What is Income Tax Payable And How to Calculate

The government is entitled to a cut of the total revenue of your company, called the income tax. Paying income tax is your company’s financial obligation. However, an accounting term often used is income tax payable.

What is the income tax payable?

The income tax payable is the amount that your company needs to pay in income tax within the following year. Simply put, it is the tax your company has to pay within the next 12 months. Income tax payable grows in proportion to your company’s profit. You will not always have the same tax payable on the total income.

The income tax payable on the total income is shown on the balance sheet as a liability. Liabilities can be decreased through tax credits provided by the relevant government agency. Most tax credits have a time limit on when they can be used on your taxes. It is necessary to track when your company becomes eligible for each.

Formula to determine the income tax payable

Your organization’s taxable income is not determined exclusively by its bookkeeping profit. The total profit reported on the books can differ from the taxable profit that must be applied to the income tax rate. This is because the government permits many modifications that affect the accounting profit.

Income tax payable and income tax costs can fluctuate because it takes time for a company to record the earnings in the account. This often happens because some clients are given late payment due dates.

Income tax payable is not included in the statement of operations. Instead, it is shown on the balance sheet. There is typically a disparity between income tax expenditure and income tax paid. The difference may be due to depreciation, tax deductions, and other accounting issues.

Since the process is complicated, your business needs help calculating its taxable revenue. There is no set method for determining income tax payable. However, the calculation is done according to set standards.

Tax costs can be estimated using the following formula:

Taxable income x tax rate = income tax payable

For example, if the total taxable income is INR 10,00,000 and the tax rate is 25%, your company has to pay INR 2,50,000.

Deferred income tax liability vs. income tax payable

Income tax payments and deferred income tax liabilities are financial obligations on a company’s balance sheet. It is a common misunderstanding that they are the same thing.

These two things couldn’t be more different from an accounting perspective.

Income tax payable represents tax that has not yet been paid. It is still not paid often because the filing dates are far.

For example, your company expects to pay Rs. 2,50,000 in taxes for the upcoming tax period. Then, you can record an income tax payable of this amount on the balance sheet. This sum is due on the same day as the rest of the company’s tax obligations.

On the other hand, a deferred income tax liability refers to an outstanding tax bill that has been postponed until a later tax filing season. Obligations result from discrepancies between tax accounting and generally accepted accounting procedures.

Income tax expenses and income tax payable

Income tax expense and income tax payable are not the same.

Expenses have to be recorded when they are incurred. An income tax expense is an amount your firm estimates it will have to pay in taxes for the reporting period.

Income tax expenses can be utilized to record income tax charges. A business that makes its tax payments monthly or quarterly should make corrections to its income statement.

On the other hand, the balance sheet will show income tax payable on the total income as a liability.

Types of Income Tax Payable

Your corporation’s taxable income can be broken down into two categories. There are two types of income taxes that must be paid:

• Current income tax payable: The estimated tax payment for the current year.
• Deferred income tax payable: The taxable income in the current year that will not be paid until the following year.

How do you calculate the income tax payable for your company?

You can use the formula given above to calculate the income tax payable. However, it is not always clear whether the income is taxed. Companies use GAAP-calculated pre-tax net income as a starting point.

You can account for changes between the net income and taxable income. You have to make adjustments if there is any discrepancy between accounting and tax regulations. The fines and other costs you deducted from your net income may not be tax deductible. Adding and subtracting these amounts is often done.

Once you have completed these processes, you will have your initial taxable income, from which you may deduct any tax-related expenses (such as tax credits). Apply the government’s tax rate to determine your total income tax. This is the amount your company has to pay.

On the balance sheet, record this amount as a liability.

Deferred impacts of items like future year tax credits, revenue, costs, and net losses might be difficult to account for when calculating income tax payable on the total income.

Conclusion

Your company’s expected income tax payable is a liability. It is your company’s responsibility to pay the income tax in full. The income tax payable by your business might be due in the current or next financial year. Income tax payable is an important obligation for any business.

Businesses need to account for various state and local income tax rates. The process can be confusing. If you’re unsure where to start, look to a professional for help.