Income tax payable, a critical term in financial accounting, signifies a company's expected payment towards income taxes within the ensuing 12 months. This account is prominently registered under the current liabilities section of an organization's balance sheet, representing the impending tax debts to be remitted to tax authorities.
The calculation of income tax payable adheres strictly to the Generally Accepted Accounting Principles (GAAP), which take into consideration the tax rates stipulated by the jurisdictions where the company is liable for tax. In the United States, organizations are bound by federal, state, and local tax laws, plus the tax regulations of any other countries where they operate and generate income.
However, it is essential to differentiate between the rules for determining the annual tax amount owed to the government tax authorities and the financial accounting regulations for documenting taxes on financial statements. American companies' taxes, as manifested on financial statements, comprise federal, state, and local taxes, along with taxes levied by other jurisdictions where they conduct business and earn income.
The balance sheet's income tax payable mirrors the tax sum due for remittance to government tax agencies within the following 12 months. Taxes due for payment in future years are reported as deferred income tax liabilities on the balance sheet.
Typically, most events reported in an organization's financial statements for a year include taxes owed as per applicable tax laws, which constitute the amount registered as income tax payable. As a current liability, income tax payable shows the extent of the amount expected to be paid or resolved within 12 months. Tax liabilities accrued in a year but due in subsequent years are documented as deferred income tax liabilities.
The Income Tax Payable account on a company's ledger is where funds are set aside to settle the tax liability in the current quarter or fiscal year. This account is usually distinct from those dedicated to payroll and sales taxes and is expected to be emptied at the end of the fiscal year.
Corporations, unless they are pass-through entities like certain S-Corps, are obligated to pay income taxes based on their gross income, with these funds held in the Income Tax Payable account. For pass-through entities, the tax liability is transferred to the owners or shareholders. On the other hand, C-corporations are invariably accountable for corporate income taxes on both federal and state levels, barring a few exceptions.
Corporate income taxes can act as a driving force, prompting companies to relocate to countries with more tax-friendly environments. Companies, especially those with controlling interest in other companies, are required to file a consolidated return for all entities and pay into the estimated withholding amount with quarterly filings.
Understanding the concept of income tax payable is essential in financial accounting. It provides a clearer insight into a company's financial health and its potential future obligations, allowing the organization to plan its financial resources better. This understanding is also critical for investors who use such information to make informed investment decisions.
Summary
Income Tax Payable is an account on a company’s ledger where they reserve amounts that will be used to pay the tax liability in the current quarter or year.
This account tends to be separate from payroll taxes and sales taxes. This account will typically be empty at the end of the fiscal year. Corporations must pay income taxes based on their gross income, and the funds to pay them are held in the Income Tax Payable account on their company ledger.
Pass through entities such as certain S-Corps will not pay taxes on behalf of the partnership, but the tax liability will be passed on to the owners or shareholders. C-corporations will always owe corporate income taxes, however, on a Federal and a state level (except in a few states).
Unless the company is making less than $335,000 (as of 2016), the corporation will pay an effective rate of about 34% in Federal income taxes. A company that owns controlling interest in other companies will file a consolidated return for all of the companies. Companies must pay into the estimated withholding amount with quarterly filings.
Corporate income taxes can cause companies to set up in another country with more favorable tax treatments.
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