ok I have read it about 200 times and I think I have maxed out my level of understanding but I'm just going to do the best I can on my tax return I hope I don't massively botch it. I think what you've said applies to US tax law as well, with it being taxed in the hands of the prop as an individual. Important thing I guess to take away is that tax instalments are an asset
I think you've got it Zoe!
As long as you don't include the installments as an expense for your business.
Your basic business equation is 'revenues - expenses = profits' (or net income).
Your tax form will ask what your business profits are. And then all that other personal stuff.
Somewhere near the end of the tax form, after your tax is calculated it will ask if you have made installments. Now you enter your tax installment amount.
I think you're on your way now. Good luck!
@Kimpton said:
Some clients wish to track their income tax installments within their Wave platform because their sole-prop is their only source of income. So you can post your tax instalments as you described (although instalments paid are an asset and posting them as a negative liability achieves the same result) for tracking purposes and to have these amounts show up on your Wave financial statements, but again, sole-prop income taxes are calculated using net taxable income to the individual taxpayer.
Hope this helps.
K
Thanks so much for your helpful input - so as a Canadian sole-prop it's basically a personal preference if I want to track my income tax payment? I actually came here to try to figure out how to track my HST payment, which I was able to piece together from what was posted above. But for income tax it doesn't matter if I track it in terms of my P&L?
@Kimpton said:
Some clients wish to track their income tax installments within their Wave platform because their sole-prop is their only source of income. So you can post your tax instalments as you described (although instalments paid are an asset and posting them as a negative liability achieves the same result) for tracking purposes and to have these amounts show up on your Wave financial statements, but again, sole-prop income taxes are calculated using net taxable income to the individual taxpayer.
Hope this helps.
K
Thanks so much for your helpful input - so as a Canadian sole-prop it's basically a personal preference if I want to track my income tax payment? I actually came here to try to figure out how to track my HST payment, which I was able to piece together from what was posted above. But for income tax it doesn't matter if I track it in terms of my P&L?
Hi @mizzlara Yes, as a Canandian Sole-prop (tha you file your business taxes in your personal income tax Schedule T2125) it does not show in your T2125 P&L at ALL your income tax instalment/ payment in your Tax return (just when you file your taxes is shown the amount paid as instalment, but it should not show in your P&L in the T2125 as expense).
You can track it in Wave (if you want) for the "income tax expense" account, the amount of income tax paid thought.
Well unfortunately I’m now more confused than ever.
Excuse my ignorance but isn’t tracking income and expenses to help calculate 1040ES payments (for US users) one of the *main* reasons small businesses use platforms like Wave? Accurately categorizing and reporting quarterly tax payments seems like basic functionality. This doesn’t seem like an unreasonable feature to request.
I just started testing the software out and this is the first bump in the road. I understand that estimated tax payments are not to be categorized as an expense, but what are we to do with the transaction record of the said installment payments that were pulled in from the bank? Delete them? ***read some more support docs - I may have figured out what "creating accounts" mean now! ***
I read all the posts in this thread and I am willing to study them some more, but I just wanted to add a +100 vote for a simple way for a layman like me to be able to easily categorize/record estimated income tax payments. Thanks.
Ok EB, nomenclature matters.
If you have estimates, that's great. That will help out with your business planning. But, there is NO PLACE for estimates in your accounting records.
If, on the other hand, you are making periodic installments on your eventual tax bill, then that's something else. Once you understand that there is a difference between actual cash transactions and some theoretical estimates you can choose a few ways to go.
You can (and probably should) create an account called "Income Tax Installments Paid". The question is, Where to put it?
Since a tax installment is a prepaid expense you can put it in your Assets. Nothing wrong with that, it is quite correct. Just remember that you'll have to do a journal transaction at the end of the year to pay your tax bill.
If you understand what a negative number means in an expense account, then you'll be fine categorizing these tax installment amounts as "Income Tax Expense". It's a shortcut to showing your current balance with the taxman and it's fine if you're a sole-prop. If you need to read your Income Statement more often throughout the year the negative expense will throw off your Net Income.
So you could also create an account called "Income Taxes Payable" in your Liability section and run your tax installments through there. This will also appear as a negative liability which again, you'll have to clear with a journal entry once you pay your tax bill.
This is actually a pretty simple and straightforward problem to solve EB, especially if you follow the first suggested course. Use the right terms to describe what you're doing so you can take the right steps at the right time.
@Kimpton
At this point, the value of this post will come from the Wave team and some updates to their software or at least an explanation as to why a technical solution can't be achieved. As people hop on to the post and vote up, this will become more likely and that's why they're doing so.
I'm not sure what your underlying intent is in responding to comments on this post, but I've felt a tone of condescending pontification in some of your responses. I am personally not seeking commentary in the manner that you're providing it and the writer of the latest comment didn't seem to be asking for this type of contribution either. I'm guessing that your suggestion that s/he didn't know the difference between an estimate and a payment was not helpful and perhaps even offensive. A simple step by step instruction might have been more useful.
Given where this post is at, I wonder if there's a different way/place for you to make a contribution.
@Kimpton@SandyL
Much delayed reply, but thank you both for your insights and support. As a complete newbie, I do appreciate all and every information that I can learn from. I do also agree that Wave should directly address this issue, as we see in this post, many users do not have the accounting expertise of others in the community. Regards.
The easiest way for me, as a sole prop, has been to take the tax payment from my bank transactions and list it as "owner draw."
If I was a corporation, which I soon will be, I don't know how I'd do it. If it's not considered an expense, but simply a cash outflow, maybe it's a similar solution within a corporate form?
@FPH said:
The easiest way for me, as a sole prop, has been to take the tax payment from my bank transactions and list it as "owner draw."
If I was a corporation, which I soon will be, I don't know how I'd do it. If it's not considered an expense, but simply a cash outflow, maybe it's a similar solution within a corporate form?
In your sole prop (If in Canada, you only need a Profit and Loss Statement for your taxes, then is fine to utilize "owner draw").
However if you plan to incorporate, in a corporation you will need to expense this, and then is included in a special line in your Corporate Tax return, as it is not a tax deductible expense.
Hope this helps, anything else, reach out.
I am looking to replace QuickBooks SelfEmployed software and based on my read of this thread Wave is not the answer. A basic need of a small business/single person LLC is to be able to estimate quarterly income tax payments using a connected bank account. Each transaction is tagged as 'business' (and catagorized) or 'personal' (or excluded), and the software determines the quarterly payment (1040ES) to be sent to the IRS. The payments are tracked and imported into the yearly 1040 return. Are there still no plans to develop this MOST BASIC need??
Since Wave is a Canadian company I find it unusual that their SW will not handle non-deductible Canadian tax expenses simply. Their sales tax account would be a model to work from. It can't be that hard to implement.
@canoeman2 said:
Since Wave is a Canadian company I find it unusual that their SW will not handle non-deductible Canadian tax expenses simply. Their sales tax account would be a model to work from. It can't be that hard to implement.
Hi @canoeman2, I know that Wave is a Canadian company, but adding a non-deductible category will imply changing the layout of the Profit & Loss reports, and adding one more field in their database "Non-Deductible" Expenses. This is hard to do since imply changing the entire software and databases to accommodate the new field and ensure it works correctly, also increasing storage cost, calculation of reports etc. (I am not a software engineer, just thinking of it).
Since Wave it is free as it is, I doubt they would want to spend that on fixing this very important situation (as others). I will be the first to apologize if they do, but I do not think they will change this (ever or in a very long time).
Since businesses can not "wait" years to obtain this function (taxes every year need to be accurate).
Workarounds can be made (exporting to Excel and "manually" adjusting it) or others.
Hi - Any latest updates from Wave on this topic? I'm looking to have my Income Statement show a "Pre-tax Income" line item. Facebook and Amazon 2021 Income Statement snips attached as an example.
I too have been trying to figure this out for months. Reading all of these threads just leaves me with more questions. I understand it's important to understand basic accounting, but we are not asking to be taught an accounting lesson, we just want a solution to a common problem we all face. At the end of the day, we're all business owners and entrepreneurs with expertise in many areas other than accounting. We look for Wave to make it easier for us, not more complicated.
I find it both hilarious and annoying that reaching out to the automated Wave bot provided the exact answer I was looking for. Please see how to solve this below (copy and pasted from what the bot told me).
Income tax tracking is currently not built into Wave but you can work around this by creating a liability and expense account.
To add your accounts 👇
1️⃣ Navigate to Accounting in the left menu, then Chart of Accounts.
2️⃣ Select Add a New Account.
3️⃣ Under the Liabilities heading, choose Other Short-Term Liability. Name this "Income Tax Liability," or something similar and click Save.
4️⃣ Click Add a New Account again.
5️⃣ Under the Expenses heading, choose Operating Expense. Name this Income Tax Expense, or something similar and click save.
Now, let's use an example that you owe the government $100 in income tax. You would need to create a journal transaction to show what is owed.
1️⃣ Navigate to Accounting on the left, then Transactions.
2️⃣ Select More and click Add journal transaction.
3️⃣ Enter the description and date.
4️⃣ Debit the Income Tax Expense account previously created for $100. Credit the Income Tax Liability account previously created for $100.
💡 When you actually make the payment, you would categorize the withdrawal transaction to the Income Tax Liability account to lower that liability.
🎉 That's it! Your income tax payment is accounted for.
It took me 5 minutes to do this and now my problem is solved. It shouldn't be that hard or unreasonable to ask a real-life person who works for Wave to provide this answer rather than a robot. I got tired of reading "We are technicians, not accountants. Therefore we recommend you consult with an accountant". Like, you built this software with accounting in mind and you can't provide a simple answer? I love Wave, but the customer service is lacking when it comes to issues like this.
I share your frustration with Wave. But realistically I do NOT think that Wave will address your concerns about changing the way Taxes are calculated or displayed.
The best/easiest "workaround" to display this will be to download in an MS Excel spreadsheet the Profit & Loss and doing it "manually" moving the Income Tax expense and creating the subtotal before taxes and after "manually".
It will be faster if you utilize the google sheet add-on that wave has (also free).
@Colton I'm not sure you have found your solution. Using the Short or Long Term liability accounts will not treat your tax payments as a non-operational expense. Those accounts allow you to track and account for tax liabilities, which is useful, but once you pay from those accounts you'll see that your P&L shows them as operational expenses.
The only way to avoid this is to pay your taxes from your retained earnings, or as @Gabriel_Krozkin has suggested, by abandoning the Wave P&L and using a spreadsheet to make your own report. I'm using the retained earnings approach as my business is quite simple in nature but if yours is more complex, you'll likely want to go the spreadsheet route.
I hope Gabriel is wrong about the likelihood that the Wave will update its P&L but I suspect he's not.
@SandyL It may not be what you were looking for but this solution was what I needed. After I paid my taxes I had an uncategorized expense that I had nowhere to put it. It would be great if Wave could format it so that tax payments don’t show up on the P&L but they’ve made it clear they’re not going to do that. I just wanted a way to estimate my taxes before they are paid and have it reflect in my transactions as well as an easy way to categorize the payments.
I have an accountant do my taxes so I can just highlight that expense in my P&L and she’ll know to void it in her calculations.
Comments
ok I have read it about 200 times and I think I have maxed out my level of understanding but I'm just going to do the best I can on my tax return I hope I don't massively botch it. I think what you've said applies to US tax law as well, with it being taxed in the hands of the prop as an individual. Important thing I guess to take away is that tax instalments are an asset
I think you've got it Zoe!
As long as you don't include the installments as an expense for your business.
Your basic business equation is 'revenues - expenses = profits' (or net income).
Your tax form will ask what your business profits are. And then all that other personal stuff.
Somewhere near the end of the tax form, after your tax is calculated it will ask if you have made installments. Now you enter your tax installment amount.
I think you're on your way now. Good luck!
Thanks so much for your helpful input - so as a Canadian sole-prop it's basically a personal preference if I want to track my income tax payment? I actually came here to try to figure out how to track my HST payment, which I was able to piece together from what was posted above. But for income tax it doesn't matter if I track it in terms of my P&L?
Hi @mizzlara Yes, as a Canandian Sole-prop (tha you file your business taxes in your personal income tax Schedule T2125) it does not show in your T2125 P&L at ALL your income tax instalment/ payment in your Tax return (just when you file your taxes is shown the amount paid as instalment, but it should not show in your P&L in the T2125 as expense).
You can track it in Wave (if you want) for the "income tax expense" account, the amount of income tax paid thought.
Excuse my ignorance but isn’t tracking income and expenses to help calculate 1040ES payments (for US users) one of the *main* reasons small businesses use platforms like Wave? Accurately categorizing and reporting quarterly tax payments seems like basic functionality. This doesn’t seem like an unreasonable feature to request.
I just started testing the software out and this is the first bump in the road. I understand that estimated tax payments are not to be categorized as an expense, but what are we to do with the transaction record of the said installment payments that were pulled in from the bank? Delete them? ***read some more support docs - I may have figured out what "creating accounts" mean now! ***
I read all the posts in this thread and I am willing to study them some more, but I just wanted to add a +100 vote for a simple way for a layman like me to be able to easily categorize/record estimated income tax payments. Thanks.
Ok EB, nomenclature matters.
If you have estimates, that's great. That will help out with your business planning. But, there is NO PLACE for estimates in your accounting records.
If, on the other hand, you are making periodic installments on your eventual tax bill, then that's something else. Once you understand that there is a difference between actual cash transactions and some theoretical estimates you can choose a few ways to go.
You can (and probably should) create an account called "Income Tax Installments Paid". The question is, Where to put it?
Since a tax installment is a prepaid expense you can put it in your Assets. Nothing wrong with that, it is quite correct. Just remember that you'll have to do a journal transaction at the end of the year to pay your tax bill.
If you understand what a negative number means in an expense account, then you'll be fine categorizing these tax installment amounts as "Income Tax Expense". It's a shortcut to showing your current balance with the taxman and it's fine if you're a sole-prop. If you need to read your Income Statement more often throughout the year the negative expense will throw off your Net Income.
So you could also create an account called "Income Taxes Payable" in your Liability section and run your tax installments through there. This will also appear as a negative liability which again, you'll have to clear with a journal entry once you pay your tax bill.
This is actually a pretty simple and straightforward problem to solve EB, especially if you follow the first suggested course. Use the right terms to describe what you're doing so you can take the right steps at the right time.
Hope this helps,
K
@Kimpton
At this point, the value of this post will come from the Wave team and some updates to their software or at least an explanation as to why a technical solution can't be achieved. As people hop on to the post and vote up, this will become more likely and that's why they're doing so.
I'm not sure what your underlying intent is in responding to comments on this post, but I've felt a tone of condescending pontification in some of your responses. I am personally not seeking commentary in the manner that you're providing it and the writer of the latest comment didn't seem to be asking for this type of contribution either. I'm guessing that your suggestion that s/he didn't know the difference between an estimate and a payment was not helpful and perhaps even offensive. A simple step by step instruction might have been more useful.
Given where this post is at, I wonder if there's a different way/place for you to make a contribution.
Kind regards
@Kimpton @SandyL
Much delayed reply, but thank you both for your insights and support. As a complete newbie, I do appreciate all and every information that I can learn from. I do also agree that Wave should directly address this issue, as we see in this post, many users do not have the accounting expertise of others in the community. Regards.
The easiest way for me, as a sole prop, has been to take the tax payment from my bank transactions and list it as "owner draw."
If I was a corporation, which I soon will be, I don't know how I'd do it. If it's not considered an expense, but simply a cash outflow, maybe it's a similar solution within a corporate form?
Hi @FPH,
In your sole prop (If in Canada, you only need a Profit and Loss Statement for your taxes, then is fine to utilize "owner draw").
However if you plan to incorporate, in a corporation you will need to expense this, and then is included in a special line in your Corporate Tax return, as it is not a tax deductible expense.
Hope this helps, anything else, reach out.
I am looking to replace QuickBooks SelfEmployed software and based on my read of this thread Wave is not the answer. A basic need of a small business/single person LLC is to be able to estimate quarterly income tax payments using a connected bank account. Each transaction is tagged as 'business' (and catagorized) or 'personal' (or excluded), and the software determines the quarterly payment (1040ES) to be sent to the IRS. The payments are tracked and imported into the yearly 1040 return. Are there still no plans to develop this MOST BASIC need??
Since Wave is a Canadian company I find it unusual that their SW will not handle non-deductible Canadian tax expenses simply. Their sales tax account would be a model to work from. It can't be that hard to implement.
Hi @canoeman2, I know that Wave is a Canadian company, but adding a non-deductible category will imply changing the layout of the Profit & Loss reports, and adding one more field in their database "Non-Deductible" Expenses. This is hard to do since imply changing the entire software and databases to accommodate the new field and ensure it works correctly, also increasing storage cost, calculation of reports etc. (I am not a software engineer, just thinking of it).
Since Wave it is free as it is, I doubt they would want to spend that on fixing this very important situation (as others). I will be the first to apologize if they do, but I do not think they will change this (ever or in a very long time).
Since businesses can not "wait" years to obtain this function (taxes every year need to be accurate).
Workarounds can be made (exporting to Excel and "manually" adjusting it) or others.
Hi - Any latest updates from Wave on this topic? I'm looking to have my Income Statement show a "Pre-tax Income" line item. Facebook and Amazon 2021 Income Statement snips attached as an example.
Thanks!
I too have been trying to figure this out for months. Reading all of these threads just leaves me with more questions. I understand it's important to understand basic accounting, but we are not asking to be taught an accounting lesson, we just want a solution to a common problem we all face. At the end of the day, we're all business owners and entrepreneurs with expertise in many areas other than accounting. We look for Wave to make it easier for us, not more complicated.
I find it both hilarious and annoying that reaching out to the automated Wave bot provided the exact answer I was looking for. Please see how to solve this below (copy and pasted from what the bot told me).
Income tax tracking is currently not built into Wave but you can work around this by creating a liability and expense account.
To add your accounts 👇
1️⃣ Navigate to Accounting in the left menu, then Chart of Accounts.
2️⃣ Select Add a New Account.
3️⃣ Under the Liabilities heading, choose Other Short-Term Liability. Name this "Income Tax Liability," or something similar and click Save.
4️⃣ Click Add a New Account again.
5️⃣ Under the Expenses heading, choose Operating Expense. Name this Income Tax Expense, or something similar and click save.
Now, let's use an example that you owe the government $100 in income tax. You would need to create a journal transaction to show what is owed.
1️⃣ Navigate to Accounting on the left, then Transactions.
2️⃣ Select More and click Add journal transaction.
3️⃣ Enter the description and date.
4️⃣ Debit the Income Tax Expense account previously created for $100. Credit the Income Tax Liability account previously created for $100.
💡 When you actually make the payment, you would categorize the withdrawal transaction to the Income Tax Liability account to lower that liability.
🎉 That's it! Your income tax payment is accounted for.
It took me 5 minutes to do this and now my problem is solved. It shouldn't be that hard or unreasonable to ask a real-life person who works for Wave to provide this answer rather than a robot. I got tired of reading "We are technicians, not accountants. Therefore we recommend you consult with an accountant". Like, you built this software with accounting in mind and you can't provide a simple answer? I love Wave, but the customer service is lacking when it comes to issues like this.
Good luck to everyone on their business journey!
Hi @bdt92 and @Colton
I share your frustration with Wave. But realistically I do NOT think that Wave will address your concerns about changing the way Taxes are calculated or displayed.
The best/easiest "workaround" to display this will be to download in an MS Excel spreadsheet the Profit & Loss and doing it "manually" moving the Income Tax expense and creating the subtotal before taxes and after "manually".
It will be faster if you utilize the google sheet add-on that wave has (also free).
@Colton I'm not sure you have found your solution. Using the Short or Long Term liability accounts will not treat your tax payments as a non-operational expense. Those accounts allow you to track and account for tax liabilities, which is useful, but once you pay from those accounts you'll see that your P&L shows them as operational expenses.
The only way to avoid this is to pay your taxes from your retained earnings, or as @Gabriel_Krozkin has suggested, by abandoning the Wave P&L and using a spreadsheet to make your own report. I'm using the retained earnings approach as my business is quite simple in nature but if yours is more complex, you'll likely want to go the spreadsheet route.
I hope Gabriel is wrong about the likelihood that the Wave will update its P&L but I suspect he's not.
Cheers,
Sandy
I have an accountant do my taxes so I can just highlight that expense in my P&L and she’ll know to void it in her calculations.
I'm not sure if this makes sense, but why if your income tax is a non-operating expense, wouldn't it work to create an "equity" account?
If the biggest concern is to keep tax out of the P/L report, this will achieve that.
Hi @FrozenKiwi, the concern is to have it in the P&L, where it belongs, but not as an operational expense.