should aim for. ) I just need a very specific step by step process...I know this should be fairly straightforward as it is a one time a year payment, but it seems hard to find.

Right now as an imported item from my bank account it is just hanging out as an uncategorized expense. Thanks for any help.

Mikeg

Caryl,
Speaking from the US. There are 2 different methods to account for taxes. It is based upon your method of accounting. If you are cash basis (majority of small businesses) then you just expense taxes as they are paid. Create an expense under operating expenses - Corporate Tax Expense. The second method is accrual. If you are accrual, then you first compute you tax liability (not what is owed). This gets posted as Debit Tax Expense - Credit Income Taxes Payable (liab). Payments of tax are posted against the liability. That is because you already have expensed the taxes and what you have paid reduces what is owed. Hence any balance due shows up as a payable on the balance sheet or if overpaid becomes a short term asset as Prepaid taxes.
Mike G, CPA
www.mgfinancial.net

forbiddenfiberco

I’ve been working on this all day! If you treat income taxes as an operating expense, doesn’t it reduce your net income, thereby reducing your income tax payable, and entering you into a vicious circle? I was trying to find a way to make an expense account to be deducted after net income for “Net Income Less Taxes” final line.

The help desk told me to contact an accountant. I told her I AM an accountant, and then she wouldn’t answer any more questions. Still trying to find an answer, or if I’m just overthinking it!

Mikeg

Speaking from the US. Taxes do reduce income. However, tax expense is computed before taxes. From a C Corp, federal taxes are not deductible, only state income tax. At the state level neither of them are. So compute income before tax, then compute state tax. After considering that deduction compute federal tax. Without knowing all circumstances surrounding your particular situation, answers and computations can vary or even the question is it necessary.
Best of luck

emmegi

I'm not in the US, but i guess that if income tax is calculated on net profit, it cant be included as an expense... however i'm also curious to know how people account for income tax and social contribution payments.