Tax payments to Government are a major part of a business. Like any other general ledger the tax payable accounts have to be reviewed and reconciled every month. In the fourth part of the month close series, we shall look at how to prepare the books to make tax payments.
Taxes paid by a business can be classified into three buckets:
- Income Tax payments including Withholding taxes (WHT)
- Goods & Service Tax (GST) or Sales Tax
- Payroll Taxes
Governments across the world trust business’s to collect taxes and deposit them on time. Every business needs to develop mechanisms to ensure taxes are deducted and paid without fail. Non-payment of taxes will lead to major compliance risks like penalties or even business closure.
How to handle income taxes?
Income taxes are required to be paid every year or even on quarterly basis. In countries like India, income taxes are required to be paid in advance every quarter. These quarterly payments are paid on estimated profits. To arrive at profits, one has to:
1.Estimate the sales for the year:
This has to be done in conjunction with the sales department. Estimated revenue numbers have to be arrived on basis of sound underlying assumptions. These numbers have to be revised every quarter based on the actuals of the previous quarter.
2.Estimate the expenses for the year:
Expenses, both direct & indirect, have to be extrapolated for the year. This requires that recurring expenses like salary, utilities etc. have to be estimated based on inputs from the department heads.
The difference between the two would be estimated profits. The taxes are arrived at after applying the relevant tax rates. A provision entry has to be passed in the books to reflect the tax liability. The Finance team now has to set aside money for payment of taxes as part of the cash flow plan.
Withholding taxes (WHT) are deducted from vendor payments. These deductions have to be deposited to the Govt every month. An accountant must be familiar with:
- Rates of WHT
- Categories of payments covered under WHT
- Dates of payment of WHT
To ensure correct WHT is done every month, the accounting team must ensure that all the vendor bills are accounted. Further, correct rates of WHT must be applied. This process is complete only when the WHT amounts are deposited with the Government.
At the end of every month, the WHT deductions must be reconciled with the WHT payments. As a thumb rule, the WHT balance must be zero after the payment.
How to handle GST or Sales Tax?
GST or sales taxes are part of the indirect tax system. These are levied on sale of goods or services. Essentially, these taxes contain two components:
- Input Tax
- Output Tax
Input taxes are those charged by the vendor on their invoices. Output tax is what you collect from your customers. Input taxes are set off against the output. If the output outnumbers the input, it is paid to the Government. However, if input is more than the output it is carried forward to be used in the next month.
To close the books every month, an accountant has to set off the input credit with the output in the books. This will enable him to arrive at tax payable/carry forward every month. This account gets closed only on payment of taxes.
How to handle payroll taxes?
Payroll taxes comprise of two components:
1.Employee welfare payments:
These payments contain deductions from salary and a matching contribution from the employer. An accountant must be aware to post the employee deductions to a liabilities account in the balance sheet. The contributions from the employer must be posted to an expense account in the P&L.
These accounts must be closed once the amounts are deposited with the Government.
2.Employment taxes levied by the Government:
A business acts as a pass through agent when it comes to collecting tax and depositing with the Government. Taxes deducted from the employees are a liability, hence must be posted to a liabilities account in the balance sheet. These accounts must be closed once the amounts are deposited with the Government
The tax payments are time bound and have to be monitored. The best way to review the balances would be to add these accounts to a dashboard. A tool like Zoho Books allow you add key ledger accounts to the dashboard.Every business needs to reduce the risk of non-compliance. This requires a very skilled accounting team. We at, Integra Books, can help with managing compliance. We are a line away.