How can i record US Backup Withholding Tax (withheld)?

[heyjo00as]

I selling template on themeforest.net (a online market), i can download a Statement on themeforest website so i know how much i earn, for example

2018-01
Net Sales $100
Author Fees -$30
US Backup Withholding Tax (withheld) -$20
Earnings $50 (this is what i earning on 2018-01 from themeforest website)

I tried enter above info on Manager but the Total Assets become $80, in fact, The Net Sales are only $50, US Backup Withholding Tax (withheld) not a deduction item?
Net profit are $80 now, but no, i just earn $50.

I create Themeforest US Backup Withholding Tax (withheld) into Chart of Accounts - Assets in this example, is it wrong? Or i should create Themeforest US Backup Withholding Tax (withheld) into Chart of Accounts - Expenses?

Thanks

[heyjo00as]

And i never get that author fee and US Backup Withholding Tax (withheld), its withheld by Themeforest.net not me. I just get that earning $50. Will this any different of other case?

Updated:

I saw my accountant created that Profit and Loss Statement, in that statement author fee and US Backup Withholding Tax (withheld) both are in income deduction item, i cant ask her because we have some problem so we dont contact anymore, i have no money to find another accountant…

Is this doing right in my case this time? if yes i just follow what method she do in record income and all problem was solved…hope i am doing right…

thanks…please help i need this in few day in my real life…sorry

image show how the chart of account and other info now. am i doing right this time? thanks

[Tut]

First, your terminology is incorrect. The 100 is not net sales. It is gross sales. The term net sales would refer to gross sales minus certain deductions.

Second, if Themeforest is withholding 20%, you are probably being treated improperly by them. It is very unlikely you are in a 20% income tax bracket in the US if your only sales are 100. In fact, you may be below the taxable threshold entirely. Backup tax withholding is usually done only in response to a previous problem, and any other withholding is usually voluntary at a level you decide. Normal withholding is done as a convenience to you so you do not owe all your income tax at tax filing time. Backup withholding is at the direction of the government because they believe you might not otherwise pay your proper tax amount. It is possible Themeforest does this because of your overseas location.

Third, the proper accounting treatment of backup withholding depends upon your legal form of organization. It may not be a business transaction at all, especially if you are a sole proprietor. In that case, it is a personal tax transaction. The method for recording it would be different under different forms of organization.

Fourth, the first chart of accounts you showed is closer to correct than the second:

• Themeforest fees will never be income. They will always be expenses, so that account should be moved to the Expenses group.
• Backup withholding will never be income. Again, depending on your form of organization, it could be an asset until tax filing time, when it might become an expense. Or it might not belong on your chart of accounts at all.
• Your Themeforest asset account is only an asset if you are accounting for money owed to you but not yet paid. Most likely, however, you do not need this account at all. You could just wait until Themeforest pays you and directly create a receipt, posting the gross amount to an income account. The correct action will depend on whether you are using accrual or cash basis accounting, as well as the terms of your agreement with Themeforest. In other words, do they really owe you the money before paying it, or does it only become due, for example, once per month when paid.

Fifth, in order to claim proper credit for that backup withholding (or have it returned to you), you will need to file a US income tax return. The deadline for that was April 17th this year. By law, Themeforest should have already remitted that withheld tax to the government on your behalf, where it is recorded under your Taxpayer Identification Number.

[Brucanna]

Lets put mathematics to the solution, but it would be helpful if you used constant terminology.
You start with referring to “Author Fees” but then call the account “Themeforest Fees”.

Also it would be extra helpful if the data being presented is also constant:

You open with:

But the first Receipt displays this:

While the second Receipt displays this:

Anyhow, let us first consider the situation without any withholding tax by Themeforest.
Your Income would be 100, your expenses would be 30 so the profit is 70.

You disclose the above in your tax return which incurs you with a tax bill of 20.
Therefore, your before tax profit is 70 and your after tax profit is 50 - hence your net earnings.

Manager’s P&L Statement always displays the “before tax profit” situation.

However, probably due to some legal obligations upon Themeforest, they are deducting upfront your “tax bill”, this doesn’t change the profit accounting. As commented above, your first model is correct.

[heyjo00as]

Thank you again.

I almost cry…i only have few day lefts to finish this Profit and Loss Statement and Balance Sheet…but seem that i made everything wrong

The Net Sales is on the statement that download from themeforest.net, its call Income Summary to Earnings Account, so i just use they name to record like net sales, author fee etc.

The Price on the image is just example.

The Statement which download from themeforest.net like this (this price is just example)

Income Summary to Earnings Account

Net Sales $100.00
US Backup Withholding Tax (withheld) -$20
Envato Author Fees -$30

Total: USD $50
Net Change to Earnings Account

Yes i am not live in US, so they Fill the form 1099-MISC, its has follow info on the form

(price is example)

Royalties $100 (Net Sales amount on statement),
Federal income tax withheld $20 (US Backup Withholding Tax (withheld) amount on statement),

PAYER’S name is Envato (themeforest.net)
RECIPIENT’S name is my name

Here is the price about author fee, net sales etc…

Pricing Your Items Responsibly

An item’s sale price is made up of four parts:

• List price: The price shown to customers on the item page (item price plus buyer fee).
• Buyer fee: The portion of the list price that represents Envato’s fee to the customer (this is a fixed fee in categories with author-driven pricing).
• Item price: The price paid to the author for the item license.
• Author fee: The portion of the item price that represents Envato’s fee to the author.

When i sell a item on themeforest, for example the item price is $110 (list price)

buyer pay $110 to buy the item, the buyer fee (for example $10) is nothing about me, so the statement will not show it, only will show

$100 net sales
-$30 author fee
-$20 US Backup Withholding Tax (withheld)
$50 earning

I dont know tax and accounting, and i have problem with my accountant, now i dont know what to do.

I saw she put the author fee, US Backup Withholding Tax (withheld) on the income ( deduction item)

Look like the second record from me.

So i dont know why she do that, yes i cannot ask her now…

Seem that i dont need file any tax return about US Backup Withholding Tax (withheld) because seem that themeforest will do the work about it, i saw 1099-misc pdf copy in my user account on themeforest website.

I also think i should not put author fee and US Backup Withholding Tax (withheld) in income that why i think my accountant doing wrong…but i never hold the author fee and US Backup Withholding Tax (withheld)…I need REPORT TAX on my country (not US) from the Profit and Loss Statement and Balance Sheet info, i should put US Backup Withholding Tax on my assets or have other method? Because i dont really earn that much (plus the US Backup Withholding Tax).

So can someone give me some idea how can i record my earning on themeforest? i already ask themeforest, but no answer from they can help me, they call me ask my accountant, yes i know…i should do that but i cant…

Thanks everyone…i really need some help, please, thanks all

[heyjo00as]

Hello, thanks for the answer, can you please read my reply above and give me some idea? i need help…sorry i know the post is too long…

My image was wrong…example should like above post.

I just very angry why my accountant put withholding tax and author fee in income…seem that is total wrong.

If my Balance Sheet show i earning $70, i will need report more tax on my country (not us), i dont know, i dont know tax and accounting…

Oh My god…i seem doing everything wrong…i cant talk with my accountant…if i can i can ask she why the chart of account like this.

[Brucanna]

It appears (I am guessing) that perhaps you need to show Themeforest as foreign earnings (not local earnings), if your tax return has this category, also you could have credit for US tax paid if your country has a double tax agreement with the US.

If you can’t speak to your accountant, ring your local tax office or pay another accountant…

Ok, Themeforest gross sale is 110, after the 10 deducted becomes their net sale of 100.
You just have to think of their Net Sale as your Gross Sale as the 10 doesn’t matter to you.

Once again, perhaps you need to have Themeforest activity in separate Manager business so local and foreign earning aren’t mixed.

So far we have clearly explain the accounting, as to the tax return that is beyond this forum.

[heyjo00as]

My Local tax office told me that i need repot my country tax too,so that why i need Balance Sheet and Profit and Loss Statement to show the earning i have.

Seem that my country dont has a double tax agreement with the US.

Do you think i still need record the US Backup Withholding Tax (withheld) in assets? Just give me some idea if my country dont has a double tax agreement with the US.

ok i know i should record net sales at $100 now, that good news for me so i dont need worry that $10 buyer fee.

Sorry for everyone…i know i should not ask too much accounting in this forum but i have no time and money to find other accoutnant, i will phone local tax office again, last time they just told me ask my accountant, yes i know i should do that…but i cant now
Please dont lock this post, i want some suggest from anyone. please

[Brucanna]

Your tax return questions are beyond this forum.

But from an accounting perspective, if you are “charged” withholding tax but can’t claim that tax as a credit locally, then the withholding tax would be an expense, not an asset as you can’t recover the asset.

[heyjo00as]

I know my question are beyond this forum. sorry please forgive me…its a big issue with my family

WOW! seem that i got the GOOD NEWS, yes i think i can not claim it, because i search the info from website some people said that the withholding tax can not give back to me.

Thanks for the info, seem that i can sleep tonight, big thanks from my heart!!!i will still try to phone local tax office hope they give me some suggest.

Ok i still have some question but about manger, hope i can still continue this topic, thanks.

My question is i should NOT record ANY expense into income right? Just like @Tut suggest. (Themeforest fees will never be income. They will always be expenses)

Suppose withholding tax is a expense because i can not claim it, so i should record like this (image)?

thanks!

[heyjo00as]

I am using accrual basis, so i think i need to record when people buy my item on themeforest.

As my before topic, you have suggest me to only open a bank account for themeforest, i like this method too because i can easy to expression themeforest assets (my earning), because i will transfer the money to paypal and exchange other currency late. so i think i need keep this account at assets. hope i am doing right.

I think themeforest owe my money before paying me, the earning amount will show on they website, i can choose when to pay me (pay to paypal), for example 2018-01 income i can choose 2018-05 pay to me. or each month will has one day (1st or 15th? i forgot…) to payout to paypal if income over $50 and enable auto payout options on themeforest website (i forgot the amount…), but not any day can payout.

I put fee and tax from income to expense at above post image, thanks for your suggest.

thank you.

[Tut]

@Brucanna

You disclose the above in your tax return which incurs you with a tax bill of 20.

This is not correct. Backup withholding in the US is not like VAT. It is direct withholding of income tax, remitted to the tax authority, and which the tax authority allows you to count against your eventual total tax due. Business profit is only one contributor to taxable income, so the ultimate income tax rate or bracket depends on many other factors. If the total US income is so small, no US income tax will be due.

@heyjo00as

Look like the second record from me.

So i dont know why she do that, yes i cannot ask her now…

No matter why she did what she did, it was wrong. You should ignore her advice.

If you had sales of 100 and author fees of 30, you had 70 in US income. The only way to get your 20 of withholding back is to file a US tax return. It is very likely not worth the effort or expense. But if you are going to continue using Themeforest, you should explore with them how to eliminate the backup withholding.

@heyjo00as, your final chart of accounts looks reasonable for accrual accounting, but only as far as this transaction goes. You have no equity structure set up. But that is another subject. One thing you might want to consider is creating Themeforest as a bank account rather than a separate asset account. The result will be the same, but transfers to your PayPal account will be simpler.

[heyjo00as]

@Tut, as @Brucanna said that if that withholding tax can not claim, can i put it into Expenses? Can you or other
people just give me some suggest, yes i know each county rule may not same but i want some suggest.

I dont wanna to get back that withholding tax, i just want finish my issue and start a new life with my family…i maybe wont selling anything on themeforest anymore.

I have add a themeforest as bank account as you suggest before, but i click the Control account so i can see themeforest and other website earning much easy, aslo other people will easy to read my earning (image)

Equity structure? i read the doc Simplify equity accounting for sole traders / proprietors | Manager

I may only need rename the equity account? Ok i will open a new topic about it because i also have a question wanna know.

BIG THANKS!

[Tut]

@heyjo00as

I may only need rename the equity account?

Yes, that is correct, assuming all the conditions described in the Guide apply to your business.

As for Themeforest now being a bank account: you have created it correctly. And you have assigned it to a custom control account with the same name, so it will show on the balance sheet. That is fine. But you did not actually need to take the last step. You could have left it in the default Cash at bank account and deleted the Themeforest control account. All that would mean is that you would not see Themeforest separately on your balance sheet. It would be included under Cash at bank. But again, what you have done is acceptable.

@heyjo00as

if that withholding tax can not claim, can i put it into Expenses?

Yes, you could. If you are not going to try to get it back, it is really no different from another fee. But you got nothing for it.

[heyjo00as]

Yes from start to now i dont get this withholding tax, i got nothing about it, i will try put in Expenses and i will try ask local tax office.

@Tut and @Brucanna i dont know how to thank you, i am going to sleep…i am under too much pressure in this few month, hope everything will be fine, THANKS!

Again sorry for my language skill…i try my best to expression my issue yet…

WISH you have a niceday.

[Brucanna]

@Tut

This is not correct.

@tut - it is clear that you either haven’t read or understood the section of text in which you extracted your quote “You disclose the above in your tax return which incurs you with a tax bill of 20”. The original context was in relation to an illustration of the accounting where withholding tax was not part of the transaction and that was made abundantly clear by the bolded “without” in the original text which is re-posted below. Therefore your entire explanation used to justify your misleading allegation “This is not correct” is totally irrelevant.

Anyhow, let us first consider the situation without any withholding tax by Themeforest.
Your Income would be 100, your expenses would be 30 so the profit is 70.

You disclose the above in your tax return which incurs you with a tax bill of 20.
Therefore, your before tax profit is 70 and your after tax profit is 50 - hence your net earnings.

@Tut

Backup withholding in the US is not like VAT.

No one claimed or stated that it was, in fact, VAT has never been a part of this topic.

[Tut]

I read and completely understood the text section in question:

@Brucanna

You disclose the above in your tax return which incurs you with a tax bill of 20.

That statement was incorrect because backup withholding in the US has absolutely no bearing on the tax you pay. It is simply an advance, remitted to the tax authority by the withholder, that can be applied against any tax ultimately due. It does not enter into calculation of your tax at all. It is not income; nor is it a deductible expense. It is a credit on your account with the Internal Revenue Service. You could end up owing no tax and have it all returned or carried forward. Or you could owe more tax on the specific income because you are in a higher tax bracket than the percentage withheld. No matter the situation, the fact that 20 may have been withheld in no way corresponds to you having a tax bill of 20. The two are simply unrelated.

[Brucanna]

@Tut

I read and completely understood the text section in question:

And your response clearly illustrates that you haven’t.
The illustration used in that text section has nothing, repeat, HAS NOTHING to do with the backup withholding tax in the US. Just re-read the very simple point “without any withholding tax”. Yet your responses continue to assume that the illustration does relate to the backup withholding tax - IT DOESN’T as it expressly & boldly states “WITHOUT”.

@Tut

No matter the situation, the fact that 20 may have been withheld in no way corresponds to you having a tax bill of 20. The two are simply unrelated.

True, the illustration was just a “mathematical reconciliation” to the stated claim - my earnings are only 50, the illustration was not a statement of actual process, but of outcome.