Taxes payable is the amount of taxes a business owes to federal, state, local or foreign governments that remains unpaid at the end of an accounting period. It is reported as a current liability on the balance sheet, because most taxes are due within weeks or months. In practice, businesses usually keep separate accounts for each kind of tax, and the balance sheet may show them individually or combine them as taxes payable or accrued taxes.
The term covers several quite different obligations. Some, such as income tax, are the business's own tax on its profits. Others, such as sales tax and employee income tax withholding, are amounts the business has collected from other people and holds in trust until it pays them over. Separate entries cover two of the main types in more depth: income taxes payable and payroll taxes payable. This entry looks at taxes payable as a whole.
Types of taxes payable
- Income taxes payable: the current year's corporate income tax not yet paid, after deducting estimated tax payments already made.
- Payroll taxes payable: employee income tax withheld, employee and employer Social Security and Medicare taxes, and federal and state unemployment taxes owed. Withheld amounts are often recorded as federal income tax withholdings payable.
- Sales tax payable: sales tax collected from customers that must be remitted to state and local authorities, usually monthly or quarterly. It is never revenue to the business.
- Property taxes payable: taxes on real estate and business personal property, often accrued monthly and paid once or twice a year.
- Other taxes: excise taxes, franchise taxes, use taxes and value added tax in other countries.
Journal entries and worked example
For a company's own taxes, the entry debits an expense, such as income tax expense or property tax expense, and credits the payable. For collected taxes, the payable is credited when the tax is collected, with no expense. When paid, the payable is debited and cash credited.
A retailer's December activity includes: taxable sales of $200,000 with 7 percent sales tax collected, $14,000; payroll with $9,000 of employee withholding and FICA, plus $4,600 of employer payroll taxes; a property tax bill of $24,000 for the year, of which $2,000 relates to December; and estimated income tax for the fourth quarter of $38,000, against which $30,000 has already been paid. At 31 December, unpaid taxes are:
| Account | Balance |
|---|---|
| Sales tax payable | $14,000 |
| Payroll taxes payable | $13,600 |
| Property taxes payable | $2,000 |
| Income taxes payable | $8,000 |
| Total taxes payable | $37,600 |
Of this, only the $4,600 employer payroll taxes, the $2,000 property tax and the $38,000 income tax are expenses of the retailer; the sales tax and employee withholdings belong to the government and to employees.
Taxes payable and deferred taxes
Taxes payable records taxes currently owed under tax law. It is different from a deferred tax liability, which arises when income is reported earlier for accounting than for tax purposes and represents tax that will be payable in future years. Under US GAAP and IFRS, income tax expense on the income statement equals current tax, reflected in taxes payable, plus or minus the change in deferred taxes.
Why it matters
Taxes payable are among the most important liabilities to pay on time. Penalties and interest apply to late payment, and for trust fund taxes such as employee withholding and sales tax, owners and officers can be held personally liable. Analysts treat taxes payable as part of current liabilities when assessing liquidity, and a sharp rise can indicate that a struggling company is delaying tax payments to conserve cash. Accurate accruals also matter for accrued expenses generally, since unrecorded taxes understate both liabilities and expenses. Businesses rely on guidance from the Internal Revenue Service and state revenue departments for due dates and deposit rules.