I paid a few state sales tax payments with personal funds in the beginning of the biz. I’ve entered an expense claim for each one. I now have the total sitting in the liabilities Tax Payable account. How do I show they are paid to clear out that liability?
Create another expense claim which says you paid tax liability and categorize that amount paid under tax liabilities account.
I’m not sure I understand either what you say you did, @ksh, or how @lubos is suggesting you resolve things. But my sense is that he may not have addressed your exact situation.
To be clear, your Tax payable liability account should only ever have a balance in it if you collected sales tax (on top of your selling price) from customers for taxable goods or services. Nothing should go into that account by any means other than automatic allocation by Manager when you have selected a tax code to apply to a sales invoice or receipt line item. You should not, for example, have entered into that account sales tax you paid to some other merchant on a purchase.s
Assuming you have that aspect in hand, let’s look at what should have happened when you remitted your state sales tax obligation from personal funds. An expense claim was the appropriate transaction type; the account selected should have been Tax payable. You said the Tax payable liability was still sitting there, but after you paid the state from personal funds, it shouldn’t be. What should be there in its place is an equivalent amount in the Expense claims liability account. In other words, you no longer owe the state, you owe yourself.
Then you are faced with clearing the expense claim. As I have described in other responses to your questions, you can reimburse yourself from a bank account, now that you have one, or you can clear the liability to Owner's equity, which is what I suspect you would choose.
So, if I understand correctly what you did, I differ with @lubos on how to close things out. He suggested creating another expense claim to clear Tax payable. I believe Tax payable should already be zeroed out and the second transaction should be to clear the initial expense claim.
I didn’t read the question properly. @ksh said he paid sales tax in the beginning of the business. That indicates he wouldn’t have any transactions to build up tax liability balance.
So I think the issue is that @ksh simply didn’t set up correct starting balance for tax payable account. Because then tax payable account would have a credit balance and expense claim would clear it out.
From earlier posts by @ksh, I think the issue was that the company was started with no bank account. All early payments were made from personal funds. So I don’t think there should have been an opening balance for the Tax payable account. I think sales tax wasn’t being applied correctly or the expense claim to pay the taxes was entered incorrectly.
Remember, @ksh is in the U. S., so the sales tax collected is not tax owed by the company, but rather tax collected from customers on behalf of the government. It is never an expense of the company, only a temporary, pass-through liability.
Yes the biz was started prior to an official biz bank account. I had a few service sales that I invoiced and collected the 6% sales tax. I paid the tax online via my personal credit card. They total $93.30. When I entered the expense claim I used the Payee that I paid it to, which I have set up as an expense account in the chart of accounts. They are also set up as a supplier since I receive a bill from them, for the tax obviously. My issue is how to I show it paid vs an open liability?
Here is one of the tax expense claims as an example.
If I dedicate it to Tax Payable, how can I make it show under the correct chart of accounts tax expense category for Maryland so I have the correct amount for end of year tax filings?
Your problem is that you bypassed Manager’s tax module. When you created a sales invoice and selected the applicable tax code, Manager added the tax percentage to the service fee on the invoice and allocated it automatically to the Tax payable liability account. When you created your example expense claim, you allocated your payment to a completely separate expense account, Maryland Sales and Use Tax. But the sales and use tax is not an expense of your company. It is a tax levied on the end user of a good or service. You merely act as collection agent for the state and pass the collected tax on to the government.
Your Payer on the expense claim (yourself) was correct. The Payee should have been the Comptroller of Maryland Revenue Administration Division, to which you made the payment, not the name of an expense account (which shouldn’t be in your chart of accounts anyway). The Account selected should have been Tax payable. The result would have been to transfer the liability from Tax payable (meaning your company owed the state) to Expense claims (meaning your company owed you for this equivalent contribution of capital). At that point, there would be nothing left on your books pertaining to the sales tax. Think of the Tax payable account like an escrow account. The money is held for someone else. It never belongs to your company, even though it passes through your hands. So after you take it in, keeping track of it in Tax payable, you pay it right back out. In this case, the payout was only slightly more complicated because you paid the state from your personal funds.
Since you allocated your expense claim to an expense account, the balance in Tax payable did not change. More worrisome, you overstated your actual expenses, thus understating your income. That constitutes fraud and will get you in major trouble with the IRS if it is not corrected.
This situation highlights the fact that Manager is only a tool and can be misused. Because the tool is so sophisticated, you need a good grasp of the underlying principles of double-entry accounting before you can use it effectively. This forum is not the best place to get that understanding. And no-one on this forum is giving tax advice.
I wouldn’t want nor expect, or would ever take any take tax advice from anyone on a forum. I have a great CPA family member for that. I think I have a better understanding of my error in entering these types of entries - I saved these for last since they were a bit different by the nature of them. They are neither income nor expense and I neglected to see that when I entered them. I’m going to make the adjustments and if you don’t hear back it all went well!
OK that was the perfect adjustment. I deleted that account from my chart of accounts and all is well. But… when I paid two of the taxes due I paid them late. So now I’m showing a -$8.04 in the Tax Payable account which is reflective of the late fees I paid. So how do I take care of that?
Interesting situation. The late payment fee actually is an expense. It could go into a taxes and fees expense account or a penalties account or even into miscellaneous expenses. However that was entered, there should have been two line items in the transaction: one for the actual taxes payable and the other for the penalty.
Two lines sound correct instead of one. I will create an expense account just for this situation should it ever happen again.
Can you outline the correct procedure for paying off the taxes from “Tax Payable”
Spend money from your cash account and select the Tax payable under the accounts column.
Thank you
After following your instruction, I took a “Tax Summary” and in there, it still shows as liability. Tax Paid is zero
can you post a screenshot?
The print screen button on my PC is not working at the moment but I will try some other means.
the payment made is not reflected in the Tax Summary under reports.
but it is shown under the Tax payable on the summary page.
i am not sure if this is normal. @Tut or @Brucanna can help.
Due to some issues with the PC I am not able to put up a screen shot but is there a way to get around the issue?
The actual payment (paying off the taxes) is not a Tax Summary transaction, it is a payment of the liability owing to the tax authority.