Account for withholding tax on sales invoices

Some tax authorities require withholding tax (also called tax withheld at the source) to increase tax law compliance and secure earlier receipt of tax revenues. In simple terms, customers are required to withhold a portion of the balance due on sales invoices and pay that portion directly to the tax authority. Then, either the customer or the tax authority provides certification of payment of withheld amounts to the supplier. The supplier reduces subsequent payments of its tax liabilities by amounts already paid on its behalf by customers.

Withholding tax may be a form of advance payment of income taxes, value added taxes, goods and service taxes, or some combination of these and other types of tax. Because the entire process involves both customers and suppliers, Manager supports withholding tax accounting through both its sales invoice and purchase invoice processes, though procedures are somewhat different.

Notes
As implemented in Manager, withholding tax does not refer to deductions on payslips of taxes due from employees. These are referred to as Payslip Deduction Items and are explained in another Guide.

Withholding tax cannot be applied on cash receipts, because the full amount of the transaction must be recorded. Further, cash receipts cannot be associated with individual customers’ subaccounts as withholding tax must.

As a seller or supplier who issues sales invoices indicating the need to withhold tax, you must do four things:

  • Activate withholding tax accounts.
  • Use withholding tax on sales invoices to reduce receipts from customers.
  • Record customer remittances on your behalf to tax authorities.
  • Apply customer remittances to your tax bill.

Activate withholding tax accounts

Withholding tax functionality for sales invoices does not require activation of any new tabs. Nor do you need to create any new accounts. All necessary accounts are added automatically to your chart of accounts the first time you check the Withholding tax box on a sales invoice:

Two accounts are created in the Assets group, because the money they represent technically belongs to your business until it is eventually used to pay taxes owed. They are:

  • Withholding tax receivable - This account records amounts your customers owe to the tax authority on your behalf but have not yet paid. If withholding tax had not been deducted from sales invoice balances, amounts in this account would be included in Accounts receivable.
  • Withholding tax - This account records amounts your customers have paid to the tax authority that are available to offset your tax bill.

Use withholding tax on sales invoices

When the Withholding tax box is checked on a sales invoice, two options appear in a dropdown box, Rate and Amount. A secondary field accepts either the percentage or amount:

Because withholding tax is independent of any other tax code that may be applied, percentage amounts are calculated on the total due, including other taxes. (Remember, withholding tax is not an additional tax, only a way for the tax authority to collect prospective taxes earlier.)

Notes
If various line items on the sales invoice are subject to different withholding rates, calculate the total amount to be withheld manually and enter as an Amount. You may wish to explain the calculation in a custom field named Notes on the sales invoice.

If withholding tax in your jurisdiction is not calculated on the total amount of an invoice, either (a) calculate the withholding tax manually and enter an Amount or (b) lower the withholding percentage to offset any tax codes applied. Option (a) is usually easier.

Example
Sample Consulting invoices Brilliant Industries for advertising design services worth 1,000. (For clarity of illustration, all other transactions have been removed.) In this case, no tax is due directly on the design services, but 10% must be withheld by the customer against expected income tax. So the Withholding tax box on the sales invoice is checked, and a Rate of 10% is entered. The resulting sales invoice shows the customer how much to withhold from payment:



900 is posted to Accounts receivable and 100 to Withholding tax receivable:



In the Customers tab, a new column appears showing Withholding tax receivable:

Record customer remittances

When the customer remits the withheld tax, either the customer or the tax authority will send you some form of “proof” of the remittance (a certificate, account statement, voucher, etc.). This “proof” can be recorded in Manager by clicking on the Withholding tax receivable figure in the Customers tab, then on New Receipt:

Enter Date, Customer, and Amount of the customer’s remittance. A Description is optional:

Click Create to record the transaction. The transaction amount will move from Withholding tax receivable to Withholding tax .

Example
Sample Consulting receives proof of remittance by Brilliant Industries. It enters a transaction for 100. The balance sheet shows the movement between the two accounts:

The transfer between the two asset accounts creates a withholding tax receipt in Manager. This receipt appears in a tab named Withholding Tax Receipts that is enabled automatically. The tab can also be enabled manually by clicking Customize below the left navigation pane, checking the box, and clicking Update:

Once the tab is activated, you can also enter withholding tax receipts manually. Required information is the same as for the automatic method described above.

Apply customer remittances to tax bill

When a tax filing is made, the balance of Withholding tax is available to offset your tax due. It has already been paid to the tax authority. Indicate the amount being applied on the appropriate forms of the tax authority and submit with your filing. This step in the process does not occur in Manager, only in your tax filing.

To record your application of available withholding tax credits in Manager, use a journal entry. Credit Withholding tax and debit either:

  • An appropriate expense account, such as Taxes paid, if the tax is an obligation of the business, or
  • An equity account, such as Owner’s equity or Capital accounts, depending on your form of organization, if the tax is an obligation of the owner or partners.

Example
When it submits its tax filing, Sample Consulting applies the 100 from Withholding tax to its total bill. Sample Consulting is a sole proprietorship, so its income is taxed on the owner’s tax return. Therefore, it makes a journal entry debiting Owner’s equity and crediting Withholding tax. That account is zeroed out on the Balance Sheet.

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