Non-employee compensation, sales tax & employees

I have a doubt about how can I or should I record some transactions for non-employee compensations. In my country we have this annoying law about “professional services” that require us to retain a 7% of amounts paid to professional services above $1,500 (yearly). For example, you have your accountant, or your lawyer and they bill you at the beginning of the year $500. You should not withheld the 7% but when in the second month they bill you $1,000 there’s the limit, so when you paid them for their services after that $1,500, all payments should have the 7% withheld. Additional, last year the government also pass a law about a special service tax of 4% that your supplier should bill you and paid to the governmental agency. So an example of a transaction, so you can visualize it better, should be like this:

Gross 1,000 7% withheld (70) 4% service tax 40 Total to be paid 970

So in the end, you will pay the 7% you’re withholding and your supplier should pay the 4% of this amazing new special law… what my question is, the tax module should work in my case? I know that I can set up the tax module to function for the sales tax but when I set up the different sales tax (because service is 4% and sales is 11.5%) the module ask me for a payable account. I have set up this part to an expense account because I can’t take the 4% as a credit for the amounts I earned.

Another question is, this whole “professional services and 7%”, we have to track this amounts because at the end of the year I have to file a form that indicates how much I paid to every supplier and how much is the 7% withheld, and additionally make a reconciliation form about the 7% and the payments I have emitted to the agencies about this withhold. Is there any way that I should use to track this amounts that maybe I’m missing? I have to export the Professional Services account and the account dedicated to this 7% to track this so I can file the necessary forms to the government.

About the employees module, I would love to know if there is any plan to add more reports in the future and the functionality of calculate deductions with formulas.

Thank you for your time and any advice you could give me. Cheers!

First, please do not mix subjects when creating a new topic. You will lessen the chances of getting answers to either of your questions. In this case, you’ve mixed tax questions with questions about future feature additions having to do with employee reports deduction calculations with formulas.

As to your tax question, you are making the situation more complex than it needs to be. The 4% tax on services is a sales tax, imposed on you as the buyer, but collected by the seller for remission to the tax authority. You do not need to account for that in most situations. Your $1,000 gross, from an accounting perspective, is just raised to $1,040 and can be entered at that price on a purchase invoice or payment form. It is up to the seller to account for it and remit to the government.

The only time the above would not be true is if you are able to separately deduct the tax paid from income. Then you would want to account separately.

The 7% withholding tax is advancedcollection by you on behalf of the tax authority of amounts it is assumed the seller will have to pay on income. They have you do it because some people can’t be trusted to pay their tax due.

Unfortunately, there is no withholding capability on purchase invoices. (There is one on sales invoices.) One way to handle this is to create a liability account called Professional services withholding and add a line item on purchase invoices or payments where you enter a negative amount (-$70 in your example). When you remit the withholding to the tax authority, allocate the payment to that liability account to zero it out.

Thank you, @Tut for your answer. I’m sorry I mix subjects. I’m pretty new at the forum and wasn’t aware of that. Now I know and won’t be mixing subjects in the future.

As of my tax question, the 4% tax is in fact a type of sales tax but it’s not the same. The real sales tax here is 11.50% and you’ll paid that for every article you buy in any store. In that case I don’t necessarily split transactions because the government does not require us to tell them how much on sales tax you have paid during the year. In a perfect world, you do this because the tax returns do have the account for that, but most people just record the expenses for the total. There’s no consequence, the result is the same. On the other hand, the service tax of 4% is different. You could deduct your expenses as you said but you have to separate the 4% from the gross for reporting the amounts you paid to your suppliers in order to give them a form (like a 1099 in the US) but with the gross (without the 4% tax) and the 7% of withholding tax. So, for a service that you paid, let’s say, $15,000 for the year it must be like the next example in the form that you’re suppose to give to the tax authority and to your service supplier:

Gross - $15,000
7% Withholding - $945

In this example you paid $14,655 to your supplier during the year ($15,000 + $600 [4% service tax] - $945 [7% withholding of the $15k minus the first $1,500 paid during the year]). So, in my accounting I have to match the gross amount paid with my expense (without the 4% of service tax) so when I file my tax return at the end of the year, that expense would match with all the forms I have filed to the tax authorities for every service supplier. As I said, this is just for professional services, not for all the purchases you made in stores like supplies, materials, food, etc.; just professional services paid (legal, accounting, maintenance, etc.). So if I have to match my professional services account with the total of gross paid to my service suppliers, then I have to put the 4% of service tax in some place. I cannot use it as credit if I have rendered services to my clients, so it is an expense. That’s why I have created a Sales Tax Expense account. Believe me, if I had not to do this whole exercise, I would do it the way you said, but this is the way we’re working here.

Again, thank you for your answer.