Posted on: 25 August 2022Share
Taxes are an unfortunate but necessary part of doing business. One key part of managing them is to understand how your past, current, and future taxes affect the financial statements and your business's books.
To help you know where your money is going and avoid problems with the IRS, here are a few key things to know about sales, income, and payroll taxes in your bookkeeping.
1. Sales and Use Taxes
If you must collect and remit sales and use taxes to your local jurisdictions (some businesses are subject to more than one), it's vital to keep good records of this.
Once you collect sales tax from a customer, it becomes a short-term liability on your financial statements. Why? Although it's additional money in your possession, this is money owed to the tax agency.
Most companies have an account called Sales Tax Payable which houses this money until it's sent off. You must remit sales taxes correctly, regardless of how much was (or was not) collected. So you'll need to carefully monitor and reconcile this account. Ideally, the payable account and the sales tax expense account will balance each other out.
2. Income Taxes
Corporations pay income tax to their state of incorporation and the IRS. If your company is not incorporated, you generally pay income taxes on profits through your personal income tax forms. However, the future income tax liability is not as closely monitored nor as easily managed as sales tax liability.
In general, income taxes only show up on financial statements once it's been remitted to the agency. When an amount is sent in estimated taxes, for instance, it's usually entered as Income Tax Expense (or a more detailed account, if necessary) and can be seen on the balance sheet.
3. Payroll Taxes
Do you have employees? Then you'll have to deal with payroll taxes. The portion of these taxes which is withheld from employee paychecks works like sales taxes. It is a liability on your books because the money is not yours to freely spend — it belongs to the employee and the government. These should be closely monitored and remitted on schedule.
Employers generally have to pay their own portions of payroll taxes as well. These are not collected from employees, so they must be calculated separately. You may create a holding account, such as Payroll Tax Payable, to ensure that the right amount is held back and remitted on time.
Where to Learn More
Managing your tax obligations can be challenging for any business. Could you use help setting up a system, improving the accuracy of remittances, or understanding how you can and cannot use money withheld for taxes? If so, start by meeting with an accountant for help with business tax preparation today.