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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 liability that is owed to the local government where it operates and is based on its profitability during a given period. It is not considered a long-term liability but a current liability since it is a debt that needs to be settled within the next 12 months.

 

Income Tax Payable

 

Sometimes, the calculation of the taxes payable is not solely based on the reported income of a business, as the government may allow certain adjustments that can lead to a taxable profit.

 

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 in a company’s balance sheet. However, they are also different from each other because income tax payable is a tax that is yet to be paid.

Therefore, 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 a tax that is still unpaid even though it is already due. It usually happens when there are disputes regarding the tax payable due to differences in tax laws and company policies. For example, a company records taxes due in the amount of $15,000; but because of depreciation, the amount goes down to only $13,000.

Naturally, the company will only pay the latter amount simply because it is the only amount it owes the government. However, on the balance sheet, the full amount of $15,000 is recorded, and the $2,000 difference is labeled as the “deferred income tax liability.”

 

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 on the period they were incurred, instead of on the period they were paid. Therefore, for a company that pays its taxes monthly or quarterly, it should still make adjustments on the periods that produced an income statement.

Basically, income tax expense is the company’s calculation of how much it owes for its tax, based on business accounting rules. It usually appears on the last line, right before the net income calculation.

Income tax payable, on the other hand, is what appears on the balance sheet as the actual amount in taxes that a company owes to the government. 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 for 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, among others. Add the values of all the taxes.
  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. Otherwise, the accountant will incorporate the employer’s contribution to it.
  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 resources below:

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

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