Income Tax Payable
A financial accounting term used to describe the amount of tax liability on the income a company has towards the government.
What Is The Income Tax Payable?
Income tax payable is a financial accounting term used to describe the amount of tax liability on the income a company has towards the government. But, of course, this income cannot be calculated without measuring the business’s profitability.
It is determined using the company’s profits and applicable tax rates. The prevailing corporate tax rate in the nation of operation finds the rate of taxation.
The profits and earnings a corporation pays in taxes are a way to give back to the government, helping it facilitate operations and provide goods, services, and funds to the nation’s people.
It is classified as a current liability on the balance sheet because it represents a debt expected to be settled within the normal operating cycle of the business. However, if it were due more than a year away, it would be classified as a long-term liability.
Once the tax is paid, the specific liability entry on the balance sheet is replaced by the actual payment entry, reducing the cash or bank balance.
These taxes can be paid to the government in numerous ways. They are generally paid to the applicable federal, state, or municipal governments where the company is located.
Nevertheless, to calculate the taxes that need to be paid, the reported earnings found in the financial statements are not the only thing to look out for. With the help of some adjustments due to tax law, your total tax liability can be reduced.
What are the benefits of paying? Paying one’s income tax payable is a legal obligation that helps avoid penalties and ensures compliance with tax laws. It also provides financial help or increases social security payments, but not directly.
Government funding for infrastructure projects and business subsidies comes from a combination of revenue sources, including taxes, rather than directly from individual or corporate taxes.
Not to mention launching public welfare schemes that can benefit a person’s health, education, and housing, improving the economy overall.
Key Takeaways
- Income tax payable is a company's financial obligation towards the government based on its profits. It is determined using the company's profits and the applicable tax rates, with the prevailing corporate tax rate influencing the taxation.
- It is classified as a current liability on the balance sheet, representing a debt expected to be settled within the normal operating cycle. If the payment is due more than a year away, it would be classified as a long-term liability.
- While there's no definite formula for income tax payable, the income tax expense is calculated using the formula:
- Income Tax Expense = Taxable Income x Tax Rate
How to calculate Income Tax Payable
Income tax payable is classified as a current liability on the balance sheet because it represents a debt expected to be settled within the normal operating cycle of the business.
Although there is no definite formula for income tax payable, based on accounting standards, the income tax expense is calculated using the formula:
Income Tax Expense = Taxable Income x Tax Rate
There is still a set path to follow to figure out the income tax payable on the balance sheet.
- Add all the values of the different taxes to be paid, such as income and social security taxes
- Ensure that the employer's contribution is included in those balances
- Add the total amount of income tax liabilities to the state income tax payable account, excluding sales tax and other local taxes
income Tax Payable Example
To further illustrate an example of how to calculate income tax payable, suppose a company in 2022 reported the following:
- Revenue for the year is $96,000
- Expenses are $40,000
To calculate, we'll use the formula:
Pre-tax income = Revenue - Expenses
= $96,000 - $40,000 = $56,000
The tax rate is 20%
Income tax expense = pre-tax income * tax rate
= $56,000 * 20% = $11,200
Suppose an additional month of revenue of $8000 got added to the total revenue:
- Revenue would then be $1,04,000
- Expenses stay the same at $40,000
Pre-tax income = Revenue - Expenses
= $1,04,000 - $40,000 = $64,000
The tax rate is 20%
The income tax payable would then be $12,800, calculated as 20% of the revised pre-tax income of $64,000.
To record the journal entries, the company must:
- Debit the income tax expense account with $12,800
- Credit the income tax payable account with $12,800
When the company later pays the tax, it must:
- Debit the income tax payable account with $12,800
- Credit the cash account with $12,800
Income Tax Expense vs. Income Tax Payable
While they may seem similar and confusing, they differ in multiple ways.
Let's take a look at the table below to understand the difference:
| Aspect | Income Tax Expense | Income Tax Payable |
|---|---|---|
| Definition | The income tax amount recognized as an expense in the income statement based on accounting rules and principles. | The amount of income tax that a business owes to the government but has not yet paid. It represents a liability on the balance sheet. |
| Timing of Recognition | Recognized in the income statement for the period in which the income is earned or expenses are incurred, regardless of when the tax is paid. | Recognized on the balance sheet when the tax is assessed or becomes payable, usually based on tax laws and regulations. |
| Purpose | Reflects the tax provision for financial reporting purposes to accurately portray the company's financial performance. | Represents the actual amount of taxes owed to the government and serves as a liability until paid. |
| Accounting Treatment | Recorded as an expense on the income statement, reducing the net income for the period. | Recorded as a liability on the balance sheet, indicating the obligation to pay taxes in the future. |
| Relation to Cash Flow | May not align with the actual cash paid during the period, as it is based on accrual accounting principles. | Represents a future cash outflow when the taxes become due and payable. Cash flow is affected when the taxes are actually paid. |
| Example | If the income tax rate is 20% and the pre-tax income is $100, the income tax expense would be $20. | If the assessed income tax for the period is $18, the income tax payable would be $18 until it is paid to the government. |
Income Tax Payable FAQs
It is the amount of money a company owes in income tax to the government. It is considered a current liability, as it represents taxes owed to the government and is generally payable in the short term, often within 12 months.
It is found in the liability section of the balance sheet as a current liability.
The formula for income tax expense is more complex and involves applying the applicable tax rate to the taxable income, considering deductions and credits:
Income tax expense = Taxable income × Tax rate + Other adjustments
To record income tax payable as a journal entry, initially debit income tax expense and credit income tax payable. Upon tax payment, debit income tax payable and credit cash.
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Written and researched by Jad Shamseddine | Linkedin
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