Taxes payable definition
/What are Taxes Payable?
Taxes payable refers to one or more liability accounts used to record taxes currently owed to federal, state, local, or other government entities. These accounts can include income taxes, sales taxes, payroll taxes, and property taxes. When the organization pays the taxes, the related payable account is debited and cash is credited. Because most taxes payable are due within a relatively short period, they are generally classified as current liabilities on the balance sheet.
Examples of Taxes Payable
We provide several example of taxes payable, which are as follows:
Sales taxes payable. A business will likely need to withhold sales taxes from sales made to certain customers, for which the liability is recorded at the time a customer is invoiced, with a debit to the accounts receivable account. This liability is typically paid to the relevant government entity once a month.
Income taxes payable. A for-profit business will likely need to pay income taxes to the applicable federal and state governments, for which the liability is recorded at the end of each accounting period, with a debit to the income tax expense account - assuming there is a taxable profit.
Payroll taxes payable. An employer will need to withhold payroll taxes from employee pay and provide matching funds, for which the liability is recorded when a payroll is calculated, with a debit to one of several possible payroll expense accounts.
Property taxes payable. Businesses that own real estate must pay property taxes assessed by local governments, based on the value of the property. The expense is recognized over the period in which the property is used, even if the bill is paid annually. The unpaid portion is recorded as a liability under property taxes payable.
Excise taxes payable. Excise taxes are imposed on specific goods like fuel, alcohol, or tobacco, often included in the product’s price. Businesses collecting excise taxes are responsible for tracking and remitting them to tax authorities. Until payment is made, the amount owed is recorded as excise taxes payable.
Presentation of Taxes Payable
Taxes payable are almost always considered to be current liabilities (that is, to be paid within one year), and so are categorized within the current liabilities section of the balance sheet. The various taxes payable accounts may be aggregated into a single "taxes payable" line item in the balance sheet for presentation purposes.
Taxes Payable FAQs
How do taxes payable differ from tax expense?
Tax expense represents the amount of tax incurred during a reporting period based on taxable activity. Taxes payable represent the portion of that expense that remains unpaid at the reporting date. Differences arise from timing between when taxes are accrued and when they are remitted to taxing authorities.