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Income Tax Payable

A business organization’s liability that is owed to the local government where it operates

What is Income Tax Payable?

Income tax payable is a term given to a business organization’s tax liability to the government where it operates. The amount of liability will be based on its profitability during a given period and the applicable tax rates. Tax payable is not considered a long-term liability, but rather a current liability, since it is a debt that needs to be settled within the next 12 months.

 

Income Tax Payable

 

The calculation of the taxes payable is not solely based on the reported income of a business. The government typically allows certain adjustments that can reduce the total tax liability.

 

Income tax payable vs. Deferred income tax liability

On a general note, income tax payable and deferred income tax liability are similar in the sense that they are financial accountabilities that are indicated on a company’s balance sheet. However, they are distinctly different items from an accounting point of view because income tax payable is a tax that is yet to be paid.

It remains on the balance sheet because, probably the tax period is still to come. For example, if a business’ tax for the coming tax period is recognized to be $1,500, then the balance sheet will reflect a tax payable amount of $1,500, which needs to be paid by its due date.

Deferred income tax liability, on the other hand, is an unpaid tax liability upon which payment is deferred until a future tax year. Such a liability arises as a result of differences between tax accounting and standard accounting principles or practices. This sometimes appears as confusing, however, it is as simple as the fact that – for example, in the United States – the accounting required by the IRS is not identical to the accounting practices delineated by the Generally Accepted Accounting Principles (GAAP).

 

Income tax expense vs. Income tax payable

Income tax expense and income tax payable are two different concepts.

Income tax expense can be used for recording income tax costs since the rule states that expenses are to be shown in the period during which they were incurred, instead of in the period when they are paid. A company that pays its taxes monthly or quarterly must make adjustments during the periods that produced an income statement.

Basically, income tax expense is the company’s calculation of how much it actually pays in taxes during a given accounting period. It usually appears on the next to last line of the income statement, right before the net income calculation.

Income tax payable, on the other hand, is what appears on the balance sheet as the amount in taxes that a company owes to the government but that has not yet been paid. Until it is paid, it remains as a liability.

 

How to calculate income tax payable on the balance sheet

In order to come up with an accurate reporting of financial status, it is important for businesses and organizations to know how to compute income tax payable on the balance sheet.

  1. Take the balances of the different taxes to be paid, such as income tax, Medicaid tax, social security tax, and unemployment benefits tax. Add the values of all the taxes together.
  2. Make sure that the balances are already inclusive of the employer’s contribution, specifically on the balances of the Social Security and Medicaid accounts.
  3. Add the total to the sales tax payable account, other local taxes, and state income tax.
  4. Write down the final amount and put the figure under the Tax Payable section of the balance sheet.

 

More resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

  • Accounting for Income Taxes
  • EFTPS
  • How to Use the IRS.gov Website
  • Tax Shield

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