I’m a bit new to accounting and manager.io in general but I was wondering how withholding tax gets counted when invoicing customers. I have billable hours that I’ve created an invoice for and have applied VAT to each of them but withholding tax gets deducted from the final amount and I need a way to account for that on the invoice to get the actual cash amount that the customer will be paying me.
How does one account for withholding tax on a sales invoice?
Is this legally required in your country to show withholding amount in your country? The reason why I’m asking is because in other countries I’m familiar with, only certain companies can withhold tax from their suppliers and rates vary. Therefore suppliers (you) don’t put withholding amount on invoice because you don’t know how much your customer will eventually withhold.
Apologies for the delay in responding lubos, I’m not entirely sure if it’s legally required to show withholding amounts on the invoices themselves but I will look into it.
I have the same issue with withholding tax, but it goes like this:
Accounting treatment, in any case, means the invoice is ‘paid in full’.
• So you need to reduce AR by the full amount, $1000.
• Increase Bank Account by $800
• Increase Income/Sales by either $800 or $1000 depending on your policy
• Record $200 either as Asset on future tax gain, or more likely, just record as an expense
How would we do that in Manager?
The accounting entry for this transaction will be;
Dr Account Receivables 1,000
Cr Sales 1,000
Upon receipt of cash of $800,
Dr Cash 800
Cr Account Receivables 800
and
Dr Withholding Tax Receivables 200
Cr Account Receivables 200
Upon Remittance of WHT to Tax Authority by customer, you can use any of these two (2) approaches;
Dr Sales 200
Cr Withholding Tax Receivable 200
or
Dr Withholding Tax Receipt 200
Cr Withholding Tax Receivable 200
In the Philippines, if your customer withholding taxes on their payment, they will also give you the internal tax form 2307. For example you lease out a real property for 10,000. Upon payment, the lessee will only give you 9,500 because it is mandatory to withhold 5 percent on the rent. The lessee will then remit the withholding tax of 500 to the Tax bureau. The said 500 will be later on deducted on the income tax of the lessor at years end.
Entry will be:
Cash. Debit 9,500
Prepaid creditable tax. Debit 500
Rental revenue. Credit 10,000
@tyfarmaaccounting and @Jamad are right, upon further experience the withholding tax receivable will be an asset not an expense i learnt.
Currently manager calculates withholding tax on the Sales Tax/ VAT inclusive Amount. In my country and all the countries i know in Africa and many more, withholding tax is calculated on Tax Exclusive amounts what your say on that? How is it calculated in your country when VAT or Sales Tax is involved? @Jamad @webo @tyfarmaaccounting
In the latest version (15.7.27) it’s now possible to set custom amount as withholding tax on sales invoices (as an alternative to percentage rate)
Under our country tax laws the Creditable withholding tax are computed based on the amount exclusive of vat, for example you pay rent:
Rent 1000
Vat 12percent of 1000
Creditable withholding tax 5 percent of 1000
Entry
Rent expense. 1000
Input tax. 120
Cwt payable. 50
Cash. 1070
Entry if you are the one receiving rent income
Cash. 1070
Prepaid tax (cwt). 50
Output tax. 120
Rent income. 1000
Hello there!
Im agree with @tyfarmaaccounting. The withholding tax should be calculated from net amount.
Case: Invoice to customer in total amount 1000, sales net 800 and tax 200. Customer pays to you 800. You do not pay tax 200 to anyone, it has to be shown.
Accounting entry:
Cr > Sales > Profit & Loss > 800
Cr > Tax Payable > Balance > Liabilities > 200
Dr > Accounts receivable > Balance > Assets > 800
Dr > Tax Receivable > Balance > Assets > 200 or Cr > Tax Payable > Balance > Liabilities > 200 (It’s depend how your tax office want to see it.)
So tax will be +/- 0. Like in EU reverse charge.
The same issue should be applied to the sales credit notes (example if you create to this invoice credit note, your withholding tax should then deducted), purchase invoices and purchase credit notes.
Case: You will get purchase invoice from supplier in total amount 2000, net costs 1600 and tax 400. You pay to supplier 1600 and you pay to tax office 400.
Accounting entry:
Dr > Costs > Profit & Loss > 1600
Cr > Tax Payable > Balance > Liabilities > 400
Cr > Accounts payable > Balance > Liabilites > 1600
Cr > Tax Receivable > Balance > Assets > 200 or Cr > Tax Payable > Balance > Liabilities > 200 (It’s depend how your tax office want to see it.)
If your company don have a right to deduct VAT then accounting entry has to be:
Cr > Costs > Profit & Loss > 2000
Cr > Tax Payable > Balance > Liabilities > 400
Dr > Accounts payable > Balance > Liabilites > 1600
I would recommend also add to this withholding tax some tax code, to see it by the tax reports.
By the purchase invoices can we talk also about incoming tax. That can apply when you buy something from offshore company or example you buy some services from private person.
Accounting entry:
Dr > Costs > Profit & Loss > 2080
Cr > Incoming Tax Payable (lets suppose it’s 30% from amount)> Balance > Liabilities > 480
Cr > Accounts payable > Balance > Liabilites > 1600
With kind regards
Gunnar
@tyfarmaaccounting May you please tell me how to show the deduction in income tax in the financial sttaements
Thanks
Are you asking about income tax assessed/payable on the company’s earnings or income tax withheld from employees’ pay? If the first, please start a new topic; it is unrelated to this one.
NO MY QUESTION IS ON THE SAME TOPIC WHEN TAX IS WITHHELD BY THE CUSTOMER ITS IMPACT ON FINANCIAL STATEMENTS
FOR EXAMPLE
AS BANK WILL BE AFFECTED IT MUST APPEAR IN CASH FLOW STATEMENT BUT UNDER WHAT CATEGORY?? (operating, investing or financing)?
SHOULD IT APPEAR IN THE STATEMENT OF PROFIT OR LOSS AS A PROVISION WHEN CUSTOMER HASNT GIVEN ME THE FORM 2307 (As mentioned by @tyfarmaaccounting) BY YEAR END AS I DONT HAVE A SUPPORTING DOCUMENT FOR IT OR CONTINUE TO SHOW IT AS AN ASSET (Am following up for it till now since Nov 2016 but customer isnt very responsive)
Thanks
Such categories in a chart of accounts are entirely up to you. Depending on your business, what is operating for one business could be investing for another. None of the categories has any impact on the bottom line. They are merely convenient ways some businesses like to organize and summarize their accounts.
Witholding tax receivable and Withholding tax (the two automatic accounts involved when withholding taxes are deducted and paid by the customer on your behalf) are both asset accounts and do not appear on the profit and loss statement at all, because all transactions posted to them reflect withholding and payment of tax owed to the authority, not income or expenses of the business.
You will need to check your local tax authority on procedures to follow if a customer does not provide proper documentation to you. In jurisdictions of which I am aware, you would file tax returns reflecting what should have been paid on your behalf. You may need to attach statements explaining the discrepancy and may have to provide supporting documentation. But I have never encountered a situation where the taxpayer is held liable for mistakes of others. (Of course, there is always a first time.)
set up an expense account, either new group or just part of the expenses… name it income tax
what if the tax withheld is a final tax? Will you still record it as tax receivable or you just instead record your sales NET of tax?
You need to explain your situation in much greater detail.
Hi Tut,
We have customer we invoice like this:
refurbishment of turbine.....(etc) Php1,000,000
*less 8% petroleum tax
80,000*
net invoice value
Php920,000
since petroleum tax is final tax, what should be the journal entry in
recording the above sale transaction?. We are a subcontractor of a company
engaged in petroleum operations.
thanks fo your help
rose