Income tax payable is just one of the jargons that every business encounters in their financial accounting. Small businesses often struggle to understand whether it is a ‘liability’ or an ‘expense.’ What is income tax payable, how to calculate, and more, find out in this guide.
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What Is Income Tax Payable?
Income tax payable, as its name suggests, is the amount payable to the government based on your business’ taxable income. In the United States, it is the federal income tax you need to pay to Internal Revenue Service (IRS).
Payable federal income taxes come from all your profits (e.g., operating income, capital gains), called gross income or pre-tax profit, minus your allowable deductions or expenses.
There are several confusions around what income tax payable is in financial accounting, especially whether it should be treated as an expense or a liability. There’s a clear difference between the two (more below).
Is Taxes Payable a Liability or Expense?
Your income tax payable is shown in your balance sheet (which lists what you owe), hence, it is a liability. Tax expense, on the other hand, is how much tax your business had to deal with during a certain period. This is shown in your income statement (which reports how much money you made or lost).
Investors look at these reports to see your business’ financial standing, especially if it makes a healthy bottom line.
Is Income Tax Payable a Current Liability?
Usually, income tax payable is a current liability, as it is a short-term bill, often paid within a year. Another thing to clear up is how it is different to deferred tax.
Income Tax Payable vs Deferred Income Tax
The money you currently owe in income tax payable is different from deferred income tax. Deferred tax happens when there is a discrepancy between your regular accounting and tax reports.
For example, how you count the wearing out of equipment (depreciation) might be different for taxes than for your own records. This can create a deferred tax liability if you owe more tax later, or a deferred tax asset if you owe less.
Dealing with other countries may make understanding these two a bit more complicated, as the United States tax law differs from international taxation.
If you operate interstate, you might want to read about the tax implications when moving to another state.
How to Calculate Income Taxes Payable
Generally, here’s how you calculate your income tax payable:
- Determine your gross income.
- Subtract the deductible expense from your gross income (this arrives at your taxable income).
- Apply the federal income tax rates on your taxable income. The U.S. tax law follows progressivity and marginal rates, which means the more money you make, the higher the percentage you pay.
- Apply eligible tax credits to further lower your tax liabilities.
Federal personal income tax works differently from corporate.
How to Pay Tax Payable
Businesses often have to pay estimated taxes throughout the year. Once you determine your income tax payable, be sure to file and make tax payment on time.
If you are an individual business owner, you use Form 1040 to file your tax returns. Formerly, personal exemptions were available to lower your tax, but this is now phased out.
Companies use different tax forms and might have to deal with a special rule called the AMT (Alternative Minimum Tax), which makes sure they pay at least a certain amount of tax.
For limited liability companies, usually the business itself does not pay income tax. Instead, the owners report the business’s profits or losses on their own tax returns and pay federal personal income tax on it.
Remember that payroll taxes, which are taxes on wages you pay to your employees (like Social Security and Medicare), are different from income tax payable.
Legend Fusions’ Accounting Support
Need clarity on your business’ financial accounting? Legend Fusions is here to sort your accounting books, taxes, and all your other administrative obligations. We have been helping hundreds of taxpayers over the decade under the name of our UK-based firm. They come back every tax season, and we get it—simple and customized solutions, every time.
Whether you are an individual or a business owner, we guide you on what is income tax payable and more. Reach out to our US tax accountant anytime you need help!
Reviewed by:
Hira Asif
Hira Asif, Client Manager (US) at Legend Fusions, brings over 11 years of tax expertise, including 8 years with Ernst & Young. Her work focuses on tax advisory, compliance, and planning for individuals, partnerships, and private equity funds. With a deep knowledge of federal, state, and local tax regulations, Hira is skilled in identifying tax planning opportunities and reviewing corporate and partnership tax returns to optimize compliance and reduce exposures.
This provides benefits for retirees, those with disabilities, and the family members of deceased workers. There’s a set percentage for this tax, and it only applies to your wages up to a certain income limit each year.